Investment | Paul Wallbank - Communications Professional

Australia’s missing technology leadership

Australia’s political and business leaders go missing as the nation tries to refocus its economy

This morning Cisco announced its latest global innovation centre in Sydney focusing on what it describes as Australia’s strengths in agriculture, resources and smartcities.

Along with with Cisco’s commitment to support the Sydney centre to the tune of 15 million Australian dollars and invest in local IoT businesses the project promises to bring together the data resources and skills of the University of New South Wales’ Engineering faculty, the Data 61 research agency and various state government departments.

Cisco’s launch though comes at a difficult time for the Australian scientific and research communities as just last week the national research agency, the CSIRO, launched another wave 0f job cuts immediately after restructuring the sector and even the location of the announcement is being sold off to property developers as the state government sees real estate ventures trumping technology investments.

Governments go missing

Even more telling during Cisco’s announcement was the poor presence by governments and corporate partners, the New South Wales state government at least sent along a minister and his Departmental head but the Federal government, despite its much heralded Innovation Agenda, was nowhere to be seen.

That lack of Federal government support is telling, particularly given regional and rural development is supposedly a priority of the current administration. An informed observer may be forgiven for thinking 21st Century technology investment would assist even the 1950s inspired project to develop Australia’s sparsely populated north but one supposes that grand vision extends to dams and highways.

The missing corporate links

Probably the most troubling omission is that of telecoms providers, agricultural and resources businesses utilising the Internet of Things or M2M technologies need connectivity and the absence of either Telstra or the flailing government owned National Broadband Network means an important piece is missing from the push to connect these industries.

Once again both Optus and Vodafone – the latter probably having the best global M2M capacity of any provider – miss an opportunity to position themselves as an alternative provider to Telstra which proves whingeing about competition in the Australian market is a damn sight easier than putting some money down.

Notably missing as well is support from Australia’s corporate sector. While resources giant Woodside is a partner of the Perth centre, there’s little engagement from any other major company. The reply to a question by this writer to the panel about accessing the data held by the large pastoral companies illustrated what little engagement there is from key private sector stakeholders.

Fighting the innovation bureaucracy

To be fair to Cisco, these missing links are not the company’s fault and the delay in launching their Sydney centre was due to various shenanigans within Australia’s innovation bureaucracy beyond their control.

Hopefully Cisco’s Sydney centre will be successful – despite the fine words of Prime Ministers and other politicians Australian industry desperately needs some genuine leadership as the nation realises the safe certainties of the 1990s have passed.

For the moment though the lack of engagement in the technology industries by political and business leaders is striking. It’s hard not to think the country has regressed back to a smug 1950s view of the view, something not helped by all these events being almost overwhelmingly dominated by white, middle class middle aged men.

It’s time for Australia to start thinking differently. The nation’s business and political leaders can’t expect multinational corporations to drag the nation into the 21st Century.

Does venture capital really matter?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reverse financing a manufacturing revolution

3D electronics printing startup Nano Dimensions illustrates some fundamental changes in finance, business and manufacturing

Nano Dimensions may not have shipped a product since it was founded in 2012 but is worth $49 million dollars and was Israel’s best performing tech stock last year reports Bloomberg Business.

It’s not surprising that Nano Dimensions has caught the imagination of investors, the company was founded in 2012 to develop advanced 3D printed electronics, including printers for multilayer PCBs (printed circuit boards) and the nanotechnology-based inks those machines rely upon.

Should the technology prove successful, the application of those printers in fields like rapid prototyping is immense. The company speculates their devices may even get RFID tags down to the magical one cent figure which opens may opportunities in industries like logistics and retail.

In a GeekMe profile of the company last June, the writer even speculated Nano Dimensions could be heralding a disruption to the electronics industry similar to that the music industry faced when home users could burn their own CDs and stream music.

While that – and the speculation that 3D printing of electronic devices will kill Chinese manufacturing – may be some way off, it isn’t hard to see the potential of this technology.

The Israeli aspect of the Nano Dimensions story is interesting as well, with the company receiving a $1.25 million investment from the country’s office of the chief scientist after it was reverse listed onto the local stock market by taking over a moribund company.

For countries like Australia, Canada and the United States which are likely to have many moribund small mining and energy on their stock markets in coming years, such reverse listings may be an opportunity to spark their tech sectors with fresh capital and talent.

While Nano Dimensions is still very a speculative venture, the company illustrates a number of possibilities for 3D printing, electronics, the Israeli tech industry and the future of fund raising at a time when the Silicon Valley venture capital model seems to be under stress.

Another fascinating aspect of Nano Dimensions is that it’s one of the new breed of hardware startups, a field that until recently was dismissed as ‘too hard’ by most tech investors. Overall, the Israeli businesses an interesting company to watch for many of the aspects it touches upon.

Another wannabe tech unicorn begins to look sick

It seems the tech industry’s home delivery investment mania is coming to an end.

Doordash, one of the myriad home delivery services the current tech bubble has spawned, is abandoning its hopes of becoming a unicorn Bloomberg reports.

The company was seeking a valuation of a billion dollars from its latest fund raising round but in the face of disinterest from prospective investors the company has started lowering expectations.

Even at $600 million dollars that valuation seems rich and for existing shareholders offering more equity at the same valuation this is bad news as their stake is being diluted out.

For Doordash, the lack of investor interest is only one of their problems. Last year the company was sued by iconic Californian burger chain In ‘n Out for alleged trademark infringement and deceptive practices.

As market leader Instacart raises prices and looks to cut costs it seems the home delivery mania is coming to an end. Doordash could well be one of the wannabe unicorns that never quite made it.

Saving Twitter

Twitter needs focused management that understands the service if it is to survive

Twitter is in trouble, its share price has fallen 70% in the past two years and the service is not gaining new users. To halt the stagnation, CEO Jack Dorsey is reportedly considering ditching the 140 character limit.

Commentator Josh Bernoff suggests playing with character limits will do little to address Twitter’s lack of momentum which is almost certainly correct given the underlying problems at the service.

The one most desired feature by Twitter users is the ability to edit their posts, although the New York Times points out this may not be a good thing, another popular change would be for the service to crack down on abusive behaviour.

Stagnant management

It seems however that Twitter’s management can’t make those changes and this is understandable given the company’s executives not understanding how the service is used and their desperate obsession to justifying its stock valuation which, despite falling 70% over the past two years, is still $14 billion.

Justifying that stock valuation with no clear path to monetising the service is a paralysing problem which means other useful changes aren’t being made while the company still embarrassingly cosies up to sports, pop and movie stars in the hope their fame will bring advertiser dollars to the platform.

For Twitter the solution is to accept they aren’t a fourteen billion dollar company which would take the pressure off the executive team to find unsustainable ways to justify that valuation and instead focus management’s efforts on improving the user experience.

Making Twitter useful

To make the service more useful, management has to understand how Twitter is used which means finding experienced and capable leaders who also use the service.

Adding features that allow users to make some changes to tweets and lists would be a start and clamping down on the bullies, trolls and frauds to make it more friendly to new entrants would be a start. Creating an easy way for new users to find useful information would also help engagement and retention.

The most important task though is finding executives who actually use Twitter and have an understanding of social media instead of hiring from the tech, advertising and broadcasting industries without any regard of whether those individuals have ever used the service.

Twitter is a valuable service but it’s dying as management play games. If it is to survive, accepting it isn’t as big as it wants to be and finding leaders who understand why its users find it so useful is essential.

Secrets of successful crowdfunding

Engaging with community is the key to successful crowdfunding Indiegogo finds

Crowdfunding site Indiegogo dissects 29,000 campaigns to find what the formula is for success in funding projects.

Their finding show longer campaigns, in excess of sixty days, do better and engaging with supporters are the keys to success.

That latter point isn’t surprising, if you’re looking the community to raise funds then keeping them informed and excited is essential.

As crowdfunding evolves, engaging with community is going to be essential to stand out from the pack. In some respects, this is exactly what crowdfunding originally promised.

The victims of unicorns

A highly valued business is not good news for all shareholders, particularly employees who’ve taken equity.

It’s not all good news when a tech company becomes a unicorn reports the New York Times as it often means employees and other ordinary stockholders may be diluted out by later investors holding preferential shares to secure their big bets.

The danger with these high private valuations is the later investors whose big cheques created the unicorn mythology insist upon preferential shares to protect their stake. Should the company go public or be sold for less than the valuation then it’s the common stock holders who take the greatest hit.

Good Technology’s sale to BlackBerry is the example cited in the New York Times’ story. The company’s last round of funding valued the business at $1.1 billion but it’s eventual exit was less than half of that.

As a consequence, the common stockholders lost 90% of their wealth in the company while executives and late stage investors came out with only a slight dip in the preferred shares valuation. The CEO walked away with nearly six million dollars.

With the last two years investment mania and the clear topping of the market, situations like Good’s are now becoming common. The New York Times points this out in the story.

The odds that the unicorns will all reap riches if they are sold or go public are slim. Over the past five years, at least 22 companies backed by venture capital sold for the same amount as or less than what they had raised from investors

For employees in these highly valued startups, those valuations and the risk of losing most of your own equity is a serious concern. Analyst firm CB Insights flagged earlier this week an exodus of talent from overvalued firms with dubious prospects is a great opportunity for the top tier companies.

While the headline numbers for unicorns are impressive, the reality for employees, founders and early stage investors is an overvaluation is a dangerous place to be.

When startup growth pains prove fatal

The startup investment model can work against building a sustainable business

One of the most dangerous things for a startup business is trying to grow too quickly. In his blog, Jun Loayza describes how RewardMe, one of the startups he was involved in, failed after it tried to scale to fast.

In his list of factors that led to RewardMe’s demise Loayza cites an undue focus on customer acquisition, however this is a fundamental part of the current Silicon Valley greater fool model.

As the exit strategy is to sell the business, whether it’s to a trade buyer or through an IPO, the aim is to maximise the value of the operation ahead of that sale. Boosting the numbers of users is a key task for management.

Loayza says in retrospect he would have liked to focus on product development rather than user acquisition, but that’s a luxury not available when you’ve taken venture capital funding.

Opening the chequebook. Can you buy a Silicon Valley?

In subsidising tech businesses, the Victorian government is doomed to fail. However at least they are trying unlike their Sydney counterparts.

How do you build an industrial hub like Silicon Valley? Many cities and regions have tried various tactics, from demolishing entire suburbs to attract corporate headquarters through to spending millions on enticing film productions and countless examples of setting up Digital Hubs.

An interesting experiment is happening at the moment in the Australian city of Melbourne where the Victorian state government is spending millions on subsidies to businesses, government enterprises and academic research centres to set up in the town.

One of the Victorian government’s most surprising moves was to poach Sydney’s Sydstart startup conference for a million dollars. Naturally the event will have to be renamed and there’s no word on who will pay for the branding consultant’s time.

Opening the chequebook

Having an open chequebook is fine, but in the absence of a broader strategy that ties in educational, financial and other vital factors for building an industrial hub it’s hard to see how spending taxpayers’ funds on adhoc projects is going to create a sustainable local tech sector.

The National Broadband Network security office subsidy is particularly galling given it’s a payment to a Federal government owned corporation and it’s highly likely the facility would have been based in Melbourne anyway given the organisation’s Network Operating Centre is already in the city.

Added to the embarrassment of the NBN announcement are the overwrought claims of job creation. While it’s possible a total of 300 building staff might be involved in the construction, the idea the centre will employ 400 IT and telco security staff is surely stretching credibility.

The failed games industry

Sadly for Victorian taxpayers this isn’t the first time their government has tried to use their chequebook to attract high tech business. In the late 1990s a similar effort was launched to attract video game developers.

For a while this worked but ultimately the Victorian games sector declined in the face of a high Australian dollar, a shift in the economics of studio produced games and successful competition from Queensland who built their own subsidised centre on the Gold Coast by offering better incentives that those on offer in Melbourne.

Both the Queensland and Victorian efforts ultimately failed and today both states have little to show for those subsidies.

At least though the Victorian government is trying, unlike its property development and coal mining obsessed neighbours in Sydney who are in the process of selling off their Australian Technology Park hub and replacing it with a poorly articulated thought bubble of a technology precinct based out of a disused power station in a transport blackspot.

Sydney’s failure

In the process of coming up with these ideas, the New South Wales government managed to alienate the most successful of Sydney’s tech startups, Atlassian who last week floated on the NASDAQ stock market for over four billion US dollars.

One of the notable things of Atlassian’s story, and that of most other successful Australian tech startups, is how little direct government support features in their development.

That direct government support like subsidies feature so little in these company’s successes really tells us what really works for governments wanting to develop an ecosystem – providing the environment for skills, capital and distribution networks to develop.

Without a long term plan it’s hard to see how Victoria’s ‘splashing the cash’ will end up any better than previous efforts with other industries. As Silicon Valley, Israel and the UK have shown, it’s consistent long term investment in the industries and the infrastructure that allows businesses to developed that creates successful industry hubs.

Atlassian and the changing tech investment mindset

Atlassian’s float may mark a change in the Silicon Valley mindset. It’s also a warning to Australian business

Last week’s successful float of software collaboration tool service Atlassian may mark a number of turning points for the tech industry, both globally and in the company’s home country of Australia.

Unlike many of the high profile unicorns which have dominated the tech industry headlines in recent times Atlassian is a real, and profitable, business with revenues of 320 million dollars that has grown at over 40% in each of the last three years.

An even greater difference to the unicorns is Atlassian has raised little in external funding, instead the company was bootstrapped from a $10,000 credit card debt as this BRW profile of the business describes.

Having a profitable, debt free business not beholden to a small army of investors is distinctly different to the Silicon Valley greater fool model hoping for cashed up sucker to buy their unprofitable, but well publicised, operation out. In fact it appears the greater fools themselves are dropping out of the market.

Atlassian’s float may well be the marker that investors are looking for more substance in tech companies than just the promise of millions of eyeballs.

For Aussies the lessons are sharp, Atlassian shifting its corporate functions to the UK last year and now listing on the US stock is a sharp reminder of just how out of touch with the technology sector Australian industry has become.

Had Atlassian listed on the Australian Securities Exchange at the same capitalisation, it would have been the market’s 38th biggest company sitting between two property companies and one of the few technology listings on the board.

On the ASX Atlassian would be one of a handful of technology businesses on the banking, mining and property dominated Australian exchange. It was that dominance of old world businesses and local investors’ lack of understanding of technology stocks that saw the company’s co-founder Mike Cannon-Brookes long maintain that Atlassian would never be listed in Australia.

Another weakness for the Australian markets are local investors’ obsession over yield with businesses large and small paying out dividends at a far greater rate than global equivalents. This makes it hard to retain earnings and invest in new markets and R&D. Basically an Amazon could never exist in Australia.

For companies looking at following Atlassian’s footsteps the lesson is clear – the Bay Area startup model of chasing investor funding with the hope of finding a greater fool isn’t necessarily the best way to build a business and that bootstrapping a cash flow positive business gives founders greater control and flexibility.

To Australian entrepreneurs Atlassian’s lesson is to find a worldwide problem to solve and go global immediately. A domestic market focused primarily on property, banking and mining while being obsessed with short term yield isn’t going to be hospitable for local startups.

Changing the Australian investment mindset

Can the Turnbull government’s Innovation Statement reset Australia’s investment mindset?

“Of course I’m minimising my tax. If anybody in this country doesn’t minimise their tax they want their head read,” media tycoon Kerry Packer growled when asked about his financial affairs at an Australian Parliamentary committee in 1991.

Kerry Packer’s attitude towards tax minimisation runs deep in the Australian psyche so the announcement of a range of concessions to encourage investment in startups as part of the Federal government’s Innovation Package, branded as The Ideas Boom, may well succeed in unexpected ways.

The National Innovation and Science Agenda should be welcomed by any Australian concerned about the nation’s role in the 21^st Century. After 25 years of neglect – if not wilful ignorance – by successive Liberal and Labor governments there is now at least a recognition that developing new industries and businesses is essential to maintain first world living standards.

Many of the proposals in the package are long overdue such as a commitment to open government data, initiatives to support STEM education, programs to encourage women in the IT industry and recommitment of funding for the government scientific agency, the CSIRO.

Australia’s quiet tragedy

The defunding of education and CSIRO research by successive Liberal and Labor governments has been one of the quiet tragedies of Australia’s turning its back on the 21^st Century. The reversal of the focus on property speculation and mining is hopefully the start of renewed government efforts to restore the long term competitiveness of the country.

While many of us hope this is part of a broader, bipartisan vision of where Australia should be in the connected century, at this stage no-one can have confidence that these long term measures won’t be the victim of short term political expediency.

Short term gains

In the short term however the focus will be on the immigration and investment incentives. In some respects they are disappointing – the $200,000 annual limit for tax benefits should be contrasted with there being no such restrictions on property speculation – and both the investment and immigration proposals are still overly complex and will be a boon for well connected advisors and consultants.

However the changes are a start in shifting the attitudes of the nation’s risk averse investment and business culture and may well be well timed as the real estate price bubble starts to deflate forcing investors and speculators to look elsewhere for returns and tax breaks.

That chase for tax breaks could well mark the change for Australia’s investment starved small business and startup community, at the time Kerry Packer made his comments to the Parliamentary committee one of the most popular tax minimisation strategies was investing in locally made movies under the 10BA scheme that allowed generous deductions for investors.

Following film

Most of the films made under the 10BA regime were at best forgettable and the scheme was wound up in the mid 2000s but the wave of money that flowed into the Australian film industry helped launch the careers of many of today’s globally actors, producers and industry professionals.

If these changes can have similar success in the technology industries then they may be well worthwhile.

Another aspect to the Innovation Statement may well be the shift in Australian government industrial policy from a failed ‘think big’ mindset that assumed local businesses had to dominate their domestic markets to compete globally into a view where smaller, nimble operations can succeed internationally.

Welcoming change

Overall the Turnbull government’s Innovation Statement is a welcome change from the last twenty years of complacent policy around Australia’s economic development. One big challenge remains though in changing the nation’s complacent business culture.

Ultimately, the biggest challenge is move Australian households and investors on from the tax minimisation mindset. While Kerry Packer may no longer be with us, his mindset remains the driving force of Australian business.