Nigel Bowen explores the case for (and against) investing in local start-ups.

Cast your mind two years’ back to the start of 2017. It may not seem like the distant past but it’s a foreign country as far as Australia’s start-up sector is concerned.

Back then, Prime Minister Malcolm Turnbull’s call for Australians to embrace agility and innovation contributed to him almost losing a first-term election. Atlassian’s Scott Farquhar was yet to upgrade from his two-bedroom Pyrmont apartment to his $70 million Point Piper estate. And his partner, Mike Cannon-Brookes, was not yet in a position to tweet fellow billionaire Elon Musk and challenge him to build the world’s largest lithium battery in South Australia.

Canva was a little-known graphic-design website just starting to generate noteworthy revenue (rather than the billion-dollar unicorn it now is). Only the earliest of early adopters were using Afterpay for their retail purchases. Plus, venture-capital investment in this country hadn’t cracked the $1 billion ceiling.

Accelerating a start-up culture

Australian start-up leaders say the sector has experienced something of a perfect storm in recent years.

Alex Gruszka, chief operating officer of advocacy group StartupAUS, and Alan Tsen, general manager of fintech hub Stone & Chalk and chair of Fintech Australia, list several developments boosting Australia’s scene of late.

• In 2015, Turnbull pumped $1.1 billion into the sector after the release of the National Innovation and Science Agenda report.
• Then Treasurer Morrison introduced tax incentives for early-stage venture capital investments in 2016.
• And he championed open banking, which will give Australians control of their financial data from July 1, 2019, making it much easier for fintechs to attract new customers.

Whether headed by Turnbull or Morrison, the federal government has remained attentive to the needs of the start-up sector. For instance, after scrapping 457 visas in mid-2018, the federal government introduced a global talent stream visa. This is available to workers who can “contribute to Australia’s developing start-up ecosystem”, says the Department of Home Affairs.

There’s encouraging and sobering news when it comes to angel investing in Australian start-ups.

You can earn mind-boggling returns

“Atlassian is worth more than companies such as Qantas and News Corp. Start-ups such as Culture Amp, Safety Culture and Redbubble could soon be worth as much as Atlassian,” Gruszka points out.

“Apple, Google and Microsoft combined are worth more than all the companies listed on the Australian stock exchange. Technology is the sector that’s growing fastest and which has the highest ceiling.”

To get to a point where you’re reaping those kinds of returns you’ll need to be patient.

“Even with a successful start-up, it usually takes seven to 10 years until there is an IPO [initial public offering] or acquisition,” Tsen warns.

And along the way those potentially eye-popping returns are matched by very high risk.

Start-ups can disrupt an industry or totally fail

Investing in this sector means you can be part of the disrupting – rather than suffering disruption – from a new market entrant.

“Software is eating the world,” Tsen observes. “The large and growing companies – Facebook, Apple, Netflix, Google, in the US; or the likes of Atlassian and Canva in Australia – are tech businesses. Even industries that nobody would have imagined could be digitised are being digitised.

“Who would have backed a business plan based on consumers going to a website to buy an untested mattress in a box? But in the space of four years, [retail start-up] Koala has forever changed the bedding market in Australia and are now expanding into Asia.”

But then, almost all start-ups fail, Tsen says.

“My advice to investors is to steer clear of start-ups unless they have an informational or strategic advantage. If you have a deep understanding of an industry a start-up is attempting to transform, or, for example, can encourage the customers of a business you already own to engage with a start-up, it’s possible you’ll see a return on your investment. But even then the odds aren’t in your favour.”

Australia’s comparative advantage

In industries such as mining, agriculture and healthcare Australia is producing potentially world-beating start-ups.

Gruszka says Australia is, or soon will be, punching above its weight in terms of agtech, fintech and spacetech. Tsen is similarly bullish about agtech and fintech.

And there’s bargains to be had.

“Australia’s start-up sector has matured but it’s still early days,” Gruszka explains. “Investors don’t have to pay a premium to invest in cream-of-the-crop start-ups in Australia the way they have to in Silicon Valley.”

But it’s not an easy field to navigate.

Opportunities to invest in start-ups are surprisingly difficult to access. Many start-ups are funded by established players in the industries they aspire to transform. Angel investors typically have to spend lots of time pressing the flesh at tech-sector meet-up events before an investment opportunity arises.

“My advice is to get involved in the ecosystem and add value by, for instance, offering to mentor start-up founders,” Tsen says.