In this first discussion, PwC’s Steve Maarbani and supply chain group Infoactiv founder and managing direct Helen Jarman join BlueNotes managing editor Andrew Cornell to debate the funding and resource hurdles for start-ups and challenger enterprises.
"The Australian early stage ecosystem over the last five years has consistently grown in a really positive way."
Steve Maarbani, Partner PwC
Andrew Cornell, BlueNotes: With a new PM determined to make Australia more agile, the challenge for encouraging a more vibrant start-up culture in Australia looms large. Funding – particularly gaps in funding at certain life stages – has long been an issue. Do you see that as the problem?
Helen Jarman: I think the sub $A10 million scenario, a key area, isn't a sweet spot for traditional investors, you have literally two or three firms. There are very few places in Australia, structured as institutional venture capital firms, that can write checks sub $A10 million that truly enable expansion and the ability to export.
It does present a problem for SMEs looking for funding, particularly for services based companies like ours looking for expansion capital or to start up a separate venture. Yet there is always the lure of what's available offshore.
I am one of the few, of a very small group of entrepreneurs, still onshore in some way. Most of the people I mix with have gone off-shore for investment and have thus based their business and transferred their IP (intellectual property) offshore as part of the deal.
There is just a lack of appetite for risk here maybe. It is ok if you have existing profits, a proven model, and you are looking to scale. There is probably no difficulty for that. But not a concept business.
Take a potential AirBnb or whatever - they have a business plan, they have done some market research, they have a great idea. But for this kind of opportunity there is no appetite in Australia. The US and Israel tend to do better on this than we do.
BN: You have a slightly different perspective though Steve?
Steve Maarbani: I think the Australian early stage ecosystem over the last five years has consistently grown in a really positive way. We now have more angel investors and angel groups operating in a more sophisticated way than we had four or five years ago, we certainly have more accelerators, incubators, co working spaces than we had four or five years ago; we have more micro-VCs than we had four or five years ago, we have more traditional VCs and generally more early stage capital to invest than we had four or five years ago.
There is also a fragmented but growing network of high net worth investors, family offices and corporates who are available to contribute capital to emerging technology companies at different stages.
So actually I think the reverse of [what Helen says] has been my experience in Australia. There is more seed funding now than there has been previously.
I agree there is a gap as it gets a little bit higher but I think seed funding is easier now than it was years ago when I first joined PwC. In the last four years, my team alone has advised on the establishment of the Sydney Angels Sidecar Fund, the iAccelerate fund, which is attached to the University of Wollongong, the iLab fund out of the University of Queensland, the Slingshot fund which is the NRMA Slingshot Accelerator fund out of Newcastle, Tank Steam Ventures, and the Artesian fund of funds which is raising $A100 million and we are working on 4 new funds right now with a number of others in the pipeline.
I think part of the reason for our differing perspective is that people in more traditional SMEs feel like the investor and government start-up focus doesn't assist them. But the reason for that is digital disruption. I know it is trite to say but it is not a small issue it is a massive issue.
HJ: What I'm seeing is a disconnect between what's emerging and what actual entrepreneurs and start-up guys are running with.
SM: Yes, I do completely accept that, the difficulty around a new idea. It is a very difficult challenge to get across. When people come to see me about funding, the two things we tell investors to look for is technical validation and consumer validation.
That means that you need to have a beta product ready to show somebody and more importantly you need to have a product that you can show to customers and hopefully have some people either using or paying for it – before even Angel investors will look at it.
So in that very early phase, the place that you go if you really need the capital and you need that assistance is friends, family and the accelerators.
HJ: That's the lure of offshore. They are more open, they have the funds and the risk profile to proceed with investments in a way that Australian based firms can't.
SM: To some extent, absolutely. I don't necessarily agree with this idea that you just rock up in Silicon Valley and someone writes you a cheque over a coffee. They still look for technical validation and consumer validation and they still look for decent sized markets and really good teams.
I go over there once a year and spend time with PwC's VC clients and I hear the common complaint of US VCs is that there are groups of Australians who turn up in the Valley for two weeks and do a roadshow and leave and you never hear from them again. And they wonder why they are not being funded.
So if you were to go to an Australian accelerator they may be more prepared to fund an idea that is likely to have a market and is backed by a good team with good research and a good business plan.
In that scenario, Australian accelerators would invest 20k and 50k in exchange for 5 – 10 per cent of the company. They will then put you through a structured accelerator programme for the next three months and then see what develops.
That's high risk capital. That's really high risk capital because you don't even know if the team can deliver a beta product and then you don't know if anyone is going to buy it. So there is capital in that really high risk early stage - I am an idea and I need some cash space - but I accept that it is highly competitive.
Over the coming months, BlueNotes, in conjunction with PwC, will explore some of the big ideas that were discussed at the Capital Edge Forum and speak with some participants, recognising the importance of keeping the debate around innovation alive while beginning to pave a way forward to secure Australia's future prosperity.
HJ: So what do we have in Australia really? I have looked at EIP (the Entrepreneur's Program) and we are probably going to get involved with EIP here but beyond that, the R&D component here is ok if you qualify, there's nothing in the federal budget for us, no tax element helping us out…
As a business that is export ready, having some operations in India and looking to expand in Asia, there isn't a lot behind you as an Australian company. It's a tad lonely in Australia, given the absence of any strong vision, awareness and leadership here.
I am talking about the need for greater awareness. Australia is a small market. I have a global idea, if I really want to take it global I know about these sorts of programs offshore, but onshore, it's still piecemeal.
I am most impressed by what Singapore has done in support of SMEs. Not just committing $S500 million over three years but covering small to mid-size business – those businesses that are 'export ready'. They have eight or 10 different programs that intersect and harmonise beautifully, covering all sorts of related activities to innovate and boost the economy.
Those sorts of models and examples, we can learn a lot from that - tax deductions across qualifying activities, some capability development grants, boosting R&D efforts with a research fund. They have got a business angel scheme, they have got all sorts of venture debt risk sharing schemes, growth schemes, M&A tax allowances, future credit. I find it all very interesting and it is intricately woven together. I like it and it's working.
I take your point Steve that we are getting further along but there is still a big disconnect between, one, being aware of it, and, two, understanding it and, three, having it led by the government with some really strong vision behind it.
It does need to be more formalised in that way to have the impact in the next two years.
SM: I agree with what you say about Singapore. Singapore is a really good example of a really focussed national strategy to build a brand new sector of the economy.
HJ: And it's probably because almost all enterprises in Singapore are SMEs, they hire 70 per cent of the national workforce, so they have to. But even what's done in Korea, it took them much, much longer but you know their creative economy initiative seems to cover that start-up to exit phase, so even that's interesting to look at. Besides from what's going on in the UK and the US of course.
SM: One of the things that I think we do really well in Australia is the R&D tax refund. The idea that if you're pre-revenue, which is that highest risk phase development phase for an emerging technology company, eligible R&D gets you 45 cents refund in the dollar. I think that's very, very powerful, and I have a number of clients for whom that incentive definitely factors into decisions as to where they should locate their business. I think the refund is working, it's doing what it needs to in terms of keeping people here.
HJ: Still, from my perspective, where I sit, I look at government and I don't necessarily see a lot happening there. Steve sees something else. Starting to participate in forums, that is really, really good, heading down a path of R&D, great, tick.
It just has a slower impact…unless there is really, really good awareness and media focus on this sort of entrepreneurial activity, and that connection is stronger, it takes a while to filter down because it is coming from all sorts of different sources. I can be optimistic hearing about the things Steve is saying and I acknowledge and agree with some of those things, but I think there is still an enormous amount of work to be done to nail it.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
29 Oct 2014
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