Is the honeymoon over? Australian startups in decline

Published on the 26/10/2018 | Written by Jonathan Cotton


Aussie startup decline

For the first time in five years Australia’s start-up ecosystem shows significant drops in startup activity...

According to StartUp Muster, a research organisation charged with ‘measuring and publishing the progress, challenges, and opportunities within the Australian startup ecosystem’ (and paid for by the Department of Industry, Innovation and Science, Atlassian, Google and The University of Technology Sydney), the number of early-stage startups in Australia has fallen for the first time in five years.

The organisation collected 178 different data points from 3,476 people – that’s people participating in a startup, people thinking of founding a startup and businesses that support startups. Startup Muster manually reviewed submissions, only accepting companies addressing a large market in a scalable way, removing a significant proportion of self-identified startups in the process. (Analysis was carried out by Data61 – a full description of the methodology).

“It’s a startling result, especially considering the recent increase of Australia’s R&D incentive scheme to AU$3 billion.”

Now the bad news: According to the report, the number of startups in Australia has fallen from 1675 in 2016 to just 1465 in 2017. As for the launching of new startups, that number has fallen too, from 712 in 2017 from 1291 in 2016.

Estimated number Aussie startups

 

Estimated number Aussie startups between surveys

It’s a startling result, especially considering the recent increase of Australia’s R&D incentive scheme from AU$1.8 billion in 2011 to AU$3 billion. (According to the report, R&D tax incentives are the most often received government grants).

But could the decline have something to do with new uncertainty around the nature of those R&D grants?

R&D tax incentives provide cash flow support for start-ups who are unprofitable in early years, but the sweeping changes brought in by the Turnbull government in May have affected around 12,000 companies currently collecting R&D and much of the rationale for those changes is reform – excluding bad actors from participation in the scheme.

“Although the majority of taxpayers do the right thing, some claimants, spread across all industry sectors, have engaged in behaviour such as incorrect self-assessment of eligible R&D activities, exaggerating their expenditure claims, ‘pushing the boundaries’ of the interpretation of the R&D definition and engaging in other forms of non-compliance,” says the R&D tax incentive reform factsheet.

“The Government will implement a series of compliance, enforcement and administration changes to improve the integrity of the R&DTI.”

Is the government’s attempt to separate the wheat from the chaff already having an affect?

Maybe, but there is also the issue of how long of a timeframe one should be working to in analysing the state of the startup nation: Yes, there is a year-on-year dip in startup activity, but over the longer term the results are positive with the number of active startups having increased from 954 to 1465 over the last three years.

While the opposition is making the most of the dramatic turn, cooler heads might find that the report generates almost as many questions as it answers. And in general, the results are far from pessimistic. Positive highlights from the report include:

  • Evidence that many startups are surviving for longer, meaning more young companies producing viable products.
  • 33.8 percent of startups have secured at least one investor with 49.2 percent of startups currently trying to raise funds.
  • Diversity initiatives appear to be having an effect: Almost a third of startups have a woman on their founding executive team (perhaps as a result of the government’s AU$8 million Women in STEM & Entrepreneurship program.
  • The report finds that artificial intelligence is the biggest startup industry in Australia having grown from 14.5 percent of startups in 2017 to 20.6 percent of startups in 2018.
  • 35.7 percent of all Australian startup founders were born outside of Australia (and 22.4 percent of startups have at least one employee on a work Visa).
  • The biggest reported hindrance to founding a startup are ‘life circumstances that require a stable income’.

Click here to download the full Startup Muster report.

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