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Ben covers the property industry and has a keen interest in entrepreneurship and travel writing. He speaks Mandarin and previously covered housing and urban affairs for The Australian Financial Review.

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Sydney a haven for start-ups

Published 04 December 2012 04:46, Updated 06 December 2012 05:25

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Sydney a haven for start-ups

It has a healthy differentiation from Silicon Valley in terms of the types of companies launched and the demographics of their founders and is the global capital of data-driven start-ups.

Sydney has been ranked 12th in the world when it comes to having the right ecosystem for start-ups, research company Startup Genome reports.

This puts Sydney above cities such as Moscow and Berlin and goes against the common view that Australia lacks a start-up culture. Melbourne ranks at 18th in the study.

The report – which drew on data from more than 50,000 start-ups around the world, finds Sydney has one of the world’s highest per capita outputs of start-ups, leads the world in adopting new technologies and business models, and has an abundance of talented business founders.

It has a healthy differentiation from Silicon Valley in terms of the types of companies launched and the demographics of their founders and is the global capital of data-driven start-ups.

It’s for reasons like these that entrepreneurs such as Rod Bishop and Ross Lin came to Australia from New Zealand to fund and set up their transport shopping website, Jayride.

The duo raised $400,000 from Sydney-based angel investors for Jayride and went full-time last year. Jayride now has more than 14,000 members. They have no plans to head to Silicon Valley.

“Sydney is really our Silicon Valley,” Bishop says. “As an early stage company, all the help you could need is available here in terms of advice and mentorship, and finding people who have had similar problems and solved them already.

“In response to people who say raising capital is not easy in Sydney, I would say I don’t think raising capital is easy anywhere but our capital was purely raised in Sydney.”

However, although Sydney may be an attractive destination for entrepreneurs, it is falling short on execution. Only 4.8 per cent of Australian technology start-ups grow into successful global companies, compared with 8 per cent in Silicon Valley.

A report that applies the research to Australia called Silicon Beach: A study of the Australian Startup Ecosystem, co-authored by Deloitte private, Pollenizer, From Little Things and the Startup Genome Project, finds United States companies raise almost five times more early stage capital and 100 times more when they are ready to scale their operations. And while Sydney entrepreneurs are more likely to want to build a great product than their Silicon Valley counterparts, they are less likely to want to change the world or get rich.

Part of the problem is the relatively small size of Australia’s market. “I think our market size is an issue that’s right at the heart of our risk aversion,” a partner at Deloitte Private and report co-author Josh Tanchel says.

“We have a lot of companies that often don’t make a lot of money or scale quite slowly. It’s a perpetuating cycle because investors are less interested in supporting these companies, so the companies have less resources, which causes more to fail or not scale very well, which makes investors more risk averse.”

Entrepreneurs share some familiar complaints about Australia being a more difficult place to do business than it needs to be. Little of the vast capital in the super industry is being used to support the sector and Tanchel says Australia lacks organisations and government institutions that support the sector in the way Stamford University does in the US. The tax regime is unfriendly, particularly with employee share options and government grants, while generous, are under-utilised.

“Big business and government needs to work closer with start-ups,” Tanchel says. “I have the view that entrepreneurs are the greatest natural resource in this country. But we’re really leaving them in the ground.”

Co-working spaces Fishburners and Engineroom director and founder David Vandenberg says it is hard for start-up companies to woo young talent away from high-paying jobs in financial services and mining. Tax rules on employee share options need to change, given most start-ups fail. “You can’t offer top dollar, so you offer share options [but] there is immediate tax liability for something that is likely to be worth nothing in the future.”

Visa rules have also forced some promising businesses to pack up and leave. But he says Sydney’s start-up community has come a long way in the past five years, starting with the Silicon Beach forum and weekly drinks that got the conversation started.

“It definitely has been building up but as you have seen in the Genome Report, funding does stick out as the main problem, which is no surprise to any of us.”

Online fashion entrepreneur Nikki Durkin spent six months in Silicon Valley this year and was blown away by the pace.

“You would go into a meeting with an investor, a one-hour meeting, and they would say, ‘OK, cool, I’m in. Where do I sign?” The investor would then commit a six-figure sum.

“I’m thinking oh, OK, I was expecting it to take a bit longer.”

She admits the pace had a lot to do with the backing of start-up king maker Paul Graham from Y Combinator. But there was an emphasis on selling the vision over there that she says is absent here.

“[Paul Graham] said, ‘Don’t worry about the money, don’t worry about a business model right now. Just get traction. Get people to use it and interact and the rest you can figure out later.’ Over here when you talk to people they want all this paperwork.”

She is keen to get back over there and says it is mostly visa complications that are keeping her and some key team members in Australia. But it’s also cheaper to operate here as an international company, particularly with her mum helping her with the accounting and the strong network she has.

“You need to invest time in building a network and it’s not just a professional network, it’s friends to run ideas past,” she says. “I had a tough time [in Silicon Valley] finding women to talk to, in terms of talking to customers to develop the product. It’s something I take for granted here because I have lots of girlfriends I can talk to.”

Los Angeles-based entrepreneur-turned-venture capitalist Chris Behrenbruch, now adjunct professor at RMIT’s College of Business, says Australia’s burgeoning technology climate is getting a lot of international attention and is getting better every day.

“Our problem isn’t, in my view, talent and ideas, we have plenty of those,” Behrenbruch says. “The ASX is a wasteland of stagnant early-stage companies that listed too early and there are plenty of stories of Australian entrepreneurs who left for the US to raise capital. We have to fix this.”

Terry Cutler is optimistic. The industry consultant and chair of the 2008 Australian government review of the national innovation system says the flight of Australians overseas wasn’t always a bad thing.

“People often complain about the offshoring of intellectual property but to me there’s a real positive to it,” Cutler insists. “It puts us on the global map.

“I think Australia has become much more on the global radar, detectably over the past five years in areas like bio-tech and also clean and renewable energy. So we’ve been attracting much more offshore investor interest. You’re seeing a far greater cadre of firms that have gone from Australia to the United States, you’re seeing the brand of Australia being built.”

Cutler also says a much more active angel investment environment has developed over the past five years, typically successful entrepreneurs who are bringing experience back to Australia. He cites the example of Kaggle as an online business that gained international market traction from Australia then went overseas for more funding.

“I think we can be far too negative about this valley of death and how you can’t get funding for this commercialisation process,” Cutler says.

“It’s always the case that it’s never enough.”

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