Category: government

Are Australians too risk adverse for startups?

Does a culture of property speculation hinder new businesses and startups?

Last week I had coffee with Clive Mayhew who chairs the board of Sky Software, a Geelong based student management cloud service.

Clive covered a lot of interesting aspects about Sky’s business; including the opportunities for regional startups, government support and his experiences in Silicon Valley during the dot com boom. All of which I’ll write up in more detail soon.

One notable point Clive raised was how he struggles to get Australian staff to take equity in the business – people want cash, not shares.

The question Clive raises is why and that question is worth exploring in more depth.

My feeling is that it’s a cultural thing related to property – four generations of Australians have been bought up believing housing is the safest way and surest way to build wealth.

As a consequence young Australians are steered into getting a ‘safe’ job and plunging as much money into accumulating property equity as early as possible. Just as mum and granddad did.

Even those who don’t want to play the property game are affected as property speculation pushes up prices and rents; the landlord or bank won’t accept startup stock to pay the bills so employees need cold, hard cash to keep a roof over their heads.

The other angle is tax and social security policies, through the 1970s and 80s various business figures used share option schemes to minimise their taxes and successive Australian governments have passed laws making it harder for businesses to offer these incentives.

Interestingly this not only affects the Silicon Valley tech startup business model but also hurts the aspirations of Australia’s political classes to establish the country, or at least Sydney, as a global financial centre.

Putting aside the fantasies of Australia’s suburban apparatchiks – which if successful would see the country being more like Iceland or Cyprus than Wall Street or the City Of London – it’s clear that the existing government and community attitudes toward risk are reducing the diversity of the nation’s economy.

That the bulk of the nation’s mining and agricultural investment, let along startup funds, comes from offshore despite the trillion dollars in compulsory domestic superannuation savings is a stark example of risk aversion at all levels of Aussie society, government and business.

For those Australian entrepreneurs prepared to take risks, the risk adverse nature of most people becomes an opportunity as it means there’s local markets which aren’t being filled.

The problem for those local entrepreneurs is accessing capital and that remains the biggest barrier for all small Australian businesses.

How this works out in the next few decades will be interesting, it’s hard not to think though that Australians are going to have to be weaned off their property addiction – whether this takes a harsh recession, retired baby boomers selling down their holdings or government action remains to be seen.

In the meantime, don’t base your business plan on staff taking equity as part of their employment package.

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Taxing the internet

Cash strapped governments are trying to find new ways of raising revenue. Can they find sources online?

On Friday the US Senate passed a motion supporting the rights of states to collect sales taxes on internet sales.

While not a binding vote or a law, this is the latest blow in the fight to control, and tax, online commerce.

The stakes are high, companies like Amazon have built their business models on basing themselves in low tax jurisdictions while many bricks-and-mortar retailers have complained they are at a disadvantage compared to out-of-state or international suppliers.

For consumers a few dollars in avoided tax isn’t the main reason they shop online, most internet shoppers cite a better range, convenience and, in many cases, superior service as the reasons they buy over the web.

But it is clear the online retailers do get an advantage over local stores.

While provincial governments cite protecting employment in their regions as part of the motivation for trying to tax online sales, the bigger issue is the desperate search for sources of revenue to balance cash strapped state and local budgets.

Those budget requirements aren’t going to ease – the global economy is restructuring in a way that doesn’t favour 19th Century levies like sales tax or stamp duty, while aging populations and declining incomes are increasing demands on government services.

With governments caught in a pincer of rising costs and falling revenues, it’s not surprising they are trying to find ways to get more money.

It’s not clear though they’ll win this battle though, the Senate vote is a symbolic gesture and the difficulties of being able to tax all forms of internet commerce can’t be underestimated.

The struggle ahead for local governments also can’t be understated, the public demands more services while administrators have to deal with rising infrastructure costs and the pension liabilities of retired public servants, teachers, firefighters and police.

Even the bravest politician struggles to find the political capital needed to deal with that challenge.

How we tax the internet is going to be a task that will define our governments and society in the first half of this century. We’re going to have to think very carefully about the choices we have ahead.

Tax image courtesy of ctoocheck through sxc.hu

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Beer and 3D printing lead a Belgian town into the future

One town in Belgium shows how new industrial hubs are developing around emerging technologies like 3D printing

While many cities and states are fighting to subsidise declining businesses others are becoming hubs of future industries. The story of Leuven and 3D printing is one of the latter.

A great article and accompanying presentation from Reuters illustrates some of the possibilities with 3D printing technologies.

Most of the article revolves around the Belgian company Materialise whose CEO, Wilfried Vancraen, has been a pioneer in 3D printing.

An interesting upshot of Materialise’s development is how the company’s hometown, Leuven, is promoted by the firm as the ‘world capital of beer and 3D printing.’

Belgian town Leuven is promoted as the beer and 3D printing capital

Calling yourself the ‘World Capital of Beer’ is a big – and one suspects risky – call in Belgium so it’s not surprising that the town itself doesn’t use the tagline.

Being the world capital of 3D printing though does have some allure of Leuven being able to build itself into one of the world’s hub for the new technology.

Those hubs are a feature of every industrial revolution – whether it’s Silicon Valley and the manufacturing centres of South East China today or the English ironworking and cotton milling hubs of the 18th Century.

For governments looking at attracting job creating industries, instead of desperately trying to attract the old industries of the 20th Century it might be worthwhile to consider what the community has to offer the business leaders of this millennium.

Leuven may or may not become one of the world hubs of 3D printing, but at least the city has a chance – those bidding for car factories, movie productions or prisons are destined to decline even if their bids succeed.

Beer pouring image courtesy of dyet and sxc.hu

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Australia welcomes the multi generational mortgage

Australia starts to repeat Japan’s experience with multi generational mortgages. With a twist that might be more debilitating than the Japanese lost decades.

At the height of the Japanese property boom in the 1980s, the hundred year mortgage came into being.

Pushing payments onto children and grand-children was the only way home prices could continue to rise once they hit levels which the average Japanese worker could ever afford with a more traditional twenty or thirty year mortgage.

Twenty five years later Australia finds itself in a similar position as parents guarantee their childrens’ mortgages.

Repeating the Japanese mistake

While the Japanese looked to sticking their mortgages onto their kids and grandkids, Down Under the kids are fighting back and getting mum and dad to underwrite their unaffordable loans.

This weekend’s Sydney Morning Herald features in its property section the story of how Sharon and Graeme Bruce guaranteed their son’s and his fiance’s mortgage in Sydney’s inner suburbs.

While the story isn’t clear on the size of the deposit (which isn’t surprising given the SMH’s shoddy editing), it appears the Bruces’ have guaranteed around $300,000 so his son and future daughter-in-law can grab a five bedroom, 1.45 million dollar mansion.

One wonders what great businesses Matt and Hannah could build if mum and dad were prepared to stump up a similar amount to invest in a start up?

Australia’s property obsession

Sadly we’ll never know – in Australia, the smart money gets a job, pays off a mortgage and accumulates wealth through investment properties. What cows are to African tribesmen, negatively geared units are to the Australian middle class.

The hundred year strategy hasn’t worked too well for Japan, with a declining population those mortgages entered into a boom level 1980s values now don’t look so attractive and are one large reason for the nation’s lost decades.

In Australia, things aren’t likely to work so well either. The Baby Boomers and Lucky Generationals – those born from 1930 to 1945 – guaranteeing their kids’ and grandkids’ mortgages are relying on ever increasing property prices.

This is understandable given that few of them have any experience of long term stagnation, let alone decline, of property values but it leaves them incredibly exposed should the Aussie housing market slump.

Can an Aussie property decline happen?

Many Australians, particularly those with vested interests, maintain such a decline can’t happen but the prospects aren’t good as the SMH story shows;

The couple had attempted to buy a small terrace in Newtown but kept getting pipped at the post by other young professional couples. At a higher price point they had no competition.

Despite his parents’ generosity he said he would still need to rent out a few of the rooms to help pay for the mortgage.

So Matt can’t afford the mortgage. That’s not good starting point and one that could cost his parents dearly, which they don’t seem to care about much.

”Obviously my dad guaranteeing the loan was the only way we were going to purchase this,” Mr Bruce said. ”You need to have a 20 per cent deposit otherwise the banks want you to pay insurance … it’s a bit of a rort really.”

It’s fair to call mortgage insurance a rort – as it certainly is – but its purpose is to protect the banks should a mortgagee default and the financiers find themselves out of pocket.

With Matt’s parents getting him out of paying that insurance his bank has much better default protection, equity in his parents’ property.

Guaranteeing risk and misery

I’m not privy to the finances of Sharon and Bruce, but most of their contemporaries can ill afford to lose several hundred thousand dollars in home equity in their later years.

That is where Australia’s multi-generational mortgages could turn very nasty, very quickly as older Australians find themselves having to deliver on the guarantees they gave on behalf of their over committed offspring.

In Japan, it’s taken a long time for the population to realise their national wealth has been squandered on twenty years of propping up unsustainable property prices and economic policies.

One wonders how long it will takes Australians to realise the same has happened to them and what the political reaction will be.

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Leadership in a connected world

How do managers and executives lead in a connected world?

Managing a business or government agency as information pours into organisations is one of the great challenges for modern executives.

As part of the Australian Cisco Live event, a panel looked  at Public Sector Leadership in a Connected World, many of the issues discussed apply to private sector executives as they do to public sector managers.

Cisco’s Director of Global Public Sector Practice, Martin Stewart-Weeks, kicked off the panel with the observation that “we now live in a world where information has become completely unmanageable.”

Martin quoted from David Weinberg’s book Too Big To Know, Rethinking Knowledge Now That the Facts Aren’t the Facts, Experts Are Everywhere, and the Smartest Person in the Room Is the Room. The author has a good explanation of his book in this YouTube clip.

Trusting the community seems to be the biggest problem facing politicians and the public service, policy consultant Rod Glover puts the general distrust towards governments on the failure of leaders to consult over changes and decision.

Economist Nick Gruen and Australian Industry Group adviser Kate Pound echoed this problem in that a change of culture is needed among leaders towards the way information is controlled and managed.

Nick sees that culture changing while Rod thinks there will need to be demonstrated successes before risk adverse public service leaders will be prepared to adopt new ways of managing.

Kate’s view is that culture change will require a realignment of incentives which will make managers accountable for the delivery of services. She cites a situation where businesses are obligated to register online but the agency’s website doesn’t work.

So the problem is as much gathering the right data along with processing the information inside an agency. Both are challenges for organisations with rigid hierarchies and  information flows.

Information is no longer power — it’s how you use it. But the structures are still based around access and control of knowledge.

The big culture shift for politicians, public servants and corporate executives is we can no longer hoard information.

For managers in both the public and private sectors, the task is now to share information and trust the right people will use it well.

Paul travelled to Cisco Live courtesy of Cisco Systems

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Now may not be a good time to buy Melbourne property

Why do monster skyscrapers mark a looming economic downturn?

There’s plenty of indicators that can be used to predict the health of an economy

While my favourite is the mini-skirt index, the most reliable is when rich folk start building huge skyscrapers.

Whenever developers propose a hundred storey building it marks the top of the property cycle. Should they get to actually build the thing, you can be guaranteed a nasty economic downturn is about to hit.

The Skyscraper Index’s historical record

This track record was set with the very first megatower – the Empire State building was started just before the 1929 stock market crash and completed as the great depression tightened its hold on the United States.

Forty years later New York’s ill-fated World Trade Center opened just in time to welcome the 1973 oil shock and subsequent recession.

A more recent example is Dubai’s Burj Khalifa, the world’s tallest building which was topped out in time for the city’s property crash and economic rescue by neighbouring Abu Dhabi.

In Australia, the most notable downfall was 1980s entrepreneur Alan Bond who planned to build a 140 storey tower on the World Square site opposite Sydney’s Town Hall.

The site was excavated but Bond went broke before work started and the hole remained for over a decade until a more modest 40 storey tower was built on the site.

Australia 108

So the news that property developers want to build a 108 storey tower on Melbourne’s Southbank should worry the Victorian government and unsettle the state’s property owners.

What’s always notable about these super skyscrapers is the garishness of the project. While Australia 108 won’t match the Burj for sheer Las Vegas gaudiness, it will feature the ‘Star burst’, a star-shaped Sky Lobby and hotel at the top of the tower.

Why the Skyscraper index works

The reason why 100 storey buildings are such a reliable economic indicator is because they illustrate there’s too much dumb money in the economy. It rarely makes sense to build such tall buildings.

Designing and building high rise buildings is complex and expensive – the higher you go, the more construction challenges there are as this Popular Mechanics article describes.

Skyscrapers are subject to the law of diminishing returns as the taller the building is, the more space that’s needed for services like elevators, air conditioning, water supplies and fire protection which reduces the landlord’s rentable floorspace on the lower levels.

When a building reaches a hundred storeys, there’s little space available on the lower floors for paying tenants. So the economics don’t add up.

Builders, property developers and financiers know this so when they start proposing projects that don’t make commercial sense it’s a fair indication the locals are gripped with irrational exuberance and Adam Smith’s invisible hand is going to deliver a short, sharp slap to the back of the economy’s head.

Does it matter to Australia?

And so it is in Melbourne, which is going to be interesting to watch as South East Queensland is the only Australian metropolitan area to suffer a prolonged property downturn in the last twenty years.

Hopefully Melbourne’s woes won’t affect the rest of the Australian economy but given how much the nation has invested in property and the stratospheric debt levels to service that speculation, it may well be that the rest of the country will follow Victoria.

Winning the next election might not be a good thing for Tony Abbot and his followers who genuinely believe a Liberal government will deliver a magic pudding to the home of every dinky-di Working Australian.

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New York celebrates its entrepreneurs with Made in NY

New York City shows how cities and nations have to promote their economic strengths

Part of a thriving industrial hub is having the business and skills that support the sector. If you’ve got them, you need to tell the world you’re open for business.

Somebody who is doing this well is New York City’s Office of Media and Entertainment which runs the Made In NY program.

While much of the focus of the program is on attracting film production, Made in NY recently branched out into promoting the city’s tech community boasting successful businesses like video sharing site Vimeo, tutor matching service Tutorspree and stock photography supplier Shutterstock.

Towards the end of the Shutterstock clip one of the staff mentions ‘drop bears’ – a little bit of Sydney argot creeps into the story.

It’s the Sydney connection that makes the Made In NY campaign so bittersweet, I was involved in setting up the Digital Sydney project for the New South Wales government.

While Sydney doesn’t have the size of New York’s or London’s tech industries it does share the advantage of being one of the most diverse cities in the world. The work of organisations like ICE in Parramatta is important in realising some of that potential.

That potential is huge – having sizeable communities of East and South Asian language speakers gives Sydney a real opportunity in the Asian Century.

Unfortunately most of those communities live in Sydney’s West and while lip service is given to the needs of that region most economic development work focuses on corporate welfare for established interests and supporting inner city stuff that white folks like.

When I started at what was then the Department of State and Regional Development in 2009 I was told that many in the agency believed NSW stood for “North Sydney to Wooloomoolloo”, something that largely turned out to be true. The west of Sydney, like most of the state, took second place behind the wants of big business.

This is what’s encouraging about the Made In New York campaign, it promotes smaller business – although they all seem based in lower Manhattan staffed largely by a middle class monoculture, which seems to be a problem when you buy into hipster chic.

Hipster chic is one of New York’s strengths and that’s what every city and country needs to be doing in a global connected economy.

If you can’t define and articulate what it is you add to the economy, then you’re locked into the low value, small margin commodity end of the marketplace and that is a tough place to be.

The question for all of us, on a personal and a national basis, is do we want to be price taking commodity producers or do we want to develop the high value, growth business of the 21st Century.

New York City has made its choice, we have to make ours.

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