Establishment of the Entrepreneurs Infrastructure Programme

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Establishment of the Entrepreneurs Infrastructure Programme AIIA response to Discussion Paper June 2014 39 Torrens St Braddon ACT 2612 Australia T 61 2 6281 9400 E W info@aiia.com.au www.aiia.comau

About AIIA The Australian Information Industry Association (AIIA) is the peak national body representing Australia s information technology and communications (ICT) industry. Since establishing 35 years ago, the AIIA has pursued activities aimed to stimulate and grow the ICT industry, to create a favourable business environment for our members and to contribute to the economic imperatives of our nation. Our goal is to create a world class information, communications and technology industry delivering productivity, innovation and leadership for Australia. We represent over 400 member organisations nationally including hardware, software, telecommunications, ICT service and professional services companies. Our membership includes global brands such as Apple, EMC, Google, HP, IBM, Intel, Microsoft, PwC, Deloitte, and Oracle; international companies including Telstra; national companies including Data#3, SMS Management and Technology, Technology One and Oakton Limited; and a large number of ICT SME s. In March 2014 AIIA launched SmartICT 2014, which represents the current policy and advocacy priorities for AIIA and its members. It articulates AIIA s vision for a prosperous Australia, the critical role of digital technology and the ICT industry in achieving that vision, identifies current and potential impediments and suggests priority areas of action for government and industry. Overview The submission provides comments to the Government s Entrepreneur Infrastructure Programme (EIP) Discussion Paper. In summary these comments relate to: seeks clarification regarding funding for the EIP; concerns regarding the shift in focus of the EIP and the apparent assumptions relating to the availability of investment capital in the market; the absence of focus of the EIP on entrepreneurship and innovation; the need to broaden the industry expertise proposed to be used by the programme; proposed eligibility criteria for the respective Business Management, Research and Commercialisation streams; absence of specific funding to the Research Connections stream; concerns regarding Australia s commitment to driving innovation and SME capability comparative to overseas peers; and the limited nature of this consultation process. In the short time available to review the EIP proposal, AIIA concludes with a number of recommendations which we believe are critical to the Government s industry support programme and commitment to innovation. Comments The AIIA appreciates the opportunity to provide comment on the discussion paper Establishment of the Entrepreneurs Infrastructure Programme (EIP). AIIA s ability to respond in more detail and include specific member input to a range of the questions asked in the paper, has been limited by the very short consultation timeframe. AIIA has the following key concerns regarding the proposed establishment of the EIP. Page 2 of 7 23 June 2014

Funding The EIP replaces some 13 existing programmes supporting innovation - specifically business and industry innovation; SME business and start-up support; business investment and commercialisation. Funding for the new programme is a modest $484.2M. This represents a significant reduction in funds to support the business ecosystem aimed to drive national growth and competitiveness. Taking into account anticipated departmental and operational and overhead costs, the actual quantum of investment in business is even less. AIIA is concerned that this reflects an undervaluing of the critical importance of Australia s innovation and related ecosystem and that this will adversely impact Australia s global competitiveness. Shift in focus The EIP shifts the focus from providing a range of services and financial support to the provision of generic information and advice. Noting that Australia s venture capital industry is weak, that crowd source funding arrangements are unclear and that the issue of Employee Share Option arrangements remains unresolved, it is unclear how the programme will address the widely accepted fact that business start-ups do not have access to the funds they need to support commercialisation, market entry and development of export capability. The assumption that the market/private enterprise can be relied on to provide this support is untested and as a result and represents a substantial policy risk.. AIIA supports the Government s investment and competitiveness agenda - and the proposition that a priority of industry policy should be to facilitate more private sector investment into startup businesses. However, we are concerned that abolishing programs such as the Innovation Investment Fund, Enterprise Connect and Commercialisation Australia combined prior to a satisfactory resolution on Employee Share Options, venture capital, crowd funding and microfinance arrangements is premature and at odds with this overarching agenda.. Australia s Innovation System AIIA is concerned that the focus of the EIP is on sure-shot growth and winners rather than risk takers and innovators. The concept of the innovation system and the need to have a system of measures and a supporting environment to stimulate innovation to drive growth and competitiveness is not apparent. This is a major concern to AIIA given: (i) (ii) global recognition of the role of innovation in driving growth and competitiveness and the corresponding focus on innovation by competitive peers; and the opportunity to leverage new and emerging digital technologies to drive innovation across every industry/service sector. The contribution of early stage technology companies to a nation s innovative and entrepreneurial activity is globally recognised. For example, with the right support the Australian tech startup sector has the potential to contribute $109 billion or 4% of GDP to the Australian economy and 540,000 jobs by 2033 with a concerted effort from entrepreneurs, educators, the government and corporate Australian. 1 1 PwC Consulting, (2013) The Startup economy. How to support tech starts and accelerate Australian innovation. Page 3 of 7 23 June 2014

In the EU entrepreneurs supplied 57% of all jobs in 2012 2 and 75% in China 3. In the US startups and companies less than five years old account for nearly all net job creation over the last three decades 4. Other research shows that 74% of entrepreneurs said they had increased their workforce over the past year as a result of the company s innovation 5. In short innovation and entrepreneurialism creates jobs. With limited venture capital and private equity funding opportunities (sources for new venture capital reduced by $2.4 billion, or 77% in 2013 6 ), many Australian start-ups struggle because they cannot access to capital. While mechanisms such as crowd sourced equity funding (CSEF) and microfinancing have the potential to provide that capital, regulatory arrangements appropriate to the small amounts of capital involved and the nature of the participants involved, are yet to be defined. AIIA is concerned that foundations for private sector support such as these are not in place to address the shortfall in funding investment available from either the public or private sector under the EIP. Experts make reference to the five pillars that foster innovation and entrepreneurship 7 : Access to funding Tax and Regulation Education and training Entrepreneurship culture Coordinated support How these pillars interrelate is crucial to an effective innovation system and business growth. Based on the current Discussion Paper, the EIP seems to undermine four of these five pillars by reducing funding overall; favouring winners rather than fostering entrepreneurship; failing to address the issue of tax incentives and regulation; and not committing specifically to education or research funding. Leveraging industry experts AIIA notes that existing networks of industry experts will be used to deliver specific elements of the programme (e.g. services previously provided under Enterprise Connect and Commercialisation Australia). AIIA supports leveraging appropriate industry expertise and acknowledges the quality and professionalism of existing service providers. And we support the Departments commitment to review existing arrangements and open up the opportunity for a broader range of industry expertise to support proposed new services. Eligibility criteria The explanation of Eligibility outlined at section 2.4 of the Discussion Paper makes it somewhat difficult to provide meaningful comment. However, based on what is provided, AIIA is very concerned that access to services that will provide material support to business is limited and intended only to support those businesses that are already reasonably well established. 2 Ecorys, EU SMEs in 2012: at the crossroads. Annual report on small and medium sized enterprises in the EU, 2011/12 p.15 3 China Country Profile: small and medium sized enterprise, Ministry of Commerce Peoples Republic of China website, 3 July 2013 4 D Stangler and P Kedrosky, Neutralism and Entrepreneurship: The Structural Dynamics of Startups, Young Firms and Job Creation. 2010.p 13. 5 EY, Global Job Creation:survey of the world s most dynamic entrepreneurs, 2013 6 Reported Computer Daily News, 14 February 2014 7 EY, The Power of Three, G20 Young Entrepreneurs Alliance, 2013 p.3 Page 4 of 7 23 June 2014

AIIA notes that the Business Management and Research Connection streams will focus on helping established businesses grow and will not focus on startups. We note that startups will be the focus of the Commercialisation stream. In AIIA s view the eligibility criteria for the Business Management stream is both imprecise and limited. The fact that support is restricted to companies that have been operating for more than three years and have sufficient turnover levels reinforces concern that the EIP is aimed to support only winners. In addition, the language of the criteria suggests that material support by way of funding or weightier support services to business is at the discretion of Government and subject to Government s opinion regarding potential to grow and the relative priority of the sector in which the business operates. How small and family businesses will be accommodated is similarly of concern. While the programme advocates to support SMEs, its focus is only on a subset of SMEs, within specific sectors that the Government deems to warrant investment support. AIIA strongly supports the program be universally available. While AIIA supports Government s identification of the ICT sector as an eligible sector, the programme: (i) does not reflect an understanding that ICT innovation is pervasive across all industry sectors; (ii) fails to appreciate the very low base from which some technology businesses start and the inherent cost in developing and prototyping complex technology solutions; and (iii) ignores the inherent lack of financial support and appetite in the market for new, innovative, and sometimes (necessarily) risky ventures. Support for startups under the Commercialising Ideas stream again reinforces the focus on government picking winners. While eligibility for support under this stream is not limited to specific sectors, funding is based on the need for Government funding, identification of the significant market opportunity for the outcomes of the project, significant national benefits resulting from the project and an ability to at least match the government funding. The nature of criteria is subjective and discretionary, lacks certainty in terms of what applicant companies are required to demonstrate and at odds with driving an innovative, business startup, risk tolerant culture. Research connections AIIA is pleased the programme includes research support for business. However, it appears from the Discussion Paper that there is no committed level of funding funding is subject to the limit of funds available in a given year. The lack of clear and committed funding is of major concern. The effectiveness of this component of the programme will be contingent on the availability of appropriate funding. Lack of clarity regarding eligibility criteria is also of concern those outlined in the Discussion Paper are vague and discretionary criteria. For example, what constitutes the need for Government funding. Overseas comparisons The report, Entrepreneurial Ecosystems around the Globe and Early-Stage Company Growth Dynamics, released at the recent Davos conference in Switzerland earlier this year suggests that the conditions necessary to foster a Page 5 of 7 23 June 2014

robust start-up ecosystem are, in Australia, already below par. 8 The lack of effective links between startups and larger companies to connect start-ups with global value and supply chains 9, limited access to capital, unsupportive tax arrangements, overly burdensome government regulations and poor cultural support for early stage companies are all identified as impediments. The fact that both larger companies (i.e. listed companies) and start-ups in other countries (e.g. the USA, UK, Israel and Singapore) are able to offer greater cash and/or access to ESS benefits, is a major impediment to holding innovative businesses in Australia. This is particularly true for innovative start-ups with limited access to capital and cash-flow, competing for staff and skills in a globally competitive market place. In the case of technology, the UK, Canada, Israel, Germany, Singapore and the US are all significantly more supportive to Australian tech entrepreneurs and their valuable IP than Australia itself. 10 As recently as January 2014, media reported the worrying trend of local technology companies moving their operations overseas, principally because they can access more favourable tax treatment and access capital to grow their business overseas. 11 These companies provide the foundation for Australian jobs of the future. The Discussion Paper outline of the EIP appears not to appreciate the risk of lack of access to appropriate and necessary business finance. In the specific case of ICT, Australia s tech startup industry is not only the most likely source of our next major export industry, it is also a highly portable industry that can and will relocate if forced to. Consultation timeframe Finally, while AIIA appreciates the need to prevent discontinuity of support for business as the Government seeks to review and update current programme arrangements, the timeframe for input to the Discussion Paper undermines the genuine intent of the consultation process. Recommendations On the basis of the issues raised above, AIIA makes the following recommendations in relation to the EIP. Develop and implement the EIP in the context of a supportive business and innovation ecosystem. This requires as a matter of priority: o reverting the current Employee Share Option Scheme to pre 2009 arrangements, with a specific focus on start-ups and SMEs o developing appropriate crowd source funding and micro financing frameworks to facilitate and incentivise private sector funding in startup businesses o a review of taxation arrangements to incentivise venture and angel capital o specific ICT based education and training to support SMEs A digital first approach to EIP delivery A digital first approach to supporting the growth and competitiveness of SMEs. This requires: o measures specifically aimed to improve the digital literacy and capability of SMEs 8 http://reports.weforum.org/entrepreneurial-ecosystems-around-the-globe-and-early-stagecompany-growth-dynamics/wp-content/blogs.dir/34/mp/files/pages/files/nme-entrepreneurshipreport-jan-8-2014.pdf 9 Ibid. 10 http://www.startupsmart.com.au/growth/one-way-tickets-to-delaware-an-option-for-startups-inlight-of-the-entrepreneurs-infrastructure-program/2014061012472.html 11 Australian Financial Review, Wednesday 8 January 2014, p.1 Page 6 of 7 23 June 2014

o reassessment of the expertise available to support SMEs. Less discriminatory criteria for businesses seeking assistance under the Business Management stream i.e. criteria which enables all SMEs to be assessed on their own merit. Eligibility for the Commercialising Ideas stream to be clarified to provide certainty for applicants regarding concepts such as how they demonstrate a need for Government funding and significant national benefits in order to quality for assistance. o It needs to be noted that startups have by nature, limited resources and cash - both of which are necessary to undertake time-consuming and costly application process. Allocation of dedicated funding to a specified level to the Research Connection scheme. The range of advice and delivery services to support businesses needs to be reassessed to support the objectives of the EIP. Ongoing consultation with industry to monitor the effectiveness of the EIP and help it mature into a programme that delivers material benefit to Australian business and Australia s economy. Australian Bureau of Statistics be encouraged to measure the success of the EIP in a timely and sufficiently granular fashion to support policy review and amendment as required Measures of success for EIP to include: o number of new startups o increase in the percentage of successful startups, i.e. increase in the number of startups that transition to ongoing successful businesses o decline in the number of startups and businesses that move their operations offshore o number of registered patents o percentage increase in Australian businesses leveraging digital technologies to support all aspects of their business, i.e. increased e-commerce capability o trade metrics and Australia s net export position; and o personal assessment e.g. a net promoter score by those who access the programme. Page 7 of 7 23 June 2014