government | Paul Wallbank - Communications Professional

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.

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.

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.

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.

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.

Attracting the world’s startups

Attracting young workers and entrepreneurs will be the key for prosperous countries remaining rich.

While San Francisco and Silicon Valley remain the biggest magnet for tech startups, many other countries are trying to attract entrepreneurs with preferential visa arrangements and subsidies. Successfully doing this will define the rich nations of the 21st Century.

Israel is the latest country to join the competition with the Israeli Ministry of Economy, the Ministry of Interior and the office of Chief Scientist will launch the program in the next few months which will allow entrepreneurs from around the world to come to the startup city of Tel Aviv for 24 months in order to develop innovative projects.

Entrepreneurs who wish to stay in Israel and open a startup company will be granted a specialist visa. Aryeh Deri, the nation’s Economic Minister said, “tThe Startup Visa will enable foreign entrepreneurs from around the world to develop new ideas in Israel, that will aid the development of the Israeli market”.

Israel’s Startup Visa programs joins Tel Aviv’s city-to-city-collaborations with Paris and Berlin, which allows entrepreneurs from the cities to receive a soft landing package including desks at co-working spaces, advice on visas, regulations and legal issues around starting up companies, as well as one-on-one mentoring assistance and access to the ecosystem in each town.

Just as Israel, France and Germany are opening up, it appears the UK government is tightening up its visa requirements much to the anger of their startup community.

The tech startup community is only a small part of the bigger economy, the challenges facing all these countries is the fight to win the global race for talent and young workers.

For almost all the developed world facing stagnant growth rates and ageing workforces, winning that race will define their prosperity for the rest of the 21st Century.

Using city muscle to drive private investment

Can strategic public projects trigger private sector investment

Chattanooga in the US mid West introduced city broadband in 2008 in the face of legal challenges from the existing cable operators.

The operators lost in the courts and were forced to compete with the local, city owned power company’s network.

Now Wired reports Chattanooga is upping the ante by increasing the available throughput of their network to 10Gb.

While that’s good news for those businesses and households in Chattanooga that need those speeds, there’s a much more important effect that Wired points out.

Municipal broadband providers are raising expectations nationwide for what good Internet service means, forcing commercial providers to improve their infrastructure. And by increasing the amount of bandwidth available, they could be setting the stage for the creation of new, more bandwidth-hungry applications. This is how better service goes from a “nice-to-have” to a “you’d-better-have” for the country’s recalcitrant cable companies.

A few municipal projects could be the trigger to getting better services across the country. This is a model that could work in many other fields as well.

Does broadband really create an innovative economy?

Building a competitive nation is more than just rolling out broadband connections

How much does broadband really matter in developing a competitive and innovative modern economy? A corporate lunch with US software company NetApp last week illustrated that there’s more to creating a successful digital society than just rolling out fibre connections.

Rich Scurfield, NetApp’s Senior Vice President responsible for the Asia-Pacific was outlining the firm’s plans for the Australian market and how it fits into the broader jigsaw puzzle of economies across the region.

Like many companies in the China market NetApp is finding it hard with Scurfield describing the market as “chaotic”. This isn’t unusual for western technology companies and Apple is one of the few to have had substantial success.

Across the rest of East Asia, Scurfield sees them ranging as being mature, stable and settled in the cases of Japan, Singapore, Australia and New Zealand through to India where the opportunities and the challenges of connecting a billion people are immense.

Digital outliers

The interesting outlier is South Korea, one of the most connected nations in the world, where the promise of ubiquitous broadband isn’t delivering the expected economic benefits to the entire community.

In theory, South Korea should be seeing a boom in connected small businesses. As Scurfield says, “from a technology providers’ view this connectivity means you could do more things very differently because of the infrastructure that’s available.”

Global Innovation Rankings

Korea’s underperformance is illustrated by last year’s Global Innovation Index that saw South Korea coming in at 16th, just ahead of both Australia and New Zealand whose broadband rollouts are nowhere near as advanced as the ROK’s.

Making a close comparison of Australia and the Republic of Korea’s strengths in the WIPO innovation index, it’s clear the technology and engineering aspects are just part of a far more complex set of factors such as confidence in institutions, the ease of doing business and even freedom of the press.

Putting those factors together makes a country far more likely to encourage its population to start new innovative businesses that can compete globally. When you have a small group of chaebol dominating the private sector then it’s much harder for new entrants to enter the market – interestingly a private sector dominated by big conglomerates is a problem Australia shares.

Small business laggards

NetApp’s Scurfield flagged exactly this problem, “Korea is an interesting market in there’s about six companies that matter and from a competitive view those companies are extremely advanced, they have great technology and great people.”

“However what’s not happening across the rest of the country is this adoption isn’t bleeding into the broader community,” said Scurfield “Because of that I don’t see broadband connectivity as having a wide impact.”

That Korean small and medium businesses aren’t using broadband technologies to develop innovative new products and service in one of the most connected economies on earth raises a question about just how effective investment in infrastructure is when it’s faced with cultural barriers.

Certainly we should be keeping in mind that economic development, global competitiveness and the creation of industry hubs is as much a matter of people, national institutions and culture as it is of technology.

We shouldn’t lose sight of the importance of our people and institutions when evaluating the strengths and weaknesses of a nation in today’s connected world.

Researching the next generation of wearables

The Obama Administration teams with industry to develop a Silicon Valley based wearable tech hub

The Obama Administration teams with Apple, HP, Boeing and others to develop a Silicon Valley based wearable tech hub with $170 million in funding reports Venture Beat.

Over $17o million will be invested by the US government and its private sector partners in hybrid flexible electronics manufacturing research that may well underpin the next generation of wearable and embeddable devices.

For the US, its success in the electronics industry is based upon its strong research sector. Making the investments today will help the nation compete as the technology landscape evolves.

Engineering for change – the ethics of the new economy

What are the ethical and societal considerations we should consider with today’s technology?

Technologies like the internet of things, cloud computing, 3D printing and big data are changing our industries and society. At the ACI Connect event today, I gave a presentation on some of the opportunities, risks and ethical issues facing technologists and engineers in the connected economy.

While many of the engineering principles underlying these technologies aren’t new, their scale and the power they give businesses and governments means there are serious ethical, security and societal issues we have to consider.

This presentation explores some of those issues and the technologies and trends driving them.

Entering the Data era

A conceit among technologists is that we’re in an unprecedented era of change. This is not true.

The Twentieth Century saw massive restructuring of our society as the telephone, mains electricity, the motor car and television changed our society. Many of today’s settled industries came out of the huge technological steps forward over the last hundred years.

Just as cheap energy – delivered to us through the motor car and mains electricity – defined the Twentieth Century, this century will be defined by easily accessible and abundant information.

Those changes over the last hundred years give us some hint as to where we are going; the shifts that saw coal carters, newspaper sellers and night soil men eventually become extinct, along with a shift from a largely agricultural workforce to industrialised employment, is going to be repeated this century as information becomes abundant.

Harnessing the Internet of bees

Cheap and small sensors mean it’s easier to put a chip on something. In this case we have a CSIRO project tracking bee activity where Tasmanian scientists have put tracking devices on bees.

Those tracking devices would have weighed several hundred grams and cost hundreds of dollars ten years ago but today they are small and cheap enough to fit onto the backs of bees.

Being able to deploy these sensors means we can fit them to things we couldn’t have imagined a few years ago and the data they generate is going to give us insights into patterns and behaviours we couldn’t have contemplated.

However not all of this data is useful or necessary and some may even be damaging to individuals and groups. One ethical question we have to ask ourselves is whether it is in the community’s interests to collect this information.

Another aspect of connecting devices, or even animals and people, to the Internet or a network is it opens the possibility of hacking, as we’ve seen in the recent Jeep case where engineers showed they could control a vehicle remotely. The security and privacy aspects of the IoT are critical and something designers and product engineers can’t overlook.

Decoding the data

It’s often said that Data is the New Oil. In truth it isn’t, data is increasingly cheap and easy to access. Being able to analyse that information is where the power lies.

Data analytics is probably going to be one of the most important fields in an information rich economy and already we’re seeing companies springing up to help farmers estimate crop yields, truck drivers plan their routes and even organisations like the Royal Flying Doctor Service using cloud services to better plan their operations.

Again these services plan a lot but there’s also downsides as inappropriate data matching risks breaching consumers’ privacy and even drawing false conclusions from confusing correlation with causation. A good example of this is Facebook being used to judge credit worthiness.

Removing the human element

Automation – whether it’s through robotics, machine learning or algorithms – will change many industries and the workforces employed by them.

One understated field is management where many white collar supervisor jobs are at risk from business automation. It may be that the executive suites are the next sector to be decimated by computers and robots.

Similarly, many services industry jobs such as taxi drivers and baristas are at risk from robotics while large scale 3D printing of buildings threatens to put many building trades under pressure.

No more truck drivers

Driverless vehicles have a whole range of applications, in logistics were seeing them put forklift drivers out of work while mining companies are rolling out massive dump trucks in their new mines that don’t require $200,000 a year drivers.

One study estimates that half the police workforce in the United States would become redundant as law abiding driverless cars become common.

Similarly electric cars will have a massive impact on government revenues. Currently Australian governments raise $17bn a year from fuel excise and has ramifications for businesses involved in the supply chain for service stations.

Once driverless vehicles become commonplace we may well see them changing industries like daycare, public transport and couriers as it becomes possible to summon an autonomous vehicle, put the kids or the luggage into it and then send it off to its destination. If you’re worried, you can track the progress on an app.

The effects of the driverless car show how we have to think laterally about the effects of new technologies on our businesses, sometimes the effects of a new way of doing things could indirectly hurt our business or create new opportunities.

Squeezing out inefficiencies

One of the great promises for the IoT, Big Data and business automation is to remove inefficiencies from industry. Cisco believe that up to 14% of the Oil and Gas industry’s costs could be stripped away with today’s technologies. That in itself is worth over a 100 billion dollars a year in cost savings.

GE are deploying their technologies into a diverse range of industrial equipment ranging from jet engines to railway locomotives and wind turbines with spectacular results in reducing costs and improving productivity.

The effect of these improvements means less downtime and maintenance costs which are good news for customers and shareholder of these companies, but bad news if you’re a maintenance business. It also means the speed of change in business is accelerating.

Skilling the future workforce

In summary the skills needed today are very different to those of 1915 and 1965 and those of the next fifty years will be even different.

As a society we have to decide what skills we are going to give not our children but those currently still in the workforce who are going to be working longer and later into their lives as the workforce ages.

We also have to consider what sort of ethical compass we have. While the technology we have today is powerful and capable of great things, it’s also capable of great harm. We need to have an understanding of what the effects and limits are of our actions with the Internet of Things, Big Data and analytics.

Ultimately we need to ask what value we as individuals can add to our communities and society.

Politicians cannot save you

Australia’s retail incumbents look set for a political win, but there’s no respite from a changing market

Around the world threatened incumbents are turning to their political cronies to protect them from competition with businesses using technologies their cosy managers and shareholders never envisaged would exist.

In Australia, one of the laziest industries has been the retail sector. Long coddled by cosy duopolies and favourable regulatory arrangements, retailers ignored the changes to their markets since the web arrived in 1995.

Of the Australian retail industry probably the most cosseted of all was the department store duopoly. Protected by their market share and product licensing agreements, Myer and David Jones neglected investments in their internal systems and largely ignored the online world, with DJs even shutting down their website in the early 2000s.

Insular Australia

Eventually it became obvious to even the most insular Australian retailer that the internet was here to stay however in the meantime canny Australian shoppers had discovered buying overseas online was substantially cheaper, and much easier, than local stores.

Faced with offshore competitors that beat them on price, range and service, the Australian retailers started lobbying the Federal government to lower the threashold, currently $1000, that customs would take an interest in and add the ten percent Goods and Services Tax (GST) and various fees and duties. In the hope the bureaucracy would discourage local shoppers looking overseas.

Mistaken lobbying

The campaign to lower the GST threashold was a mistake says Ian Moir, the current Chairman of now South African owned David Jones. “It set Australian retailers back because they spent more time trying to persuade governments to do this than they did thinking about what the long term future for the business is.”

Moir was speaking yesterday in Sydney at an Australian Israel Chamber of Commerce lunch panel titled ‘Reframing retail for the digital age: The importance of an integrated approach’. Joining the DJs executve on the board were Craig Dower, the CEO of Salmat and David Mustow, Head of Retail & Consumer at Macquarie Bank.

The message from the lunch was clear – technology savvy customers were demanding more from retailers now smartphones are driving purchase decisions. “Everyone talks about Big Data and how you use it as an organisation,” observed Scottish born Moir. “Not enough people talk about the big data the customer has on their mobile phones.”

Mobile first

Moir’s view on mobile was endorsed by Macquarie’s Mustow who stated “if you’re investing in this space it’s mobile first.” Salmat’s Downer added to this with Salmat’s research that found 55% of online retail sales are coming through mobile devices.

That Australian consumers have one the world’s highest smartphone penetration rates and are also among the planet’s most avid web user only shows how poorly local retailers have responded to the web and mobile devices over the past two decades.

When Moir took the reigns at David Jones last August after Woolworths South Africa – unrelated to the local supermarket giant – the company was making a piddling one percent of its sales online. The new management has grown this three fold but it’s still trivial compared to Australians’ appetite for online shopping.

Dampening overseas demand

The appetite of overseas online sales will dampened should the proposed GST changes reducing the taxable threshold on imports to $20 be introduced as consumers deal with the bureaucracy, delays and costs of Australia’s dysfunctional customs system however Moir warns this will only be a temporary respite, “these changes only affect you in the short term, it tends to sort itself out over time.”

Indeed for retailers, the GST changes will probably only benefit customs agents and bloated ticket clippers like Australia Post along with introducing a whole range of unexpected consequences as foreign retailers and local entrepreneurs find opportunities in the new tax regime.

While the champagne may taste sweet for Australia’s retail lobbyists as they celebrate their likely win over brunch at Sydney’s exclusive Balmoral Beach Club this Sunday, their employers are going to find that swaying the politicians is the easy part – it’s ultimately the market that guarantees your success.

Rewriting the Silicon Valley playbook

Each region needs its own playbook to create an industrial hub warns veteran entrepreneur Steve Blank

Silicon Valley’s lean startup model may not be relevant to most regions warns writer and entrepreneur Steve Blank.

The lean startup model is based on getting the minimum viable product into the marketplace and should users be enthusiastic seeking investor funding to develop the business further.

Guy Kawasaki described this in an interview last year where he described the minimum viable valuable product idea of getting the most basic service to market at the lowest cost and then getting users and investors on board.

However it might be that model only works where “startup entrepreneurs have full access to eager and intelligent business customers, hosts of industry angels and venture capitalists with money to burn,” reports Canada’s Financial Post.

Blank came to that conclusion on a trip to Australia where he met with sports tech startups: “Meeting with a coalition of entrepreneurs in the tech and sports space, he realized the lean startup framework didn’t account for the vagaries of local economies. Australia sports-tech entrepreneurs trying to scale their businesses would find that their major customers are in the U.S., halfway around the world. And unlike most Valley startups, the Aussies would need to source manufacturing expertise — which means budgeting for several trips to China.

The problems facing Australia’s entrepreneurs probably extend further as the nation’s investors are notorious risk averse and the high cost of doing living means the burn rates for startups are much harder.

Blank’s recommendation is any region looking at establishing a startup community should identify its own strengths and advantages then build its own playbook.

That it’s difficult for other regions to copy Silicon Valley shouldn’t be surprising, since the start of civilisation each industrial or trade hub has risen and fallen on its own strengths and weaknesses.

We can be sure the next Silicon Valley – be it in the US, China, Europe or anywhere else in the world – will have different strengths than the Bay Area today.

Creating a false divide between startups and small businesses

Tech startups shouldn’t be treated differently from other businesses

“We aren’t small businesses” cries Tank Stream Ventures’ Managing Partner Rui Rodrigues in Business Spectator yesterday.

Rodrigues’ point was tech startups have a very different set of needs to the local small business. “Bob down at the corner shops has been there for 10 years, and he’ll be there for another, he might sell milk, or office chairs, or even fix your watch,” he writes.

Technology startups on the other hand “have ambitions to become big companies, global empires. They are high-growth technology businesses and they are working on goods and services that you might not yet know you need.”

Silicon Valley’s greater fool model

Rodrigues’ comments come from the Silicon Valley Greater Fool mindset where the end game for investors is to flip the business to a bigger company or make out like bandits in a stock market listing. Under that model profitability doesn’t matter, “too early is considered a deterrent for investors looking at a business.”

Not making a profit is fine for a company promising unlimited future growth to the market or a flipper based on finding a greater fool but for most startups those lack of returns see all but a few spectacularly successful ones shrivel away as the company’s funds exhaust before the founders achieve their objective. For Bob the locksmith who doesn’t have a fall back option of returning to a management consulting job, he needs the income.

What’s more fallacious in Rodrigues’ piece is the idea today’s tech startups themselves will be great employers themselves. Even the successful ones haven’t proved to be job generators in the way traditional business have been.

For the traditional small business sector the risks aren’t insubstantial either as the majority of proprietors will barely make a living while risking their assets, time and often health – something understated by the motivational writers urging people to quit their jobs and prove themselves.

A lack of capital

For both the startup community and the small business sector the real challenges lie in being undercapitalised. Most startups will fail because of insufficient capital while the majority of small businesses never quite reach their potential because they lack the funds required to invest in the proper tools.

Much of this comes down to banks retreating from small business lending thanks to the ill thought out Basel rules that treat home mortgages as almost risk free which has discouraged any form of finance not backed by residential property.

In fact many of the challenges facing traditional small businesses such as high rents, unnecessary regulation and high labour costs are as much a problem for the thirty something renting a desk in a tech incubator as they are for 55 year old Bob who’s been running the local locksmiths for the last twenty years.

Misdirected government

Silly schemes like the Australian government’s depreciation scheme aren’t addressing this problem, indeed the Abbott administration’s intention is to provide a brief sugar hit to the nation’s GDP as small business owners buy new laptop computers and toolboxes. It does nothing to address the uncompetitiveness of Australian business or its attractiveness to local investors.

That Rodrigues wants to create a schism between the tech startup community and the small business sector is regrettable, it only confirms in many people’s minds that technology is for geeks and not ‘ordinary people’.

In truth a nation’s business community needs a level playing field, one that doesn’t give preferential treatment to one form of activity over others – be it property speculation, tech startups or dog walking franchises.

While there are genuine differences between the startup sector and the small businesses community – in the same way there are differences between Bob’s locksmiths, Jane’s cafe or Sarah’s dog walking franchise – there is need for businesses divided in asking for equal and fair treatment from government, banks and large corporations.

Having a united voice for all entrepreneurs, however modest their ambitions, is far more important than single groups pleading for special treatment.

Tech and tax write offs

Last week’s expansion of depreciation allowances for Aussie businesses is an opportunity to refresh your company’s tech

In last week’s Federal budget the biggest news for business was the expansion of the accelerated depreciation limits where items up to $20,000 can be immediately claimed as a tax deduction.

While this was a reversal of the previous budget that slashed the previous allowance, it was welcome news for businesses looking at replacing older tools and equipment or investing in new technology.

One of the notable things about business technology is companies have a habit of holding onto older equipment long beyond what should have been its use by date.

The consequences of using old technology are real, the older equipment is often not as fast as the newer kit which affects productivity and unpatched software is often the way malware finds its way into a business.

Point of sale risks

Earlier this week computer security vendor Trend Micro held their Cybercrime 2015 breakfast in Sydney where the director of the company’s TrendLabs Research division, Myla Pilao, described some of the threats facing businesses.
One of the top risks were Point Of Sale systems (POS) where Trend Micro’s research had found over a third of US retailers had malware on their cash registers, in Australia it was six percent.

Most of those infected POS terminals would be older units with many of them being software running on out of date versions of Windows that haven’t been patched or upgraded since they were bought a decade ago.

Similar problems exist with older workstations, internet routers and even photocopiers where the technology has moved on and security holes discovered. Basically old equipment holds businesses back and exposes them to risks.
Now the carrot of an immediate tax deduction gives Australian businesses an opportunity to refresh their technology. So what is the technology, smart company managers and owners should be spending their money on?

Kick out your desktops

“If it ain’t broke, don’t fix it” is the mantra for most business IT and desktop computers are the best example of this. In most companies as long as the word processing software or accounting package works the PCs continue to be used.

With the withdrawal of support for the decade old Windows XP operating system last year, many older computers started being a liability in a business so now is the time to replace them.

Consider tablets

It may not be necessary to replace the old desktop computer with new ones, for many job roles a tablet computer is often a better choice. With cloud technologies increasingly being adopted there’s less of a need for a grunty PC sitting on each staff member’s desk.

Upgrade the router

One of the areas where businesses often compromise is with their internet access. Having an old, cheap router designed for home use is just not good enough for companies who rely upon being connected.

A new business grade router will improve office internet access along with resolving most of the security issues older equipment is notorious for.

Going mobile

If you’re struggling on old mobile phones, now might be the time to upgrade to the latest smartphone. Amongst other things this will improve your office productivity, particularly if you combine the investment with some of the cloud services that make working on the road a lot easier.

Cloud services are not part of the depreciation rules as they are usually subscription models and this shows the weakness in the Federal government’s thinking.

Indeed for those vulnerable Point of Sale systems, a cloud based service running on tablet computers is probably a better solution than most server and PC based packages.

A lack of vision

The ‘ladies and tradies’ theme of the budget shows the Federal government is stuck in with the vision that Australian businesses are mainly mom and pop service operations in the traditional trades and professions.

While the depreciation changes are welcome they do little to help startups or companies in emerging industries and for the economy in general will provide not much more than a GDP ‘sugar hit’ for retailers’ cash registers as we buy imported equipment for our businesses.

For the Australian economy in general, the move really only benefits Gerry Harvey who can buy a few more racehorses from his stores’ and his rich mates who can afford some more expensive wine fuelled brawls in Sydney waterside restaurants.

Australian businesses owners need to be demanding better thought out policies from a government that claims to be friendly to industry. The economy is changing and 1970s style tax benefit is not the way to prepare for a changing world.

In the meantime, enjoy your tax write offs.