The innovation statement will include good news about bankruptcy for startups

If entrepreneurs fail they need to be able to get back up and try again. Christopher Lee/Getty Images

The government’s innovation statement is being tipped to include measures to reform Australian bankruptcy laws.

The proposal is intended to move away from Australia’s current laws, and more towards the US system. One important change would be the ability to keep trading even while companies are unable to pay debts.

Jonathan Barouch, founder and CEO of Local Measure, says a balance has to be struck between providing consequences for failure and encouraging people to “get back on the horse straight away”.

Further, Barouch notes reforming bankruptcy could encourage more “industry heavyweights” and retired executives to become directors and advisers of startups.

“No one wants to be a director of an early stage tech company in Australia,” says Barouch.

“In the US more people are directors or advisers, but in Australia the insolvency laws and bankruptcy is just so severe you kind of discourage a whole bunch of people who would add a whole bunch of value to the ecosystem.”

The Corporations Act may make sense for big corporates, says Barouch, but the penalties are too harsh for startups.

“Obviously trading when you are insolvent is a criminal offence. For very small early-stage startups there is no Chapter 11, there is no way to work it out,” says Barouch.

“So if you have a valuable product, there’s no way to sell the company or do something else other than call in the administrator. There needs to be something in-between.”

“There needs to be some acknowledgement that these early stage ventures are risky but we want them in our economy.”

The startup sector also puts a lot of emphasis on serial entrepreneurship and learning from mistakes. And in other countries, failure is often celebrated. US President Barack Obama’s chief data scientist even features a failed startup on his LinkedIn profile.

MoneyPlace CEO Stuart Stoyen, says softened bankruptcy laws will allow more entrepreneurs to try, learn and then try again.

“It’s well known that startups are more likely to fail than succeed, and what the changes mean is that founders will be able to continue to innovate and build great companies as opposed to being benched because one idea didn’t work out,” says Stoyen.

“Even the most successful startups almost have a near-death experience.

“This is not to say the team wasn’t capable, as there are a number of factors that can contribute to startup failure, which include but are not limited to regulation, technology advancements, market activity or having the wrong investors.”

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