Waning political focus on innovation and a lack of funding for early-stage startups have seen Australian cities slip in the Startup Genome global rankings.
The Startup Genome Ecosystem Report 2019 has seen Sydney drop six places compared to the last report in 2017, from 17th place to 23rd. Melbourne didn’t make it onto the top-30 table at all.
Melbourne was, however, named as a ‘challenger’, or an ecosystem with the potential to make the top 30 within the next five years.
The findings were, however, contrary to those of the StartupBlink Startup Ecosystem Rankings 2019 report, which named Australia as the fifth-most startup-friendly country in the world.
The Startup Genome report bases startup ecosystems in terms of their value — output, exits and success — as well as on things like funding, connectedness, knowledge and talent base.
Silicon Valley retained its position at the top of the pack, with New York City coming in second and Beijing and London tying in third and fourth place.
The report highlighted the importance of government policy in supporting startups, finding a positive relationship between policy action in support of the ecosystem and funding.
Of course, this is not an area in which Australia has been performing particularly strongly of late.
“It’s clear to anyone that’s watching that the narrative around innovation, technology and startups has fallen away at a national level over the last couple of years,” StartupAus chief Alex McCauley tells StartupSmart.
“And so it’s no surprise really that we’ve not been able to keep up with the competition.”
It’s important to note that Sydney’s ecosystem is still growing, according to the report. It has slipped in the ranking because it’s not growing as quickly as others, such as San Diego, Washington and Lausanne-Bern-Geneva in Switzerland, which have overtaken it.
“Grabbing the vast economic opportunity that technology presents has been a first-order priority for lots of other countries in a way that it hasn’t been … in Australia,” McCauley observes.
Governments around the world are starting to see the value of taking advantage of technology for economic prosperity, and consider it a “critically strategic imperative”, he adds.
“If we want to keep up, we need to do the same.”
The power of community
But it’s not all doom and gloom.
In an introduction to the report, Startup Genome founder and chief JF Gauthier said the research found more than 70% of the success factors of a startup unicorn depend on the ecosystem they’re in, rather than the efforts of the founders.
This means not only policy but founder networks, mentors, accelerators and hackathons.
“The startup revolution defines a global cultural movement where we share knowledge and favours, and invest in our communities knowing that the more we invest, the more we increase our individual and collective success,” Gauthier wrote.
Speaking to StartupSmart, Startup Victoria chief Judy Anderson stressed that for Melbourne, “it’s definitely in our immediate future to crack the top 30”.
A lot of this comes down to “local connectedness”.
Victoria has the largest startup community in the country, she says, with both Startup Victoria and many other organisations running things like pitch nights for early-stage ventures and growth clubs for those taking the next step.
“The odds of making a meaningful connection with someone that can actually help you in that next stage of growing your business is quite likely,” Anderson explains.
“There are a lot of organisations helping to connect founders to each other for peer-to-peer learning,” she adds.
“Regardless of the top-down support they get, they’re serving each other.”
McCauley adds that the community spirit is strong in Sydney — and this was noted in the report as well.
Founder numbers are growing rapidly in the city, there’s a high demand for space, and there is a lot of capital invested in VC firms, which the Startup Genome data doesn’t take into account.
“We can expect about $3 billion of capital to come into startups over the next few years,” McCauley predicts.
Sydney also “performs pretty well in talent”, he adds.
While we hear a lot about the talent gap in Australia causing a headache for local tech companies, that doesn’t mean there isn’t great talent here.
“It just means there’s this insatiable appetite for great talent,” Mc Cauley says.
The fact that we have that talent pipeline is valuable, and will be “pretty essential going forward if we want to be successful”, he adds.
However, for both the Sydney and Melbourne ecosystems to grow will require continued strength in the communities, paired with government support, McCauley says.
“If we’re going to be internationally competitive … we need both organic growth and strong, consistent support from government at all levels.”
Patching the funding gap
Alongside Hong Kong and Vancouver, Sydney is highlighted in the Startup Genome report as one of the ecosystems “most hindered” by a lack of funding available for early-stage startups.
This is an ongoing issue, noted in various state and national startup reports last year.
It was also highlighted in the most recent Techboard Australian Startup & Young Technology Company Funding Report, for the March quarter 2019.
The report found total funding for Australian startups and young tech companies totalled $2.67 billion during the last quarter — the largest since Techboard started producing reports.
However, the report includes acquisitions in its data, and therefore included that of property tech company Property Exchange Australia, for $1.6 billion.
Also, Airwallex’s $100 million raise formed a significant chunk of the total.
Private investment totalled $477 million, up from $362 in the previous quarter and $346 in the same quarter last year, but still not reaching the high of $570 million reported in the September quarter last year.
The data also showed that the average value of deals is increasing.
The number of investments under $1 million dropped significantly, and the number of those between $1 and $5 million also fell slightly.
On the other hand, the number of private investment events totalling $20 million or more saw a marked increase compared to the two previous quarters, and when compared to the average in the 2017-18 financial year.
While this data isn’t state-specific, it does point to a continuing trend in Australia as a whole, whereby more capital is being deployed into later-stage startups and larger deals — and it reflects the gap in early-stage funding that saw Sydney slide down the Startup Genome rankings.
Ecosystem will mature
McCauley observes that this “is a problem in emerging startup ecosystems everywhere”, in particular when there hasn’t yet been “visible financial success for early-stage investors”.
The maturity and numbers of these investments are likely to increase organically, “as the returns start to become more visible”, he says.
Also, venture firms tend to invest in Series A rounds, or beyond. It’s high-net-worth individuals and angel investors that are more likely to back early-stage ventures.
Part of the problem here is in the practicality. It’s hard for those individuals and startups to find each other.
The companies in need of cash may not have a good online presence, and certainly no marketing budget, and so the angels just don’t know who they are, McCauley explains.
“It’s inherently a disaggregated, dislocated kind of stage for investment,” he adds.
While attempts have previously been made to set up directories and associations to make those connections happen, they haven’t taken off.
“A bit of government support is probably necessary there,” McCauley says.
“There’s a role there to play for government and big organisations … in establishing some more cohesive measures and, frankly, professionalism, around early-stage investment,” he adds.
For Anderson, part of the solution lies in encouraging traditional investors such as family offices, super funds and private offices, to diversify their portfolios to include early-stage startups.
Some are starting to go this way, but “it’s certainly not the common ideology of those sorts of traditional investment portfolios”, she says.
“If we could articulate what the value is for them — educate them as to how to do that properly — that is a relatively untapped resource, not just in Victoria but across the country.”
Having said that, Anderson isn’t convinced that closing this funding gap will automatically propel Australian cities to the top of the Startup Genome charts, as there are “so many variables” that affect whether a startup will succeed or not.
These variables include the quality of the founders, the size of the problem, and adequacy of their solution, and their ability to execute.
“All those things go into it probably more than funding does,” she explains.
“That being said, you could have all those things, not have the funding to really hit the gas, and it never gets off the ground. It’s still critical,” she concedes.
“Based on basic logic, if there was more funding, more people could test those ideas, and there would be more likely success in the market. That’s a no-brainer.”
A warning sign
Sydney may have taken a tumble in the global startup rankings, but it’s nothing terminal.
Rather, it should give people in the ecosystem a few things to think about. In a best-case scenario, it could even give the Federal Government — whichever it will ultimately be — the kick it needs to re-focus on supporting innovation and technology.
“We can’t take our eye off the ball here or we will drop it. This is a warning sign of that,” Mc Cauley says.
“Particularly at a Federal level, both parties can do more to support innovation and startups and new industries,” he adds.
However, the fundamentals on the ground are looking good.
“If we work hard we can be globally successful,” McCauley says.
“At the end of the day, Australia has two tier-one ecosystems here.”