Category: Australia

Innovation and the Australian investment paradox

The Australian government’s Innovation Statement hits an obstacle in the nation’s risk averse culture of regulation

Even before its breathlessly awaited release it appears the Turnbull government’s innovation statement seems to have hit rough water as industry figures and the opposition criticise the proposed requirement for companies to be public before they can raise money through crowdfunding.

In itself this requirement isn’t a major barrier as prominent industry figures have pointed out although it will have the effect of making crowdfunding an option for more established ventures rather than early stage startups, which probably won’t be a bad thing for investors, employees and founders.

The requirement though does show a deeper seated problem in Australian government and regulation – a desire to legislate risk out of the system.

An Australian paradox

For tech startups, along with other businesses in new industries this creates a paradox as most of them will fail and their investors lose their money. Trying to protect backers of these ventures guarantees they won’t raise money.

So in trying to create a risk free environment, regulators end up killing the ecosystem.

From an Australian perspective, the risk free environment makes sense to a mindset that believes property is guaranteed to double every decade. Why invest in something that will probably fail when borrowing to speculate on an apartment is certain winner?

Protecting property

Strangely that attitude towards property has created another Australian paradox where the real estate industry is exempt from most consumer and investor protection law. The sad truth is the average Aussie has more protection in buying a smartphone case from a two dollar shop than they do when purchasing a two million dollar home.

Because property speculation is seen as risk free, there are few regulations or barriers to Australians gearing up into houses and apartments but for productive businesses and startups the obstacles for raising capital are substantial.

Ultimately, if Malcolm Turnbull and Wyatt Roy want to change the focus of Australian business and investors they are going to have to change the mindset of regulators and voters.

To change that mindset will take some brave steps, for the moment it’s far more likely the budding Australian innovation renaissance is likely to be suffocated by risk hating regulators.

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Being invited to the investment party

Jon Medved is one of those credited with driving the current Israeli startup boom having been involved as either a founder or investor in over 100 startup companies over the past two decades.

His current venture, OurCrowd, is a fund raising platform for startups seeking investors. Since being launched in 2013 the service has raised over $34M for 31 portfolio companies.

At the Australian-Israeli Bridge Investment summit in Sydney last week, Jon was a keynote speaker and panellist describing the startup and technology landscape of Israel. Following his morning sessions, he spoke to Decoding the New Economy about Crowdfunding, investment regulation along with both Australia and Israel’s place in the world.

Thanks Jon, let’s start with what OurCrowd do

We’re the world’s largest equity crowdfunding platform. We focus on sophisticated investors. What they call in America an accredited investor, which means that you have to have substantial assets in order to crowdfund at this point because we’re offering shares in private partnerships that then are essentially investing on a per company basis so it’s more like democratized venture capital than it is classic Kickstarter crowdfunding.

You, as an individual, to get into one of my deals have to commit $10,000 per deal. So that’s real money. You get complete choice. We sift through thousands of companies, select about 2% of those that we look at. We put them up on our website. We invest our own money and then you just choose to join us. We aggregate the variety of the investors and join us from 110 countries around the world and then we write a single check with the aggregated amount and that’s often millions of dollars so it’s not like couple 100k or 50k. This is real money.

Our biggest round has been $16 million with the other money. We invest in companies across all sectors and all stages. We’re sector agnostic as well as stage agnostic and we’re now geography agnostic. We’re from Israel and the majority of our deals are in Israel, but we’re increasingly investing in the States. Here in Australia, we’ve done two deals. Our first was launched, our first deal in India, deals in the UK, soon Latin America, etc., etc.

So where are the areas that you’re seeing the biggest growth?

The Internet of Things is just unstoppable.

On the hardware side or on the software analytics side?

Both, we have software for inter-device connectivity. We have software for big industrial control of the Internet of Things. We have devices themselves that are really cool. Things that are doing location of things, things that are doing analysis of non-connected devices. We have companies that are linking the physical world to the virtual world. I’m just a huge believer. I think this is such a big trend, and we haven’t even seen the beginning of it. It’s just getting started.

How did the idea of OurCrowd come about?

I’ve been 30 years on the tech business as an investor and as an entrepreneur, taking companies public, have been bought. I ran venture capital funds. I’ve been an Angel Investor, so I’ve been around the block several times.

I’m too young, at least in spirit, to hang up the spurs, and I wanted to do something that would combine three distinct loves that I have. One is I love investing. Two, I love disrupting and being an entrepreneur. And the third is I love Israel. I live in Israel. But I really believe that Israel has a role to play in history and the world beyond its small population.

I tried to mix up investment, entrepreneurship, and Israel, came up with OurCrowd because the idea is that today, the whole venture capital angel investing thing is very important in terms of powering innovation, but no one has disrupted that or changed that methodology for 50 years.

Some old venture funds, some old angel investments and some of the disadvantages of current practice is number one, you’re limited typically regionally or city. There’s the Boston Common Angels or South Coast Angels or the Melbourne Angels that, God forbid, don’t invest in Sydney. That’s fine for that period of time. That doesn’t work anymore. Basically, you’ve got to be global. The companies need global help. I’m here. Are they okay?

So, this was very disruptive I think of the existing way the people invest because it was going to turn something which had been very hyper and local into a global event, but it was also going to disrupt the business by bringing in completely uninvolved people. It turns out that in America, which I know very well, there are 10 million of these accredited households. About a hundred thousand have ever made an angel investment.

Literally, 1% of the rich people have ever done this kind of investing. So, I said, “Before we bring the whole world then which is going to happen, and people are working on legislation here and elsewhere, let’s first empower the wealthy to get access to these deals because really, if you look at who are the guys who’ve been investing in the next Facebook or the WhatsApps of the world, same couple of hundred angel investors in Silicon Valley and maybe the same 50 funds and everybody else has been screwed.

Basically, you’re not invited to the party. You know when you can get to the party? It’s when these companies get public. That’s what they’re called private companies. They only problem is that these companies go public and they are already at $50 billion valuation. Who wants to come to that party? It’s not a fun party. I want to get people into the company when they’re being priced at $10 million or $5 million or $20 million so you can ride it to the billion dollars and the individual can make a hundred times his money or hundreds of times the money.

I think we are disruptive both on the global thing in terms of being inclusive and giving people choice because until now, the Faustian bargain you had to make was either I’m going to have a choice, therefore, I am an angel which means I’m on my own. If I’m the newbie, figure it out, read a book, get a mentor. How do I make an investment like this? What’s a term sheet? What’s preferred stock? Who’s the lawyer I should use? How do I…That’s very hard for somebody who doesn’t grow organically in the system to access that.

You could go to a venture fund, but at a venture fund get ready to write a million or $5 million check. Get ready to be turned down by all the good funds in the valley who don’t need your money, and get ready to not have any discretion or fund. You can’t choose a deal. You basically hand over the money and say, “See you in 10 years.” It becomes like another investment. I said, “No, let’s go find a way to let people choose their own investment but within a safe platform in context where we’ve done the work, where we handle the legal, we protect the rights, we aggregate everybody so when we invest, we’re treated like the big boys. We get the same stock that a General Electric or an Andreessen Horowitz or a Telstra will get, we get for that individual. And you can get in for 10 grand. That’s where the subversive part comes.

I came up with this idea, figured that it would also be a really cool way to help Israel because all these people that get hot and bothered about startup nations, “Okay, yeah. I want to invest.” Good luck. How do you do it? They still have that same problem. They’ve got to go do it on their own and figure out, especially if they’re living abroad, how do you do that? Or find a venture fund. This is a different way, and it’s got legs. And we’ve managed now to cross the $200 million threshold. We’re $50 million Aussie dollars raised here, which is pretty cool. So it’s a big chunk of the money coming from Australia. Got a thousand investors here, 10,000 around the world, 90 companies and growing fast.

Were there any specific reason, apart from your own passion about Israel, for setting up there?

No, because our regulatory approach, which I think is the right one has been based on…In the U.S., they call it Reg D 506, but it’s all based on the exemption you get for being a venture capitalist or the exemption you get to do private placements among accredited or sophisticated investors. The regulators worldwide basically say, “You know what? If you got bucks, we leave you alone as long as you play by the rules, but we’ll not regulate these private in place because otherwise, how the hell will your companies grow to get ready to go public?”

We threaded that needle if you will, and restrict our platform to those who are accredited or sophisticated according to their…Is it they call it qualified. Each area is different. In Israel, at the moment, it’s like almost $4 million of assets. The test here in Australia is two and a half. In the U.S., it’s only 1 million outside of your home. There are different income tests, and we essentially geolocate our websites. We flow those requirements down based on where you’re from. We spend a boatload of money on our friends, the lawyers. We have a lot of lawyer friends.

We talk to the regulators regularly because they’re really trying to figure this out and want to open this business up except they have a series of difficult decisions to make. So their first big decision is whether or not they want to do this according to a junior IPO model which says, “Okay, go ahead and let the crowd into invest in startups but, they’ll buy stock directly in the company.” They’ll call them issuers. For example, the proposed regs here in Australia demand that the companies become non-listed public companies.

They demand 20 or more shareholders already, then we’ll let you crowdfund. Our whole approach is no, these guys should all go directly on the cap table. With all due respect, that screws it up. It prevents venture capitalists of note to really come. In other words, if they’re serious VCs, a company with a hundred or 200 individual investors, some with couple hundred dollars, forget it.

They’re going to go, “This is too hard.”

Because all these guys got to sign documents. It’s a mess. They got to vote. Our structure, which is to have a SPV (Special Purpose Vehicle) or intermediary partnership whereby we act as the nominee, we’re managing the process, we have a board member, that first of all, affords protection to the investor so they now have the right to get over a certain percentage of holding, which gives them anti-delusion, anti…They get preemptive rights. They get information rights to all the good…which the VCs have.

Now, we flow that down to our individual investor which no standard crowdfunding platform would have. More importantly, it’s good for the company because they now got a single shareholder who looks just like another VC fund and so we get to bring the company the advantage of having thousands of investors interested on the platform and pushing them forward but none of the headache of having to manage them all directly.

The regulators hopefully will figure out that our kind of structure doesn’t have to be mandated but should be at least allowed and in certain parts of the world, the regime as they are foreseeing it transform from accredited only to non-accredited broad based from what they call wholesale to resale, wholesale to retail, they are not allowing this, at least for the retail. If that’s the case, we won’t be in the retail again. We’ll stay with the accredited supposed to get it because we believe this is a sine qua non.

We don’t want to get a placement fee that the company pays or a slotting fee to go raise money. That’s going to get a negative selection process. It’s basically going to say that, “You know what, crowdfunding, you get the remainders,” the type B, like the socks or the underwear that have a defect. The better companies will go to venture capital. The worse ones, you’ll have to deal with that. Maybe you’ll get lucky.

That’s totally not our approach. Our approach is, we want to invest alongside Sequoia, Andreessen, Excel, and we do. In other words, we get OurCrowd into those deals which you really want to get into and in order to do that, it has to be managed. It has to be aggregated into a venture partnership, and then we want the focus of the whole process to be not ending at funding, but beginning at funding because the biggest mistake that the junior IPO approach makes is when you do an IPO, you hand the check over to the company. It’s gone public. You say, “Good luck.” Maybe you cover it.

In research, if you’re an investment bank, maybe you’ll try to do a secondary later, but you’re not involved. You don’t sit on the board, you don’t give guidance, you’re not trying to add value all the time. Whereas in venture, if you don’t, that’s the definition of dumb money. You don’t want to be dumb money. You want to be involved and we want to use our special asset, which is the fact we got these 10,000 global investors that can provide access and assistance to these companies like nobody’s business.

Going back to that regulation side, which jurisdictions do you think are ahead of the pack in this?

Look, UK is really ahead because they have just basically almost chosen not to regulate. I think that’s interesting. I think that this whole business can be fraught with danger, and I think there is regulation in the UK but very, very light handed. I think that’s the right approach.

I think that we’re going to have to experiment, we’re going to break some eggs and let the market figure out which model works. Hopefully, people will not get ripped off. By the way, just recently there was a terrible fraud in the U.S. from a guy who put together an oil and gas deal that seems to have gone on the lam and that was one of these platforms where they don’t do diligence.

Part of our whole gestalt is that we not only curate the investors and manage the deals and build SPVs, but we carefully diligence every company. We make mistakes like anybody else, but at least we hope we’d be able to weed out the obvious frauds unlike other sites that just allow people to put up whatever they like. The UK seems to be letting a lot of stuff there. The US has got this wonderful 685-page new decision that the SCC just passed.

Under the JOBS act

Under the JOBS, took them four years of work, almost. We’ll see who’s out there, but everybody is working on it. I think that you guys will get it right. I don’t think anybody feels that what will come in the first go round will be what will be ultimately. This is new stuff and for us, the major issue is that we got a thriving, rolling, wonderful business based on sophisticated, accredited, qualified investors. It’s growing really well.

There’s a ton of additional growth that we can have here, and while we would like to be with the wave of history and let everybody in, we don’t want to sacrifice our principles. If the jurisdictions won’t allow us to create intermediary structures where we can manage it, where we can be essentially incentive not at a placement to get the deal done, but we get incentive primarily on the success of the investment. In other words, we believe that we should be taking our fees from the investors, not from the companies because if we take money from the companies, we’re going to get the worst companies.

Then the companies say, “Hey, I don’t need you. I’ll go to a venture fund.” But I want to be able to compete and cooperate with the venture fund where the guy says, “Hey, I’ll take money from these venture funds and take money from you but at least I don’t have to pay either of you, right?” Then the investor pays for the privilege of hopefully making money. If we don’t make money, it’s not going to work. If no one makes money in this, none of these models are going to work. I think that our approach at least stands a better chance at returning real money because we’re getting good companies. You don’t need to pay us to get them up with the site. They have to convince us that they’re worthy.

You mentioned due diligence before. What happens when I’ve got a business, I come to you and say, “I’d like to fund my business through your funding.”

We run you through the wringer. We first ask, “Where is your kindergarten teacher and how do we reach her?” That kind of stuff. In Israel, by the way, it’s very easy because…Excuse me, if you pee in our pool, people know.

It’s not like people, the whole country knows. Diligence is rather easy. It’s little harder for us outside of Israel, but we rely often on our investor base to help us because we have deep tied investors who are from around the world.

We like to co-invest with other funds, and other family offices and corporations. We share diligence information, but we have a whole team that runs these companies through, I would say, a very rigorous diligence process. That includes not only checking out the team but also talking to their customers, verifying the data they’ve told us is correct. Speaking to technology experts, market experts, competitors, etc.

Going on to the Australian side of it, how do you find the Australian business culture versus the Israeli business culture.

I think Australia is amazing. I’ve become a real fan of this country and a huge fan of the current prime minister. I think you guys got an amazing guy there (new Prime Minister Malcolm Turnbull) who’ll actually have the potential of making a significant impact on the business culture and national culture of the country.

You got everything in place more or less. You’ve got great technology, world-class universities [inaudible 00:21:42] billions of dollars exporting education. You’ve got progressive, interesting big enough size companies in the Telstras and the Qantases and the Commonwealth (Bank). These are not small businesses.

Great, unbelievable pool of capital and it’s second in the world in terms of superannuation funds. I think it’s a matter of time until the stars align and you break out in terms of realizing your innovation potential. We’re betting on it.

That’s why we’re spending so much time down here. We’re fans of everything Aussie, and I think that the sense of isolation and a little bit like we’re out of the mainstream and we’re far away and all that stuff, that goes away, not only when hopefully planes will fly twice the speed they do today, but I think it goes away notionally [SP] and culturally and what not.

We’re just a small world. You have a lot of great Aussies who are in the valley so there’s a good money here and there’s a good. I think this is going to happen fast. I bet you that if the number is 200 million or so being invested in Australian VC, that grows tenfold over the next couple of years.

So in the Australian market, what’s your priority at the moment? Are you looking for investors putting money in or are you looking for businesses to invest in?

Yes and yes. It starts with the investors because our strategy is once we build an investor community like we’ve already begun to do here, we have a thousand investors, ain’t too shabby when they’re all sophisticated investors. I think it makes us probably…We’re now the largest crowdfunding for equity platform in Australia. That’s where it starts, but it certainly doesn’t end there. What happens is, through that network, a lot of these are investors who have deals, and they start sourcing us deals. They provide the diligence infrastructure for looking at deals and they more importantly, provide this business development shock force that can help our deals grow here as well as help our companies from Israel around the world enter this market.

This is a very interesting market. It’s big enough to actually make some money and it’s small enough to get in. The people here are nice. They’re not cut-throat. They don’t steal from you. I think it’s actually an interesting place to prove a product. It doesn’t have the explosive scale of the U.S. or European or an Asian market, but it’s a good place to make your initial mistakes and to find high standard customers who will get you through your paces.

Listening to a number of your conversations today, you seem to be fairly down on the more traditional, if you like, type of crowdfunding.

No, I like Kickstarter and Indiegogo because they don’t pretend to give you, the investor, any upside. You got a t-shirt. If you’re expecting more, then you’re a fool. It’s just the fun. It’s just like going to a…I don’t know. It’s about charity. It’s about backing somebody. You get a cool product early. In other words, if you’re a gadget guy, you get to buy them for half price. Maybe they ship and maybe they don’t but that’s the risk you’re taking. That’s fine. And anyway, you’re only talking about a couple hundred bucks. People can afford that.

What I’m afraid of is uncontrolled equity sites where people think they are buying stocks and not having the control that would prevent fraud from happening, as well as even good intentioned guys who are just letting companies put cool video up and then people start putting real money, and there’s nobody there. Forget the fraud, just nobody to help the two guys and a dog build the company, to find additional money, to provide support. That can screw it up for all of us because the consumer is not necessarily, wealthy or not, that sophisticated to say, “Oh, this crowdfunding is right. That’s what crowdfunding is…” As soon as crowdfunding gets a bad name, you hurt everybody.

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High hopes for the innovation dreamtime

The Turnbull government and its ministers face a big test in the upcoming innovation statement this week and will need to follow through with tangible results.

The Turnbull government and its ministers face a big test in the upcoming innovation statement this week and will need to follow through with tangible results.

In 1976 Clive James visited Sydney fifteen years absence from his hometown. In his book Flying Visits he described the changes that had happened during his time away including some observations on the nation’s thriving movie industry with the comment “premature canonization is the biggest threat facing the young Australian film director today.

James’ words came back to me at an Australian Israel Chamber of Commerce in Sydney last week where the hosts were gushing over 25 year old Wyatt Roy, the Federal Assistant Minister for Innovation, last week.

There’s a lot to like about Wyatt Roy, he’s an intelligent and articulate minister with a self depreciating sense of humour and a touch of humility – qualities generally not associated with Australian politicians – though the old guard gushing over his youth and the achievements of his two months in office can be embarrassing.

In many ways the fawning over Wyatt Roy is emblematic of the general sense of relief in Australian business now the Turnbull government has left behind the nightmare of the vindictive and petty middle aged adolescents who made up the Abbot administration while also being a world away from the backward looking grey Liberal Party stalwarts of the Howard era and the self interested suburban Labor apparatchiks of the Rudd and Gillard years.

The question though is whether the hopes pinned on Turnbull and Roy can be realised which is why there are so many hopes being pinned on this week’s expected release of the government’s Innovation Statement laying out a policy framework for the nation’s economic pivot.

For Australia the stakes are high, the resource sector is collapsing and the property market – the real key to the nation’s suburban prosperity – is looking brittle. Policies that encourage new businesses and industries are now essential to maintain the country’s living standards.

To date Canberra’s policy makers have not managed the economic changes well; the Intergenerational Report earlier this year blithely ignored the effects of technology on the future workforce and its implications to incomes, jobs and government budgets, while three years after the Gillard government’s Australia in the Asian Century report it’s remarkable how dated the document with its underlying assumption of never ending resources demand now looks.

So the Innovation Statement matters in laying out a strong view for the future of Australia however even if it does prove to be a strong, forward looking document, the Turnbull government will need to follow up with substantial actions.

The real risk with all the talk of innovation is that it will be siloed, along with IT, as “something the geeks and young kids” do. For the this week’s announcement to be anything more than more fine words from the Innovation Bureaucracy then it has to be backed by strong reform to taxation, social security, immigration and corporate governance regulations.

While the canonisation of Wyatt Roy and Malcolm Turnbull may well be premature many Australians, including this one, are hoping those hopes are well founded. This week’s Innovation Statement will be the first test.

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Creating a retail community – A tour of Microsoft’s Sydney flagship store

Microsoft hopes to be able to build a community around its Sydney flagship retail store

Microsoft today opens the doors to its first flagship store outside of North America in Sydney, Australia. A look inside the project gives some insight into the company’s retail strategy.

Situated in Westfield’s Pitt Street Mall, the store promises “cutting-edge retail and experiential spaces that allow consumers to get hands on with products in an immersive way.” What’s immediately notable is the lack of obvious security with all the devices on display being available for customers to pick up and walk around the shop with.

Most of those devices showcase Microsoft’s various projects and alliances. Everything from XBoxes running Minecraft to Lumia phones are on display along with a range of laptops from partners such as Dell, Toshiba and Lenovo.

Looking across the shop floor
Looking across the shop floor

Notable among the devices is are the Surface Book and Surface Pro 4 along with the Microsoft Band 2 taking place of pride in the displays. As with everything else, customers can slip the wriststaps on and walk around with them. Microsoft’s representatives were coy on how they will prevent the less honest walking out the store with them.

Microsoft Band 2 wearables on display
Microsoft Band 2 wearables on display

Acting as a store greeter, the Answer Desk is the hub of store where representatives direct traffic whether it’s technical support – which like the Apple Genius Bar is provided free – sales, or directions to events in the upstairs community theatre.

Welcome to the Microsoft Store Answers Desk
Welcome to the Microsoft Store Answers Desk

Community is a big theme in the store and the company announced $4.8 million in software and technology grants to 11 not-for-profit Australian organisations to coincide with the shop’s opening.

That emphasis on ‘community’ is reflected in this quote from the company’s press release;

“Our new flagship store is here to showcase the very best of Microsoft to the local community and we are delighted Sydney has been chosen as its home,” said Pip Marlow, managing director, Microsoft Australia. “This is a key part of our commitment to delivering a truly interactive retail experience that gives customers, partners and community organisations the opportunity to see, experience and do great things, all made possible by Microsoft technology.”

Pip Marlow sees the upstairs community room as being an opportunity to engage with various school, business and technology groups. The space itself is a little cramped, however it can be isolated from the store’s general hubbub, unlike the Apple Store’s equivalent space.

The community theatre
The community theatre

Overall the store is modernistic but somewhat cramped and should the store be successful congestion is going to be a real problem, particularly around the Answer Desk and the narrow stairwell which, like its Apple competitor two blocks away, features a translucent stairwell.

A narrow translucent staircase
A narrow translucent staircase

In comparison to both the nearby Apple and Telstra stores, the Microsoft Showcase is surprisingly low tech with its retail experience. While the assistants will have mobile Point Of Sale terminals there’s little in the way of location technologies and contactless payments.

happy_holidays_microsoft_feature_store_sydney

Overall the Microsoft Store comes across as a touch crowded and, dare one say, a little old school retail. As a showcase for the company’s products, it’s probably no more impressive than those of the better retailers.

However if Pip Marlow’s aim of building a community around Microsoft’s products is successful, that could prove to be the long term winning strategy for the company.

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ABC Nightlife – Australia’s startup goldrush and the overhyped world of wearables

The November ABC Nightlife radio program will look at Australia’s startup goldrush and the overhyped world of wearables

For November’s Nightlife tech spot we’ll be asking if wearable technologies overhyped and looking at what is going on with Australia’s sudden discovery of startup businesses.

Wearable technologies have been the next big thing. Two years ago Google Glass was all the news and earlier this year the Apple Watch was released to great fanfare.

Now Google Glass has been wound back in the face of widespread indifference and Apple are discounting the new watch as market experts find that wearable technologies are just not interesting to customers.

So are wearable technologies overhyped? We’ll be discussing where having a computer on your wrist or in your glasses may be useful and taking your questions on them.

Australia’s startup goldrush

There’s been a shift in the Australian business community since Malcolm Turnbull became Prime Minister and now tech startups have become the new black with a wave of corporate initiatives being launched to support fledgling companies hoping to be the next Facebook or at least Atlassian.

So why now all the interest and can Australia be the next Silicon Valley?

Some of the questions we’ll be answering include.

  • So where can we get a cheap Apple watch?
  • Have Apple done this sort of thing before?
  • What are the experts saying about wearable technologies?
  • Are there some industries they can be used in?
  • So why is Malcolm Turnbull so keen on startups?
  • What sort of things are governments doing to support the startup communities?
  • How many Australian tech industry successes have there been?
  • Can Australia be the next Silicon Valley?

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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Building a digital hub – and why governments shouldn’t try.

The experience of the Sydney Digital Hub shows why Australian governments struggle to create industrial centres.

“I’m not sure what to do with this,” frowned the public service executive to a group of blank faced departmental staffers. “I’ll take it,” I said to break the silence.

With that, I was on a journey into exactly what Sydney’s startup and digital media communities looked like and learning why governments struggle to build technology hubs.

I’d been working for the state government for two months after a specularly unsuccessful exit from a business and in the shadow of the 2008 financial crisis getting a public service job seemed like a good idea.

Vague ideas

The project being discussed by Bob, my then director, was a single line in the recommendations from the then Premier’s Jobs Summit which was convened in the panicky dark days of the 2008 global financial crisis – “A digital hub will be setup around the Australian Technology Park.”

Bob, and the management of the New South Wales Department of Trade and Investment had little idea of what a ‘digital hub’ was and my position of ‘Manager, Creative Industries” – with a staff of precisely zero – was vague given the state’s support to the creative industries was, and remains, based on throwing big buckets of money at the Hollywood movie studios.

So the Sydney Digital Hub was born and the quest to find out exactly was was needed, or at least would keep the Premier’s office happy, was on.

It immediately became apparent the Australian Technology Park wasn’t going to be the centre of anything as far as Sydney’s startup community was concerned. The complex was too far away from the city and too expensive for most of the businesses.

Replacing what’s existing

“We already have a digital hub,” was the other response. “It’s Surry Hills.” Which was a far call as a large part of the Sydney startup and digital media communities were based in the suburb on the edge of the city’s centre.

This actually worked well as the exact wording of the committee’s recommendation was “create a digital hub around the Australian Technology Park.” In this case, Surry Hills was ‘around’ the ATP.

Eventually the project became Digital Sydney and by the time it was launched, the state had gone through two Premiers, elected another party into government and I was long gone from the department, having lasted just 19 months.

Before leaving, I had managed to steer through a million dollars in funding for the project from the then Labor minister – since caught up on corruption charges surrounding coal mine leases – which, to their credit, was honoured by the incoming Liberal government that took power shortly after.

Dying a slow, unfunded death

That funding was renewed and the project died a slow death, which didn’t really matter as Sydney’s startup and digital media communities had developed despite of, not because of, any government policies. Indeed, the New South Wales’ government’s economic development policies were, and remain, focused on property development and coal mining.

Which brings us to the present day, where the Sydney startup community is upset at the Sydstart conference being poached by the Victorian government and moving to Melbourne on the promise of a million dollars in support as part of the state’s startup program.

The promoters of the now relocated and renamed conference are adamant it matters, but the truth is it doesn’t. In fact the biggest ticket item of NSW government support to the IT sector is the annual CeBIT conference that in truth has added little to the state’s technology industry and many similar initiatives in Victoria have had a similar lack success.

A lack of long term vision

Part of the reason for that lack of success is a lack of consistency and long term strategies, in fact the Australian Technology Park itself is under threat as the state government looks at selling the site to apartment developers despite the protests of the tech community.

Another aspect is state sponsored conferences, hubs and initiatives are not enough to create an industrial centre. There has to be an organic, or business, reason for a hub to develop.

For industry hubs, be they tech startups or anything else, the core need is a critical mass of investors and skilled workers with easy access to markets. For internet based businesses, the latter isn’t an issue which is why Wellington in New Zealand has done better than either Sydney or Melbourne in recent years.

Providing stable frameworks

The role of governments in this is to provide a stable framework for businesses to work within, something that hasn’t been a feature of state or Federal Australian politics in recent years with leadership instability and the increasing prevalence of policy by thought bubble, a good example being the latest scheme to create a new technology hub even further out of downtown Sydney on the site of disused power station.

While the talk of government sponsored initiatives is nice and keeps my former colleagues at the state government occupied writing ministerial briefings on pink paper, building the tech hubs of the future needs motivated entrepreneurs, investors and skilled workers. The best thing governments can do is make sure they encourage all three groups and leave the community building to the community.

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Malcolm Turnbull and the task of turning around Australia

Making Australia a globally competitive economy is a massive task facing the new Prime Minister Malcolm Turnbull

Watching from afar, the reaction to Malcolm Turnbull becoming Australia’s 29th Prime Minister has been remarkable as suddenly the nation seems to have collectively woken up to the fact they are fifteen years into a new century.

In a few short weeks Australian public servants have started engaging in hackathons and business leaders whose idea of an investment was a property plan disguised as a casino have started raising VC funds.

The question though for Australia is this too little and too late after three decades of concentrating on property speculation and betting on a never ending Chinese economic miracle?

New leadership

In Malcolm Turnbull – who only rejoined the Liberal Party in the early 2000s after careers as a journalist, barrister and banker – Australia for the first time in forty years doesn’t have a party apparatchik as Prime Minister.

While this wasn’t a problem during the 1970s and 80s under Fraser and Hawke, by the 1990s the shrinking membership base of Australian political parties meant increasingly the ‘talent’ coming up the ranks was lacking perspective outside the narrow factional groupings most of them were beholden to.

This became brutally apparent with the last three Prime Ministers who were fully hostage to their party factions. In Gillard and Abbott Australia had two party operatives who were no doubt talented in internal party manouvering but hopelessly out of their depths as government leaders – Abbott often seemed to be more interested in settling the battles of 1980s Sydney University student politics than governing the country.

Describing Prime Minister Rudd would take a thesis in political psychology which is way beyond the scope, or interest, of this writer.

The consequences of this were an Australian political leadership that was disinterested in the real economy beyond guaranteeing the social compact that property prices would double every decade and ensure their support in the key swing electorates of suburban Australia.

An insular business community

For the business community the insular focus of Australian society and its politicians worked well too. As the economy turned inwards in the 1990s under the Keating and Howard governments, so too did Australia’s conglomerates who realised clipping the ticket of a consumer economy was far easier than competing on global markets.

The best example of this were Australia’s banks which essentially gave up on lending to business unless it was guaranteed by property. This graph from Macrobusiness illustrates just how the nation’s banks focused on property speculation.

Australian bank lending, courtesy of Macrobusiness.
Australian bank lending, courtesy of Macrobusiness.

That focus on housing and consumer spending underpinned on rising property prices distorted the entire business sector and ingrained in the Australian psyche that the key to riches and prosperity was to get a relatively low skilled ‘safe job’ and borrow as much money as possible.

A good example of this are the regular stories of sweet twenty something wunderkinds who have built multi million dollar property portfolios while working in pizza shops or as administrative assistants.

Possibly the greatest damage Australia’s property obsession has been on the nation’s youth where the message has been ‘don’t gain a globally competitive skill set or education, just get an entry level job at the real estate agents and buy as much property as the bank will allow you.’

Turnbull’s challenge

Like Gough Whitlam, the last Prime Minister not a creature of their party factions, the reform challenge facing Turnbull is immense as 25 years of complacency have left Australia with an uncompetitive economy – as it had for the incoming Labor government of 1972 – with added complexity of having to maintain property prices to keep its economic miracle and social compact ticking over.

The similarities to Whitlam are also striking in the support Turnbull has from the population. One of the striking things on returning to Australia after spending most of the last three months in the United States has been the sense of relief that the inept horror movie of the Abbott government (Attack of the Clueless Zombies) is over and a realisation that Australia has actually entered the 21st Century and not regressing back into the 19th.

Agendas for reform

Entering the 21st Century won’t be easy though for Australia. Completing the reforms of the education sector, started half heartedly by Gillard and then trashed by Abbott in settling the scores of his student politics days, is one major challenge along with reforming tax and social security systems that focuses on asset hoarding and speculation over productive investment.

Possibly a greater challenge is to wean the Australia business sector off its ticket clipping mentality and rediscover its desire to compete globally. It may well be that encouraging the startup sector makes more sense in rebuilding the economy’s competitiveness as many of the nation’s insular conglomerates and their well fed executives are too used to milking the domestic consumer rather than taking on the world.

The end of kitchen renovations

The biggest challenge of all though will be to wean Australians off their property addiction, particularly those under 50 who have neglected their global skills as they focused on renovating their kitchens.

Given the scope of these reforms, such an agenda will require a clear mandate from an electorate that has been complacently accepting guaranteed good times as long as refugees are turned back, the terrorists among us imprisoned and gay couples prevented from marrying for the last 25 years. Making the argument for change is probably going to be Malcolm Turnbull’s greatest task.

For Australia the stakes are high. It’s not likely the 21st Century will be as kind to The Lucky Country as the Twentieth was.

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