Paul Wallbank – Brilliant Communications

Category: Investment

  • The limits of how governments can help startup businesses

    The limits of how governments can help startup businesses

    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.

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  • Autodesk and the China manufacturing challenge

    Autodesk and the China manufacturing challenge

    At the recend Autodesk University event in Sydney I had the opportunity to talk with Pat Williams, the company’s senior vice president for Asia Pacific.

    Williams’ beat covers all of Asia and he’s based out of Shanghai where he’s been based for the last eight years and prior to that he spent a decade in Japan.

    Having spent so much time in North East Asia, and heading to the PRC the following week myself, it was interesting to hear Williams’ views on how industry is changing in China and ther country’s attitude to American software companies.

    “There’s a lot of noise that gets made in China about their local IP and the local vendors and what I say is ‘the Chinese companies are competing in a global market and they are under the same competitive pressures as everybody else in the world so when they find a better tool they use it. Despite all the noise, business is quite good there.”

    For the Chinese economy, the aging and increasingly expensive workforce presents a problem, something addressed by the China Manufacturing 2025 plan which sees the country increasingly competing in high tech sectors such as aerospace, telecommunications and biotech fields.

    “China’s kind of an anomaly,” says Williams of the country’s immense growth rates. “From a government perspective there’s a lot of horsepower behind the things that they do – China 2025, their manufacturing initiative, you’ve got what they’ve been doing with Building Information Modelling (BIM) and our architectural tools.”

    They’ve really kind of spearheaded what we’ve been talking about on things like 3D printing of houses. China on its own is just this mushroom that’s happening.”

    While the industrial shift in China and the rest of Asia is promising opportunities to companies like Autodesk, that change is affecting their workforce as well with the company announcing plans to lay off ten percent of their workforce earlier this year.

    Those cutbacks are part of the adjustment to a new market reality says Williams, “it was part of right sizing the business.” He observed “we realised our margins were going to be compressed as we move to a subscription model.”

    Autodesk’s shifts illustrate how the opportunities in the new economy don’t come without costs even for the companies that seem to be winners in a shifting marketplace.

    In China, American companies are finding they have to a unique proposition – companies like Apple and Autodesk are good examples – and as the country moves its economy further up the value chain all foreign businesses are going to have to show how they add value.

    Succeeding in a changing economy isn’t without uncertainty. And it certainly isn’t without risks.

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  • Australia’s NBN debacle

    Australia’s NBN debacle

    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

     

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  • Uber’s grand experiment

    Uber’s grand experiment

    Yesterday reports emerged that the icon of the disruptive economy, ride sharing service Uber, lost 1.2 billion dollars in first six months of this year.

    Those losses show disruption doesn’t come cheap, although settling the damaging and costly battle with China’s Didi Chuxing will help the company’s cash burn.

    Despite on track to lose at least two billion dollars this year, the company still has a substantial war chest having raised $8.7 billion dollars in debt and equity raisings over the last eighteen months.

    While impressive, that war chest will only last four year at current rates and, given Uber’s already sky high 60 billion dollar valuation and the increasingly hostile Silicon Valley fund raising environment, it will be a relief to investors that the China battle appears settled.

    There remains though an ongoing weakness in Uber’s business however with the company reportedly spending hundreds of millions a year in subsidies to drivers in key markets. How sustainable their business is remains to be seen.

    In many respects Uber is following the Amazon example of beating down competitors by selling products at deep losses thanks to its access to capital and investors’ tolerance for building marketshare.

    As we’ve seen with Amazon, that tactic has been wonderfully effective both in retail and in providing cloud services. For customers and the economy though, the reduced choices in the marketplace may end up not being in their interests.

    Uber is an interesting experiment in how far the Amazon model can be pushed, for cities and states dealing with a deeply disrupted taxi and city transport network the results of that experiment may be telling.

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  • Spreading the tech industry’s footprint

    Spreading the tech industry’s footprint

    Just how broad is the US tech industry? It’s tempting to think that most of the American tech sector is concentrated in San Francisco Bay Area with some offshoots in Seattle and on the East Coast but as this New York Times piece describes, the country has a range of high-tech industry clusters.

    Like Silicon Valley itself many of those clusters exist because of other industries, research facilities or companies – Seattle being home to Boeing, Microsoft and Amazon being an example.

    Another example of how other industries have influenced the development of industry clusters is shown in the example of Philadelphia.

    I hadn’t thought have Philadelphia as having a tech sector until I spoke with Australian tech company Nuix about one of their key North American offices being in the Philadelphia suburb of Conshohocken.

    When I observed that Philadelphia wasn’t the obvious place to set up, Nuix’s managers pointed out how the city’s pharmaceutical, medical technology and telecommunications provide a deep talent pool for tech companies along with the city’s location between New York and Washington DC being an advantage as well.

    Philadelphia’s civic leaders have contributed to it with their Startup Philly program that offers services and incentives ranging from networking events through to a seed investment program.

    VeryApt CEO Ashrit Kamireddi, one of the recipients of a Startup PHL angel round, describes the pros and cons of the city investment program and points out it was the factor in setting up their business there.

    Prior to raising a $270,000 angel round led by StartUp PHL, my two cofounders and I had just graduated from our respective grad programs and had placed 3rd in Wharton’s Business Plan Competition. We could have settled our company anywhere, with New York and San Francisco being the obvious choices. For a startup, the initial round of funding is where geography is most critical. Most angels don’t want to invest outside of their backyard, which explains the natural tendency for startups to relocate where there is the most capital.

    Kamireddi’s point about capital is critical, for tech startups finding funding is probably the most important factor in where the company is based.

    Funding though isn’t the only aspect and for established companies, particularly those in the Bay Area struggling with high costs which is what the New York Times article focuses on in its example of Phoenix, Arizona.

    The spread of the US’s tech sector shows the country’s industrial depth and strength, it also shows how other factors affect the spread of technology businesses.

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