Australia’s lost business agility

The latest IMD digital competitiveness ratings show Australia sliding down the ranks, how can we address this decline?

The recent digital competitive index by Swiss business school IMD, flagged a worrying trend in Australian industry, reporting the nation’s commercial sector is falling behind its international counterparts in digital competitiveness.

Overall the IMD’s digital competitive rankings weren’t terrible for Australia with the nation only sliding one place to 15th globally from its 2018 place — albeit down from ninth five years ago.

But the indicators that kept Australia in the top 20 were in the nation’s international student numbers and the national credit rating, hardly the mark of an economy on the leading edge.

Jarringly, the survey ranked the nation’s business agility, 45th out of the 63 economies surveyed.

IMD’s definition of an economy’s business agility includes the local industry’s adoption of big data, IT integration, concentration of robots and local companies’ ability to respond to opportunities among other factors.

For those of us who’ve spent the last two decades proselytising about the importance of investing in technology, the fall was disappointing but unsurprising as Australia has long been lagging in its digital investments.

The answers to why this is happened over a twenty year period that saw Australia become one of the world’s richest economies lies mainly in the investment priorities and opportunities of the nation’s small business and corporate sectors.

With the exception of the mining industry, Australian corporations aren’t globally focused. Most of the nation’s large corporations are domestically facing service providers like banks, telcos, toll road operators and supermarkets which sees them focused on maximising local profits rather than competing in international markets.

Most of them also operate as duopolies or monopolies, so much so that in most sectors, Australia can be described as the ‘Noah’s Ark of business’.

Added to that, those dominant local corporates have shareholders addicted to high dividends., in turn reducing the funds available for reinvesting in the businesses.

When Australian corporates do invest in digital technologies, it’s almost always to slash costs. A mindset which leads them into disastrous deals with global IT outsourcers and tech vendors.

Of course continual failure on that level doesn’t matter when you can pass the costs of failure onto customers by increasing milk prices or credit card fees.

For the small business sector there’s a slightly different set of constraints, however with most SMB’s also being local service providers they haven’t needed to invest to stay competitive.

But small businesses trying to compete in global markets, or looking to invest invest, face another problem — accessing capital.

Over the last 30 years, Australia’s small business sector has been frozen out of bank lending with loans only accessible to proprietors able to pledge 100% collateral — usually home equity — against their loans.

For providing effectively risk free loans Australian banks charged handsomely, helping make them the profitable banks on the planet, something that was missed in the weak, and dare one say naive, conclusions of the Hayne Royal Commission into the nation’s finance industry.

The upshot of the banks’ refusal to lend to small businesses means their investment and subsequent productivity has stagnated and fewer have been able to compete in global markets.

So Australia’s fall in competitive indexes isn’t surprising and it’s an added handbrake on the economy as the government struggles with flat income growth, stagnant private sector employment rates and declining GDP per capita.

Fixing these roadblocks is wholly up to government — the banking system needs to be reformed, taxation policies need to be overhauled and serious consideration has to be made about breaking up the nation’s more inefficient and dominant corporates to stimulate domestic competition and innovation.

Sadly, there’s little recognition of the problem among Australian’s politicians, bureaucrats, business leaders or media and, one suspects, there’s no appetite for meaningful reform.

So Australia will muddle along for the moment, but its hard to see how living standards can be maintained as the country’s business sector stagnates.

Which is the real warning from the IMD.

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Rethinking startup rules

Much of the current mindset around investing and supporting startups creates barriers to founding new businesses. What can we do better?

What are some of the barriers to increasing diversity in the startup community’s monoculture? Yesterday we had an insight into some of the changes needed at the Women in VC forum held in Sydney.

Samantha Wong, partner at early stage startup accelerator Startmate and Head of operations at Blackbird Ventures, described how Startmate identified some of those barriers among the 51 companies that went through the program and the steps to overcome them.

What Samantha and her team found illustrate how the Silicon Valley model of founding and funding businesses inadvertently creates obstacles for women, older workers, disadvantaged groups and poorer people.

Insisting on Solo Founders

“Previously we had a rule that you couldn’t be a solo-founder. It’s too much work to do it by yourself,” she explained.

There’s good reason for that belief as building any business on your own is hard, regardless of whether it’s a tech startup or a dog walking franchise.

It’s understandable that investors are reluctant to get involved with a ‘one person show’, although a lack of capital is going to make life extraordinarily harder for a sole founder or proprietor.

The myth of the tech co-founder

“You had to have at least one technical co-founder in the team.” Samantha explained, “the reasons for this rule were historical.”

This belief goes back to the origins of the Silicon Valley business model where companies like Apple, Hewlett-Packard, Microsoft and even Google were founded by ‘two men in a shed’ where one was the marketing or sales whiz and the other delivered the product.

Interestingly many of the recent successes like Facebook, Uber and AirBnB haven’t had that dynamic, probably because the technology industries have matured to a point where developer and product managers are established trades or professions are easily available as well as cloud based tools making technology itself more accessible.

So a ‘tech co-founder’ will almost certainly be useful but isn’t essential to get a business off the ground in today’s tech environment.

Being in attendance

“We had a blanket rule of requiring participants to be in Sydney for the full duration of the program,” says Samantha. “The reason for this we know from experience that ninety percent of the program’s value comes from that sharing which happens between founders, the support and the friendly competitive pressure you get from them. It brings the best out of you.”

Startmate changed its policy so only one of the co-founders needs to be in Sydney. While it doesn’t solve the problem of solo founders with family obligations that don’t want to move, it does make it easier for those with dependents to participate.

Dropping the blanket rules

Over the six years Startmate has been running, they’ve seen a change in the nature of startups joining the program. “When the program started in 2011 we gave a small amount of money to a couple of people to build a product and start attracting customers,” Samantha said.

“By 2016 we were attracting much later companies that already had revenue and the program’s focus became growth and fund raising.”

“So instead of blanket rules we started to ask ‘what does this company need to grow in the next three to six months?’ Do they enough resources right now? Is the product good enough to sell? If you can get good answers to those then it’s worth considering them joining.”

The lessons from Startmate in increasing diversity among their intake are instructive and it indicates the limits of the Silicon Valley model that favours young, middle class men over other groups.

For the tech industry, that focus on one group is a great weakness and means investors are missing a world of opportunities. Ditching existing biases and established wisdom could be a very profitable move from everyone.

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ABC Nightlife – building the businesses of the future

What can we do to build the next generation of businesses?

This Thursday night join Dom Knight and myself on ABC Nightlife to discuss what tools you can use to start or improve your business and how can we encourage more people to have a go.

Last week the last Australian car making jobs finished and a survey of the Geelong Ford workers found only one percent were interested in starting a new business.

If you missed the spot, you can listen to the podcast through the Nightlife website.

Despite the reluctance to start new businesses it’s never been easier to do so with a range of tools making it simpler to run one. Tonight on the Nightlife we look at some of those tools and what we can do to encourage more people to have a go at running their own companies.

For the program, I’ve a compiled a list of tools businesses should be using. It certainly isn’t exhaustive or definitive and if you have any suggestions on better or newer tools, I’ll be happy to add them.

Some of the questions we cover on the program include;

  • who ran the survey of motor industry workers?
  • what were most of them going to do?
  • so what sort of businesses can these workers go into?
  • what programs are being offered to these workers?
  • how has starting a business changed over the past twenty years?
  • is the focus on tech startups intimidating people who might want to start a business?
  • what are the basic tools every business should have?
  • a few years ago social media was all the rage, does it matter any more?
  • what’s the number one advice for anyone thinking of starting a business?

Join us

Tune in on your local ABC radio station from 10pm Australian Eastern Summer time or listen online at www.abc.net.au/nightlife.

We’d love to hear your views so join the conversation with your on-air questions, ideas or comments; phone in on 1300 800 222 within Australia or +61 2 8333 1000 from outside Australia.

You can SMS Nightlife’s talkback on 19922702, or through twitter to @paulwallbank using the #abcnightlife hashtag or visit the Nightlife Facebook page.

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The quest to solve students’ problems

In the quest to solve students’ problems, Fluid Education’s Giorgio Doueihi set out on a winding path to provide solutions.

17 year old Giorgio Doueihi had a problem, his school had just rolled out a student diary app that was unusable. So Doueihi, who’d started coding at 13, decided he’d write a new one.

“I’d been dabbling with a bunch of projects at high school and I’d taught myself how to code,” Giorgio told Decoding the New Economy at Telstra’s Sydney Muru-D incubator.

That app was quickly adopted by his high school which had spent $100,000 developing the unusable system. Giorgio finished school, started university and Backpack, as his app became known, was accepted into Sydney University’s student INCUBATE startup program.

“I found out about INCUBATE and thought ‘I might just pitch this idea I had at high school’ then it kind of took a turn.”

Backpack became Fluid Education and Giorgio was accepted onto the Muru-D program, the product was doing well in the market and gaining customers when he decided to shut it down and move to a new product.

“Sales cycle was a large part of the pivot,” he explains. “Another part was that it had changed from a student orientated app to something more enterprise focused, something we were uncomfortable doing.”

So Fluid Education pivoted and is now a service for matching tutors to students and managing their appointment with the new platform about to come out of beta, “We’ve gone back to our roots,” Giorgio explains.

In many ways Giorgio Doueihi story is straight out of the startup textbook, he’s passionate, has identified a problem to solve and was agile enough to change the business’ course when he was unhappy with the direction.

Fluid education and Giorgio will be a very interesting story to follow over the next few years.

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Does venture capital really matter?

Venture capital investments are concentrated in a handful of cities, but does it matter?

Around the world governments are trying to replicate the Silicon Valley startup model. But does that model really matter?

On the Citylab website, Richard Florida looks at which cities are the leading centres for startup investment.

Unsurprisingly eight of the top ten cities are in the United States with San Francisco and San Jose leading the pack. While London and Beijing make up the other two, the gap between the regions are striking with the Bay Area being home to over quarter of the world Venture Capital investment while the Chinese and London capitals com in at around two percent.

global-startup-cities

While these proportions are impressive, the numbers are not. The total VC investment identified by Florida in 2012 is $45 billion, according to the Boston Consulting Group there was $74 Trillion of funds under management in 2014.

That makes the tech venture capital sector .06% of the global funds management industry.

In the US alone over 2013 small businesses raised $518 billion in bank loans, more than ten times the global VC industry.

What this scale shows is how small the tech startup sector really is compared to the broader economy and, more importantly, how the Venture Capital model perfected in the suburbs of Silicon Valley is only one of many ways to fund new businesses.

Even in the current centre of the startup world, it’s estimated less than eight percent of San Francisco’s workforce are employed by the tech industry although that goes up to nearly a quarter in San Jose.

None of this is to say the startups are not a good investment – Thomas Edison’s first company raised $300,000 in 1878, $12 million in today’s dollars, from New York investors including JP Morgan. The Edison Electric Light Company, while relatively modest went on to being one of the best investments of the 19th Century.

That twelve million dollar investment looks like a bargain today and it’s highly likely we’ll see some of today’s startups having a similar impact on society to what Edison did 140 years ago.

Edison’s success created jobs and wealth for New Jersey and New York which helped make the region one of the richest parts of the planet during the Twentieth Century and that opportunity today is what focuses governments when looking at encouraging today’s startups.

So it’s understandable governments would want to encourage today’s Thomas Edisons (and Nikola Teslas) to set up in their cities. The trick is to find the funding models that work for tomorrow’s businesses, not what works for one select group today.

While the Silicon Valley venture capital model receives the publicity today, it isn’t the model for funding most businesses. Founders, investors and governments have plenty of other options to explore.

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Value versus valuation

The story of Skift illustrates how businesses can add value without courting venture capital investors

“There are people who build media companies for valuation, then there are others who build media brands for value,” writes Skift c0-founder Rafat Ali in his account of how the business stopped worrying about raising venture capital and focused on bootstrapping the travel industry website.

Ali’s story of how Skift’s founders gave up on finding investors, refocused their business and found revenues to bootstrap the organisation is worth a read for anybody starting a venture, not just a tech or media startup.

Notable is Ali’s distancing Skift from the startup label, claiming it’s “a meaningless word that comes with too much baggage”.

The story of Skift is an interesting perspective on growing a business outside the current focus on external investors, instead focusing on the value it adds for customers, users and readers. Just as Skift went back to basics, many of us should also focus on how we and our businesses add value.

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An entrepreneurial paradox

Having a nation of entrepreneurs may not indicate a vibrant economy

Being an entrepreneur has become fashionable in western countries, but according to the Global Entrepreneurship Monitor it’s not the developed nations which are the most enterprising.

UK purchasing platform Approved Index took the GEM’s 2014 report and looked at which countries have the most entrepreneurs, defined as being “the percentage of an adult population who own (or co-own) a new business and has paid salaries or wages for at least 3 months.”

Surprisingly Uganda came out on top with 28.1% of the population meeting the GEM’s criteria for being entrepreneurs with Thailand and Brazil in second and third place. Of the developed nations, Australians were the most entrepreneurial at position number 26.

This raises the questions of what is the definition of an entrepreneurs and what drives people to become one?

What drives entrepreneurs?

Part of the answer to the second question is necessity. In Nigeria, a part time business is known as the “5 to 9 job” and, as the BBC reports, those evening enterprises are the way most Nigerians see as being a pathway to the middle classes which wouldn’t be possible for most wage earners.

That becoming an entrepreneur is often a result of necessity is borne out by Uganda’s profile in the GEM report where the authors note are scathing about the government’s support of business.

The biggest enabler of entrepreneurship in Uganda is its internal market dynamics. The most significant constraints are the unsupportive government policies, in terms of bureaucracy and taxes, and a lack of financing.

Indeed, the GEM itself noted in its 2014 report on global entrepreneurship that “there tends to be more entrepreneurial activity in less competitive economies” and Uganda ranked 122nd of 144 economies in the World Economic Forum’s 2014/15 Global Competitiveness Index.

Comparing the indexes

Looking at the Countries listed in the GEM’s top ten and listing the countries by the World Economic Forums competitiveness index ranking and the World Bank’s ease of doing business index starkly illustrates the correlation between business strangling bureaucracy and people setting up their enterprises outside the regulatory strictures.

GEM rank

Country

WEF rank

World Bank rank 

1

Uganda

122

122

2

Thailand

31

49

3

Brazil

57

116

4

Cameroon

116

172

5

Vietnam

68

90

6

Angola

140

181

7

Jamaica

86

64

8

Botswana

74

72

9

Chile

33

48

10

Philippines

52

103

 

Of the top ten countries by their entrepreneur ranking, only Chile and Thailand make the top 50 of either the World Bank’s Ease of Business index or the World Economic Forum’s Global Competitiveness Index. To summarise, the urge to be entrepreneurial is a reaction to a poor business climate.

Defining entrepreneurs

What we could be seeing is a poor definition of an entrepreneur although it’s hard to draw the line between a Ugandan housewife who sets up a market food store and an Australian family that buys a fast food franchise. Is one more entrepreneurial because they have more access to capital?

Perhaps the Silicon Valley definition of an entrepreneur – the founder of a technology startup – is a more appropriate however that excludes vast tracts of western economies and almost all the developing world.

On many levels the Global Entrepreneurship Monitor’s definition is probably the fairest as it indicates how many people are starting their own ventures regardless of their capital position or the nature of their business.

If the GEM’s definition is fair then the leader board indicates that maybe having a nation of entrepreneurs is actually the symptom of a constrained business community rather than that of a vibrant economy.

Maybe political and business leaders need to be careful what they wish for when they call for a more entrepreneurial nation.

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