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MATT BARRIE: Innovation is critical to Australia’s future – here’s where to start

CanThis post is part of the Innovation Nation series, sponsored by CommBank. At CommBank we believe innovation starts by asking questions. Discover new ways to keep your business moving. For more information visit commbank.com.au/canbusiness.
Freelancer CEO Matt Barie. Photo: Supplied

Since the change of Prime Minister there has been a shift in the national conversation.

Australia is talking more about innovation again. But the discussion needs some focus.

If the goal is to grow wealth, the best bang for our buck will come from targeting scalable, high-growth companies in the technology sector. These are the companies whose revenue and employment will expand the economy.

At a policy roundtable convened by the Prime Minister last Friday, we talked about four themes that Australia should focus on, in order to capitalise on Australia’s strengths. The themes were:

  • building the skills base
  • changing the culture of innovation
  • tapping the dormant research of our universities; and
  • how the government can set an example.

Australia has a number of advantages to build on. We have a highly skilled workforce. We are great at working with new technology. Our companies prioritise going global at the beginning. Thanks to a diverse population, we are also adept at working with different cultures.

But while we have a highly skilled workforce, our best and brightest go offshore to get the support they need. I have seen a hundred or so current and former employees over the last few years go overseas and only 5% come back. They can find a better environment for starting companies overseas, in countries with superior support networks and education systems.

As a result, demand for technical skills is far outstripping supply. And the school kids who do want to build self-driving cars or work for SpaceX aren’t taught the link between the skills they need and the jobs they want.

Not so long ago, I went to an event on kids’ education, and the brochures said that electrical engineers “install, repair and service technology equipment”. It said software engineers “design and document software structures and operations” and network & communications engineers “provide technical support to help people use software and hardware”.

This is how we talk about technology jobs in Australia, and it is absolutely ludicrous.

We can’t afford to have organisations like the Australian Computer Society misrepresent the jobs which will be so pivotal to Australia’s future, or blur high-technology jobs with “ICT jobs”. We need to market the technology industry better. This misrepresentation and confusion blurs all the discussion about high technology to the point I see ridiculous assertions that there is an oversupply of people in “ICT jobs” and “no-one can get a job”. Maybe at the low end, unskilled level. But in the real technology industry it’s completely the opposite, and the best fresh graduates are commanding close to six figures per annum. Australia is critically short of devops, front end developers, data scientists, product managers and software engineers.

We need to market high technology better. Think of the Code.org videos in the United States that featured the Black Eyed Peas, Jack Dorsey from Twitter and even President Obama. The real players in the industry, real role models, got involved. If we got Malcolm Turnbull and figures from the Australian industry to make videos like that, it would have a real impact.

Education reform

Students at Monash University. Photo: Supplied

We also should put experts in charge of our technology curriculum. At the moment we have agreement between the states on an additional technology curriculum, but it is only compulsory until Year 8. After that it is a hodgepodge, as each state comes up with their own syllabus. And rather than technology being an education stream of its own, it is still mixed in with textiles and woodworking. Technology education should be delivered nationally and online.

The National Computer Science School, an elite school run by experts like Dr. James Curran at the University of Sydney, should be promoted and properly funded. At the moment it is funded piecemeal by industry. Freelancer contributes to the NCSS a greater amount than the government, which is ridiculous. NCSS an elite school, like the Australian Institute of Sport or National Institute for the Dramatic Arts, for the 21st century.

At the university level we need to reduce the cost of doing STEM subjects — such as making them HECS free — and copy the new and interesting business models being trialled overseas. MIT recently launched a freemium model, where you can take certain classes online for free. If you do well enough to gain accreditation, only then do you pay, but nominally. This is a real threat to our educational system, as the foreign students who have underpinned them can stay at home and attend the real Harvard, Stanford or MIT for a fraction of the cost.

Australian universities and technical colleges need to develop their own online courses, with emphasis on their comparative advantage. If Sydney University was to run an online course on smart power systems, it could expand its classes to include thousands of students around the world. Australia would also gain access to the best and brightest. At the moment they don’t run many high end courses at all, because they can’t get the local student numbers sufficient to offer a class.

We are entering a phase of great disruption that requires continuous learning. We need to foster continued learning through online platforms.

Attracting – and keeping – the right people

Attracting overseas talent is also an issue. Recently I tried to fill a senior role and I called a top level recruiter in Silicon Valley. He essentially told me that no one wants to come to Australia anymore. It used to be that people came over for lifestyle reasons, but they don’t even want to do that any more. Policies like the Sydney lock-out in effect has turned this once promising international city into a country town and an embarrassment. Freelancer is losing people because they want to live somewhere they can go out on a Friday night, which is a ridiculous situation to be in 2016. It’s not 1920.

Another issue is remuneration. At the upper levels, remuneration is largely stock driven. We have made a complete mess of the Employee Share Scheme in Australia – ASX listed companies, which are the primary growth companies of the future, are all excluded. As are companies with turnover over $50 million or 10 or more years old, like Atlassian and Freelancer. At this level we are competing on a global playing field and need to be able to compete on remuneration. The massive irony in all this is that these changes have just served to make it harder to distribute wealth from owners to workers. It’s made it hard to have stock-based compensation in companies that either have liquid stock or are likely to get liquid stock (basically, where the stock has any real value or active market!).

Access to capital

Sydney city skyline. Photo: Supplied

Access to capital is less of an issue than one would think. Good ideas with great teams get funded.

At the seed stage ($20k to ~$1m), there are people writing those cheques and there now are incubators and angel syndicates everywhere. Once you are in the growth stage and need injections of $10 – $50 million, the solution is right in front of us: the ASX. Australia has the fourth largest equity market in the world. When Freelancer wanted to raise $45 million last August, it was done in two days. It was easy, and it was quick. Post $50 million, markets are already global in both the public and private world, and well served.

The critical area comes when you want to raise between $1 million and $10 million, which is the usual purview of venture capital. This is the valley of death for Australian startups. There are one or two venture capital funds who have recently raised money, but Australian venture capital never really got going past their Series A.

The solution here is crowd sourced equity. The general public has deep pockets and wants to invest in these businesses. So let them. At the moment only “sophisticated investors” are able to invest in these companies, where the definition of “sophisticated” is a gross income of $250,000 or more per annum in each of the previous two years or net assets of at least $2.5 million. I think this is quite derisive of the sophistication of the general public. Likewise I have met many wealthy people that are not sophisticated in investing in my time.

Categorising sophistication based on wealth is stupid.

There’s a lot of other stupid things we do in Australia. We have perverse taxes that create the wrong incentives and disincentives. Payroll tax, where companies get taxed more the more people they hire, for example, is incredibly stupid. If anything, they should get a discount.

We also provide tax breaks for investing in non-productive assets, like houses, but nothing for investing productive assets, like businesses.

There is much we can do with taxation reform, and a good model for this is the United Kingdom. One of their great programs is called Entrepreneurs’ Relief, which provides capital gains tax relief for founders, encouraging people to go and start businesses. If you hold 5% or more of the shares and and voting rights, and hold for at least one year, your CGT is 10% if you sell or dispose of your business assets within 3 years after selling or closing the business.

Another is the Enterprise Investment Scheme, where an individual who invests in a company, and who holds less than 30% of the equity, can reduce their income tax by up to £1,000,000 in the year they do the investment, and is capital gains tax free if the shares are held for three years.

This provides an incentive for investors in qualifying early stage technology companies, with a medium term investment horizon, and goes hand in hand with reform to allow crowdfunded equity

If we had these tax incentives in Australia, combined with crowd funded equity, that would solve the entire funding problem in the $1 to $10 million range.

Commercialising research

Researcher monitors robotics. Photo: Getty Images

The incentives for academics are not aligned with the commercialisation process. They’re too afraid to leave university and take a risk, and too afraid of losing tenure. Academics are also not given sufficient equity in the commercialisation of their research to encourage risk taking when they deal with the business liason offices. We should create a national register of all the intellectual property of Australian research institutions that would not be commercialised.

The register could be split into three lists, based on value. Rather than having to negotiate the terms of every deal, there would be a set deal structure for the different lists. We could charge a flat fee, maybe $5,000 or $10,000 for the rights to use intellectual property that otherwise would not be commercialised. There are a whole bunch of entrepreneurs looking for something to start a company around, they could go along to the register and get some IP. For more valuable IP, maybe a 2% royalty on gross sales. For the most valuable IP there’s a more expensive deal but the structure is known in advance, so it’s not a two year negotiation with the University Business Liaison Office. There would also be collaboration with the researchers, because there would need to be ongoing innovation in many of these fields. We should change the rules to allow academics to move between academia and industry easier, or even split time like in other countries.

Reform and the role of government

Chris Pyne and Malcolm Turnbull. Photo: Getty Images

There is a lot the government could do to encourage technology companies.

For a start, all government services and data should be accessible through an API. I’m not just talking about “open data” — all services should be accessible programmatically. This would encourage startups to create a wealth of amazing apps and really set an example for the corporate world.

Government also has a tremendous lever (as pointed out by Sinodinos at the round table) with procurement. A lot could be done here to drive business to startups with innovative solutions. The UK gives preference to startups over large corporates, for example.

There was a policy hackathon last weekend, that’s great but we should do more like that, and on a larger scale. Let’s get the whole country involved. Indonesia, for example, will soon hold a national hackathon in 28 cities called Hackathon Merdeka. The goal is to develop solutions to help Indonesia, and the winner will meet the President. Also in Indonesia they crowd source policy through Lapor Presiden, where anyone can submit ideas and have them up or down voted by crowd.

The Government got it right with these four themes — improving talent & skills, culture, startups & capital, collaboration & commercialisation and government as exemplar. They’re broadly the areas we need to focus on. Surprisingly I found the most interesting and far reaching thoughts came from Ministers Pyne, Cabinet Secretary Sinodinos and the Prime Minister. They said they are looking for ideas for systemic reform to make Australia truly innovative, not programmatic or piecemeal reform. It’s too early to tell whether this rhetoric will turn into action, but from everything I heard it seems that they are looking to make real reform.

Real reform is tricky, not in the least because the many of the most important changes we need to make, such as in education and taxation, are the purview of the States, not the federal government.

Regardless of the challenge ahead, It’s a national imperative that we build a technology industry that contributes meaningfully to the GDP of the country — software is eating the world, but if we’re not careful, it will be someone else’s software eating us.

Matt Barrie is one of Australia’s most prominent entrepreneurs. He is chief executive of global freelancing and crowdsourcing marketplace, Freelancer.com, which listed on the ASX in 2013. He will be appearing at Freelancer’s conference SydStart, Australia’s biggest start-up gathering, which runs on October 29th-30th in Sydney.

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