Category: government

When government support goes wrong

Government incentives may look enticing for businesses but StartCon’s Melbourne misadventure illustrates the risks

Last year the Sydney startup and business communities were stunned by the SydStart startup conference announcing it was rebranding itself as StartCon and moving to Melbourne after the Victorian government had offered to fund the event.

At the time StartCon’s Matt Barrie and the Victorian government were most certainly in love with Barrie describing how Melbourne was well placed to be Australia’s startup centre and highlighting the lack of support from the City of Sydney and the New South Wales state government.

Sydney’s shame

In Sydney, the announcement caused a great deal of hand wringing as the city startup and tech communities worried that government neglect would see the more proactive Victorian government attract businesses and talent.

Now the friendship with Melbourne is over with Barrie publishing a scathing blogpost on the inertia and duplicity of the Victorian state government.

The tale of StartCon and its falling out of love with Victoria holds a number of lessons for businesses being tempted by the siren call of government incentives and the risks to taxpayers.

What can I announce today?

The announceable culture is endemic in Australian politics. Having announceables is absolutely critical part a ministers’ life and their careers can defined just as much by not having enough good news to announce as being victims of bad press.

In the last NSW Labor government, ministers had hard KPIs they were held to in cabinet which gave rise to Chatswood-Parramatta railway line probably being the most announced infrastructure project in history.

While the current Victorian government may not have those formal measures, Small Business Minister Phillip Daladakis is a very good player of the announceable game. He’s a man with a future in state politics.

The mistake of the StartCon organisers was to agree to public announcement before they had secured the money.

Public service thinking

I’d never heard of Dr Pradeep Phillip prior to his appointment to run LaunchVic but his previous position as secretary of Victoria’s Department of Health and Human Services doesn’t seem to immediately qualify him to run the state’s startup development agency.

His conduct, and that of his staff, in the published correspondence chain are those of classic risk averse public servants. Not a bad thing when you’re dealing hospital procurement practices but when you’re dealing with startups and new businesses it would be nice to have someone with more relevant private sector experience.

A notable part of the Victorian public service’s risk aversion is the language of the convoluted grant agreement where the state government may provide support. This, along with the classic attempt of shifting all responsibility away from the agencies, opens a lot of wriggle room for the government to get out of paying the publicly stated amounts.

Equally the use of registered mail after weeks of ignoring emails smacks of institutional backside covering. This underscores the disconnect between public servants and the business world, particularly with smaller organisations, events and startups.

The futility of government support

For StartCon’s organisers their embarrassing and terrible Melbourne experience underscores the futility of depending upon government incentives to site your business or event.

In choosing where to base a business important factors are the access to markets, labour and capital with affordable office space being another key issue. For event organisers, the access to reasonably priced venues and accomodation for the attendees – two factors where Melbourne has a real advantage over Sydney – are equally critical.

Government incentives are almost irrelevant to those consideration and really only become the deciding factor if the competing locations are equal in the other respects.

Counting the real cost

The real damage though is to StartCon’s credibility – having made the public decision to move to Melbourne with much fanfare the climb down is a humiliation – but, more importantly the event is compromised in the eyes of its Sydney supporters. The chase for government money also draws a scent of hypocrisy among a group known for its Libertarian leanings.

Equally however the Victorian taxpayers should be concerned at how their government is announcing support for businesses and events without real substance. One suspects that a fair proportion of Mr Dalidakis’ announceables have similar backstories.

More importantly Victorian taxpayers should be questioning the nature of support – with the SydStart announcement there was widespread irritation in the Melbourne tech community that a Sydney based event should get such government backing and similarly funding foreign multinationals to setup Australian sales offices in the southern state’s capital is going to do much to build the state’s tech sector.

Australian sovereign risk

Something all Australian taxpayers and businesses should be concerned about is the unreliability of governments of both complexions at state and Federal level. Too frequently promises are broken leaving companies and communities out of pocket.

The shutting down of the COMET scheme under the new Federal Labor government in 2007 and then the incoming Liberal government replacing the ALPs Commercialisation Australia program in 2013 are good examples of sovereign risk where entrepreneurs spent thousands of dollars and hours only to have the grants pulled without notice.

Innovation schemes are only one example, almost every program is at risk when a new minister, let alone government, is appointed. It would be a foolish manager or business owner who would base their financial forecasts on any Australian government policy.

As we saw in the City of Sydney elections, the real key to developing industry is to have an attractive, well serviced location with access to capital, skills and markets. Melbourne may well do that better than Sydney but it won’t be achieved by ministers bearing gifts.

Similar posts:

Freeing business investment

Funding the businesses of the future will be critical to addressing the automation driven shifts in employment, how we fund them is one of today’s challenges.

What would happen if the world’s richest people invested in startup businesses? Bloomberg Business ran an interesting, if flawed, thought experiment looking at how many nascent companies each country’s richest individuals could invest in.

It’s surprising how low those numbers are and, if anything, the result underscore how the 1980s and 90s banking sector ‘reforms’ caused the world’s financial system to pivot from its historical purpose of funding commercial enterprises into speculation, rent seeking and manipulating markets.

Apart from a smattering of venture capital not much has replaced the banks in funding the SME and entrepreneurial sectors, if anything it has been those ultra high net wealth individuals who have been financing the investment funds providing capital to entrepreneurs.

How the finance industry evolves in the face of the fintech boom and a world that’s slowly becoming less indulgent of the industry’s greed will be one of the defining things of next decade’s business environment. For the small business and startup sectors getting the funding right will also be a key factor.

The biggest question though is job creation, being able to fund new and innovative investments will be one a critical concern for societies dealing with the effects of an increasingly automated economy.

Similar posts:

Lessons from the CIA investment fund

Dawn Meyerriecks, the CIA’s Deputy Director for Science and Technology, gives an interesting insight into the agency’s investment philosophies

One of the little discussed reasons for the US tech industry’s success is the role of military and intelligence spending by the government. Not only are various agencies funding research and enthusiastically buy technology, they are also being strategic investors in many companies.

In Sydney last week Dawn Meyerriecks, the CIA’s Deputy Director for Science and Technology, gave an interesting insight into the agency’s investment philosophies at the SINET61 conference.

The conference was aimed at drumming up interest in the technology security industry along with showcasing the connections between Australia’s Data61 venture and the US based Security Innovation Network (SINET).

SINET itself is closely linked to the United States’ security agencies with chairman and founder Robert Rodriguez being a former US Secret Service agent prior to his move into security consulting, venture capitalism and network-building.

Compounding the organisation’s spook credentials are its support from the US Department of Homeland Security along with the UK’s Government Communications Headquarters (GCHQ), so it was barely surprising the Australian conference was able to attract a senior Central Intelligence Agency officer.

Investing in flat times

“Flat is the new up,” says  Meyerriecks in describing the current investment climate of thin returns. In that environment, fund managers are looking for good investments and the imprimatur of the CIA’s investment arm, In-Q-Tel, is proving to be a good indicator that a business is likely to realise good returns.

“If you can predict a market – and we are good predictors of markets – then the return on investment is huge,” she says.

“In-Q-Tel really leverages capital funding for good ideas. We get a twelve for one return, for every dollar we put in it’s matched by twelve dollars in venture capital in emerging technologies.”

Attracting investors

For the companies In-Q-Tel invests in along with those that supply technology to the organization, the CIA encourages them to seek private sector investors.

“What we’re telling our supply chains is you go ahead and tap into the capital markets,” Meyerriecks says. “If you can turn that into a commercially viable product then will will ride the way with the rest of the industry because it’s good for us, it’s good for the country and it’s good for the planet.”

Adding to the CIA’s attractions as a startup investor are the opportunities for lucrative acquisition exits for the founders, she believes. “Not only are we using that venture capital approach for emerging technologies but our big suppliers are sitting on a ton of cash.”

Diversity as an asset

Another lesson that Meyerriecks believes will help the planet, and the tech industry, is diversity. “Globalisation has show isolationism doesn’t work,” she says.

“Back in the day when I was a young engineer the best way to make sure your system was resilient was to harden its perimeters. the best ways to be ‘cyber resilient in the old days was by drawing the barriers to keep the bad guys out.”

“The best way to be cyber-resilient in the old days was to draw big boundaries around yourself to keep the bad guys out. The latest studies look at other things because you want to be resilient, you want high availability.”

Now, system diversity is seen as an asset.“Biologically the three factors that contribute to resilience are the ability to adapt, the ability to recovery and diversity,”  Meyerriecks says. “We look to deliver high availability among components that may not themselves have high reliability.”

The future of investment

“I think we’ll see commercialisation still driving investment for applied R&D in particular,”Meyerriecks said in a later panel on where the agency is looking at putting its money.

“The big game changers will be around the edge, taking SDN (Software Defined Networking) to its logical extreme giving everyone their own personal networks, not just in data centres but at the edge of the network.”

“I think there’s lots of things that the commercial industrialisation of the technology and physical system are going to force us to grapple with on many levels.”

Risks in managing identity

An interesting aspect of Meyerriecks’ talks at SINET61 was her take on some of the technology issues facing consumers and citizens, particularly in the idea for individuals having their own personalised network.

“This opens up a whole range of things, ” she suggests. “Do I eventually not just be an IMSI or EIMI (the mobile telephone identifiers) but do I become an advertising node, does that become my unique ID? Do I a become a gaming avatar?”

“Then we get into the whole Big Data area. Computational anonymity is a phrase we use. At some point people start saying ‘this is crossing the line’ – it crosses the ‘ooooh’ factor.”

Changing Cybersecurity

“I think the definition of cybersecurity will be expanded to much more beyond wheat we’ve classically thought about in the past.”

Meyerriecks’ presentation and later panel appearance was a fascinating glimpse into the commercial imperatives of the United States’ intelligence community along with flagging some of the areas which concern its members as citizens and technology users.

The US security community’s role in the development of the nation’s tech sector shouldn’t be understated and Meyerriecks’ observation that private sector investors tend to follow the CIA’s investment path underscores their continued critical role.

Similar posts:

The limits of how governments can help startup businesses

The City of Sydney elections illustrate how limited governments are in promoting a region’s startup sector.

Over this week I’ve been posting a series of interviews with the candidates for this week’s Sydney Lord Mayoral election. All of the teams have interesting schemes and ideas on how they can improve the city’s profile as a global tech centre.

While each team’s plans are worthy, it’s worth asking exactly what governments can do to make their communities more attractive to businesses and whether short term subsidies and incentives can help.

There is some evidence they can, prior to San Francisco changing its tax rules the city took second place to Silicon Valley in the southern Bay Area. In the last ten years, the city has become the focal point for the tech industry.

However there is a counter argument that San Francisco benefited on a generational shift of lifestyle preferences away from the leafy suburban lifestyles of Palo Alto and San Jose to the grungy but walkable communities of the Mission and SOMA.

The Bay Area though is a special case, Silicon Valley’s success as a tech hub is based upon massive Cold War tech spending that drove the region’s industry and its that high level support that probably tells us more about government support.

In the case of London and Singapore, the successes have been due to the national governments putting in broader economic reforms and incentives. Also their proximity to Europe and East Asia respectively has made both cities attractive.

On balance it’s those broader economic factors that make regions attractive as industries clusters – local incentives count little compared to access to factors like markets, capital and skilled labour. Taxation is, at best, a secondary issue.

The biggest challenge for Sydney, and most Australian cities, is the the crippling cost of property. In 2013, staff.com released a survey showing Sydney to be second only to Zurich in the cost of establishing a startup.

In many respects, the cost of property doesn’t really matter to prosperous industry hubs – San Francisco, London, Singapore and New York are all eye wateringly expensive and yet they still thrive – however all of those cities have better access to capital and markets, if not labour, than Sydney.

Addressing Sydney’s chronic shortage of affordable accomodation is firmly in the state and Federal governments’ remit and beyond giving property developers a green light to build high rise apartments neither level of government has shown any interest in addressing it.

Similarly, the tax structures which penalise Australian employees of high growth businesses and dissuade investment in early stage ventures are totally the responsibility of the Federal government and it’s hard to see that changing in the term of the current dysfunctional administration.

The relative powerlessness of local governments leaves initiatives by the City of Sydney limited in scope and schemes to promote the city or offer incubator space are peripheral to the factors that encourage the development of a global industrial centre.

Ultimately though, the question has to be how much any government can do to create a Silicon Valley, factors such as labour availability and access to capital come down as much to the community’s attitudes and business’ risk tolerances.

So perhaps we focus on what governments can do for business. Maybe just providing a level playing field can be the best we can hope for.

Similar posts:

Sydney’s Mayoral Tech Race – the ALP’s Linda Scott

The ALP candidate for the City of Sydney mayoral election has a raft of policies to promote the city’s tech sector.

A few weeks back I wrote about how the tech sector had become an issue in the Sydney Lord Mayoral election to be held on September 10.

Following that post, I approached the four major candidates to get their policies on how Sydney can do better in attracting tech startups to the city. The idea was to get an overview published in one the major newspapers but sadly my pitches were ignored.

However the issues raised are important to Sydney so over of the next few days I’ll publish each of the candidates’ responses to my questions along with any other conversations I’ve had with their teams.

The first candidate we look at is Linda Scott, the Australian Labor Party candidate. Councillor Scott was elected to the City of Sydney Council in 2012 and is a researcher at The University of Sydney and lives in the inner city suburb of Newtown with her husband and two young children.

“As a Labor Councillor, I moved that the City conduct a feasibility study into the possibilities for implementation of smart technologies for City infrastructure and services. The current Lord Mayor and her team voted against it, defeating the measure.

I’ve also held a start up Roundtable for City of Sydney start ups with Labor Ministers Chris Bowen and Ed Husic to hear ideas for how every level of government can improve our support for the start up communities.”

What are your policies relating to encouraging tech  startups?

“As a Labor candidate for Lord Mayor, my Labor  team and I are committed to  delivering smart technology to the City’s infrastructure and services for the future.

“From more efficient watering of our parks to parking to better planned traffic flows, the Internet of Things has the potential to revolutionise our City – and it’s an opportunity we can’t afford to miss.

“We are committed to working with our start ups and universities to support  the continuation and creation of Tech  Startup  precincts, and will ensure planning policies foster these precincts.

“Labor will also deliver a dedicated, City-owned work space to form part of a Tech  Startup  precinct and open up City spaces for tech startup networking events and will host an annual festival to promote Sydney as an international tech  startup  hub.

“If elected, we will explore establishing dedicated innovation and commercialisation ‘landing pads’  with our sister cities, and neighbouring and regional councils here in New South Wales.

“Labor  will also work to support the continuation and expansion of existing university-based hubs and accelerators in  the City of Sydney along with hosting an annual festival to promote coding among young people. “

What do you see as Sydney’s strengths in this sector?

“Our people. Sydney is a great global city, and rightly is the first port of call for international trade and investment. Many of our nation’s and the world’s major firms have their Australian headquarters based in Sydney.

“We  have the critical mass  of creativity,  capital  and access to services  to provide fertile ground for tech startups.”

What is Sydney not doing well at the moment?

“The Lord Mayor has rejected Labor’s moves to embrace smart technology.  It’s time for change at the City of Sydney.

“We also need more affordable space for start ups, and Labor is committed to delivering this.

What are we doing well?

“Sydney has great  hubs and accelerators that  Labor  will continue and expand where possible.”

How do you see the City’s relations with state and Federal government affecting current efforts?

“As a Labor Councillor, I already work closely with my state and federal colleagues and governments to ensure I secure what’s best for the City of Sydney. The state and federal governments have the financial strength and capabilities to assist the City in delivering its tech  startup strategies.

“For example, a federal Labor  Government committed to create a 500 million dollar Smart Investment Fund and a nine million National Coding in Schools program – both measures I will continue to secure for the future.”

Currently Victoria and Queensland are doing better at attracting businesses.  Should we do anything to counter that and, if so, what?

“Sydney’s strength and appeal as a tech  startup  hub should be the size and diversity of creativity, capital and access services it can achieve.

“With all the measures listed above, and working with stakeholders, Labor is committed to doing better for the future of our start ups.”

How can Sydney compete globally against cities like Singapore, Shanghai and even Wellington?

“Our City needs to continuously increase its exposure to new challenges and new ideas from around the world as well as at home.

“Exploring opportunities for establishing innovation and commercialisation landing pads with sister cities around the world as well as neighbouring and regional councils  will be an important first step in that effort.

“Most importantly, increasing the availability of affordable work space in the City of Sydney will also be critical, and attracting angel investors to Labor’s annual showcase event in the City.

How does your tech industry policy fit in with other key Sydney employment sectors like the creative industries, financial services and education?

“Labor is committed to the creation of a fun, fair, affordable and sustainable City for the future for all businesses and residents. “

It’s hard to see the Labor Party getting a great deal of traction in the council elections, Scott herself only received ten percent of the mayoral vote when she ran for the 2012 election and was the only ALP councillor elected.

The benefit though of the Labor ticket is that Scott’s positions fit nicely with her party’s state and Federal. However, given the party will remain in opposition at both levels for at least two and a half years – although nothing is certain in the farce that Australian Federal Politics has become, that co-ordination means little for the City of Sydney.

Similar posts:

Risks in the disruption machine

Joining forces with the tech disrupters can be risky as governments doing deals with Uber over public transit are learning

At last year’s Dreamforce, Uber founder Travis Kalanick sat down with Marc Benioff to discuss the ride sharing service’s history and its aspirations to reinvent public transit.

Those aspirations are coming to fruition reports The Verge as local governments across the US sign agreements with Uber to supplement their public transport networks.

In entering those arrangements local officials are finding a number of problems, not least the service’s obsession with secrecy that falls foul of US public data practices and legislation.

That clash between the Silicon Valley obsession with hoarding intellectual property and US open government beliefs is one that will become more common as agencies attempt to ‘Uber-ize’ their services.

However the Uber model isn’t working well in some markets as the fate of Washio shows.

A month ago Mic Magazine wrote about how Washio was a symptom of the ‘disruption’ being wreaked on communities by the tech industry as high priced services displaced undercapitalised smaller business.

Washio’s success, like Uber and most of the tech startups following the Silicon Valley greater fool model, required capturing enough of the market to have a dominant position in the marketplace making it hard for new competitors to enter while driving out existing players who can’t afford to make losses indefinitely. This is path followed by Amazon, Microsoft and even IBM.

However this strategy is risky if there’s not enough capital, which Washio has now found with the service entering bankruptcy this week.

The sad thing is Washio’s unprofitable and unsustainable business model let them kill other companies whose owners, managers or investors were unable or unwilling to compete with a loss making enterprise.

For small businesses in particular the effects of a well funded megalith intent on driving them out of business is particularly cruel – as we saw with booksellers and Amazon.

Local governments need to be particularly aware of the risk of making Uber the only provider of neighbourhood public transport, leaving them the sole player that owns all their data could well prove particularly costly, one only wonders what could happen had a local hospital done a laundry deal with Washio.

Similar posts:

Australia’s NBN debacle

However when it comes to missed targets, broken promises and the sheer scale of money wasted, Australia’s National Broadband Network dwarfs all the world’s broadband roll outs.

One of the most stunning examples of Australia’s uncompetitive, post-mining boom economy is its National Broadband Network.

Announced in 2009 to provide high speed data access to the nation to address the effects of thirty years of poor decisions and poorly thought out policies by successive governments, the project was intended to upgrade the telecommunications network and break the near monopoly of the incumbent telco, Telstra.

Sadly the project quickly foundered as the managers of the company set up to build the network made a series of poor decisions that stemmed from their underestimating of the project’s scope and their arrogant hubris in rejecting the advice of those who did.

To compound the problem, the project was politicised by the intellectually lazy and opportunistic Liberal opposition who promised they could build it for less by utilising existing telephone and Pay-TV infrastructure. On becoming government, the then communications minister and now Prime Minister changed the scope to do that and promised a quicker and cheaper rollout.

Last Friday, the folly of the Liberal Party’s plans were shown when the National Broadband Network company, nbn™, issued their updated business plan that detailed a further retreat from both the original project scope and the government’s promises.

The Melbourne Age’s Lucy Battersby illustrated how completely Malcolm Turnbull and the Liberal Party bungled their costings, showing just how mediocre and dishonest the government and Prime Minister have been in estimating the cost of the project.

However, NBN Co underestimated the cost of using existing hybrid-fibre coaxial [HFC] cables laid by Telstra and Optus in the 1990s. Last year it calculated an average cost of $1800 per house. But detailed field work discovered the cost was actually $2300.

…

In 2013 the Coalition estimated FTTN connections would cost about $900 per premise and this was raised to $1997 in a 2014 strategic review, and raised again in 2015 to about $2300.

In the real world, being out by nearly 300% would cost an estimator or executive their job and for a small business could well see them being put out of business, but in the carnival of mediocrity that marks modern Australian politics, those responsible for such mistakes only thrive, as do the managers of nbn™ who recently awarded themselves fat bonuses.

Adding insult to injury for the long suffering Australian taxpayers and broadband users is that the nbn™’s management have revised the scope again to overcome increased costs and now only 21% of consumers will get a fibre connection as opposed to the 40% claimed when the new government changed the scope.

Those scope changes beg the question why anyone bothered in the first place. Had the network been left with Telstra there’s a reasonable chance 20% of customers would have ended up on fibre by early next decade as the economics of maintaining and installing the technology overtook the older copper system.

Probably the biggest insult though to Australian customers though are the desperate attempts to make the new network profitable with plans to gouge the nation’s telco users as Fairfax’s Elizabeth Knight reported.

Data use per user is anticipated to grow at a compound rate of 30 per cent per cent to 2020.

At first blush these increases in usage might look exaggerated – but wait. Only last year NBN was working off the expectation that this year its existing customers would consume 90 gigabytes per month. But the current rate of consumption is actually 131 gigabytes per month – and rising.

Thus as the years progress towards 2020, NBN not only gets an increase in customers, it get an increase in revenue per customer .Monthly average revenue per user is forecast to increase from $43 this year to $52 in 2020..

 

So Australians will be expected pay more for their substandard connections to help an organisation that has consistently failed to meet its promises and targets. It should also be noted that rising Average Revenue Per User (ARPU) is the opposite of what’s been happening in the real world over the last twenty years as revenues, and profits have fallen.

To be fair, it’s not just Australia that has struggled with rolling out fibre networks. In the US, Google Fiber is going through blood letting and scope changes as the company struggles to meet targets and keep costs under control. That same experience has been repeated around the world.

However when it comes to missed targets, broken promises and the sheer scale of money wasted, Australia’s National Broadband Network dwarfs them all.

Australian taxpayers, voters and telecommunications users should be asking hard questions of their political leaders

 

Similar posts: