The Silicon Kangaroos: Ten Reasons Why There Is a Perfect Storm for Silicon Valley to Invest in Australian Tech Start-ups.

Baby Kangaroo

Kangaroos are the national pride of Australia. They are cute, cuddly and excite tourists and city-dwelling locals alike. But beneath their cute, cuddly exterior lies a deceptive, yet deeply powerful, strength. Kangaroos tend to be muscled up – almost Venice beach style, every soupcon of fat eradicated through evolutionary excellence and awesome DNA. Kangaroos are lean, mean, fighting machines – just like the great Australian Tech Start-ups.

Screenshot From Great BBC Youtube Video Of Fighting Kangaroos 

Far from the beaches filled with the clichéd, sun-drenched, bronzed Adonises, the boot-strapped technocrati tirelessly beaver away in their ever-expanding, co-working spaces. The geek chic tech sector is beginning to flex its muscles and with good reason. The recent $4.4bn float of Atlassian on the NASDAQ, and the recent inflows of international investment capital into local companies such as Canva.com, perhaps reflect that Australia is on the cusp of massive growth helped along by the dramatic re-positioning of the Australian economy as a whole.

Throughout the Global Financial Crisis, Australia held its own on the world stage. The resources boom staved off global recessionary forces, as the Chinese Behemoth continued its voracious appetite for growth. Whilst China is far from anorexic, its growth has softened dramatically, resulting in Australia’s historic growth engine spluttering; and like so many great tech start-ups…

The Australian economy itself is pivoting…

This pivot has been towards innovation and has created a potentially perfect storm for even the seasoned, cynical Northern Californian investors to invest in “The Silicon Kangaroos”; and here are the ten key reasons why.

(Before we go on I do need to present the usual caveats for potential investors. The reasons identified below are my observations as a blockchain entrepreneur, currently negotiating with investors – seed, angel and beyond in the Aussie space – and are based around my own meandering experience and good old-fashioned business logic. They are not intended as investment advice, but as a series of ideas from someone that wants to see the whole Aussie tech startup ecosytem reap its full potential. It is, of course, recommended you undertake your own due diligence and seek professional advice in relation to all aspects of the observations below).

So, enough of the caveats here are the gems:

1) Australia is a great place to live – I landed here 14 years ago from the UK and have never looked back. Australia is an awesome place to live and the Economist agrees. In their Intelligence unit 2015 report, they highlighted 4 out of the top ten cities to live in globally were in Australia:

Based around stability, infrastructure, education, health and environmental standards, the report confirms Australia as a great place to live presenting a great draw-card for any employer in an increasingly competitive global employment marketplace associated with Tech startups.

2) The USD/AUD exchange rate has been hovering around its 5 year low as shown in the chart below, making it 25% cheaper than it was 3 years ago, and 20% cheaper than 18 months ago.

Screenshot from XE.com

As a result, the USD in your pocket right now, can go a lot further in Australia than it did.

3) Costs of Living.

San Francisco is going through its usual cyclical roller coaster of boom and bust, with the Valley driving rents and day-to-day expenses up to stratospheric proportions. Numbeo.com , a peer to peer review website, highlights how much more expensive San Francisco is right now compared to Sydney, for example:

  • Rent Prices in San Francisco, CA are 90.00% higher than in Sydney
  • Restaurant Prices in San Francisco, CA are 21.89% higher than in Sydney
  • Groceries Prices in San Francisco, CA are 39.47% higher than in Sydney
  • Local Purchasing Power in San Francisco, CA is 21.86% lower than in Sydney

Now whilst the falling Australian Dollar has undoubtedly contributed to the relative costs of living in both cities , it is the rent figure that is particularly concerning for those in Northern California. Rents are almost double those of Sydney. With direct living expenses representing the major part of all our monthly expenditure, for ambitious, twenty-something, professionals, the mainstay of tech startups, these high rents will continue to drive continued upward pressure on incomes, and therefore Tech startup costs. Those same pressures are not, as yet, present in Australia.

4) The Prime Minister of Australia, Malcom Turnbull, who frst came to power in September 2015 has a legal, investment banking and start-up background, accumulating substantial wealth from the “dot-com boom”. A country leader that understands the power of the tech startup space first-hand has to be a worthy ally of tech start-ups, and their supporters. whilst this was tested this year with the national elections, it is no coincidence that his understanding of the Tech Start-up sector was behind the release of the Government’s commitment to their innovation statement.

Commitment to Innovation Home Page 

5) The Australian Governmental commitment to innovation. As part of its economic re-alignment, the Australian Government put out a formalised innovation statement late last year. In it, a series of initiatives were proposed, all designed to make investment easier, through numerous positive tax concessions, and to engender a more positive view on risk taking and failure. Whilst the fine-tuning of these initiatives underwent extensive discussion from both sides of Australian politics, they came into force on 1st July 2016.

6) Current Research and Development tax incentives. The Australian Government has made R&D Tax incentives widely available, wherein currently up to 45% of eligible R&D expenses can be claimed back in corporate year-end tax returns. Given tech startups have a natural propensity for disruption and for creating new business model, R&D is the backbone of their OPEX. By rebating a substantial portion of many of the R&D expenses incurred, this reduces the actual capital required to be deployed, generating enhanced ROE, if used wisely, for you, as a Silicon Valley investor.

7) The availability of government grants still exist within the Australian Economy:

a) National Grants – Entrepreneurs’ programme: accelerating commercialisation up to AUD$1m for up to 50% of project costs. These grants are awarded on a competitive basis, but with the right combination of stakeholders and projects, grant funds may be available.

b) State-based government incentives – Enclosed is an example of a State based initiative. This is an example of up to AUD$100,000 grant funding being available (up to 25% of the project costs) on a competitive basis for collaborative projects – often involving academic institutions. This could be ideal for tech startups that might need to leverage leading edge thought within their value proposition. Whilst not suited to all market segments, if your potential investee company qualifies, it presents another strong risk mitigation and enhanced ROE tool.

8) EnterpriseValuations are more realistic. Whilst valuations have hitorically been over-inflated in Silicon Valley and showing signs of softening, given Australia is a smaller market with less vibrant and aggressive investment community there is less competition. As a result, there is less boiling pot pressure on valuations. This means there is the opportunity for more bang from your relative, home-grown, buck.

9) Australia is a great test-bed for new products. Australia has similar features to the US and the UK – language, legal structure and culture. Because it is a smaller market, however, new products are often tested to determine market feedback and acceptance. This can represent a risk mitigation strategy by being able to test a product in a market that is large enough to get meaningful results, but which is small enough to avoid affecting a main-line brand’s reputation. This also means that as a manager for your US based fund, you can test combinations of products from within your portfolio companies with Australian Tech Startups in the same space. It also has the added benefit of making it harder for your erstwhile, vulturistic competitors to get an inside track on what your investee companies are up to.

10) Australia is used to punching above its weight. As a nation, Australia has always excelled at so many areas – especially Hollywood and Sport e.g. swimming. For a comparatively small country, Australia has always demonstrated guts and the desire to win, resulting in so many great accolades and sporting trophies well beyond its 23 million population. That same spirit is ingrained into so many Tech startups. Australia is a young country with a need and desire to prove itself on the world stage. Used effectively, your rocket fuel could tap into that need and desire.

So as you can see from the above, there are plenty of opportunities to deploy your capital more effectively, taking advantage of the shifting emphasis in the Australian Economy towards technology and innovation. Whether it is partnering with local venture funds here, or investing direct, you owe it to yourself to come on down and say G’day to The Silicon Kangaroos. They are lean, mean, fighting machines that fight above their weight, and with your help can fight even stronger on the world stage, generating great synergistic returns for everyone involved.

 

© 2016 Tim Lea, CEO , Verdictum.io

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