June 2025
(Based on a report to the Australian Government)
“Good regulation should be conducive to business and to consumer protection. This means that regulations should be designed to be efficient and not overly burdensome, while still ensuring that customers are adequately protected from harm.”
– Jamie Dimon, CEO of JP Morgan
“I’m not a big believer in the power of more regulation to fix things. I think it can almost be more dangerous because it provides the illusion that things have been fixed without the substance.“
– Bethany McLean, Editor of Vanity Fair
Every few years I get asked to join a Government panel on innovation and technology where I’m asked to bring “silver bullet” recommendations on policies for implementing from my time and experience in industry. I’ve always seen it as Government interacting with industry in impactful ways with a high signal to noise ratio. I’ve been doing it for about 12 years now and it sort of happens once per election. This will be the 4th time.
The last few times and what was achieved are here, here and here. It is difficult exactly to draw direct causation but through them I think we’ve brought about 3 laws and red tape removal that effect just about every student, every startup that issues stock to employees and everyone in CBD Melbourne. I’d estimate this exercise impacts a few million people per year and produces close to a billion dollars of economic value and savings to the Australian federal government per year.
It’s been extremely successful and the ceiling is extremely high. So every time I’m asked I dedicate a few weeks of time into delving deep into the bowels of the technology industry, interviewing everyone I know and trying to find the most harmful bottlenecks and red tape that can be removed to stimulate innovation and the creation of new technology.
Here’s what I’ve found this time.
1. Create More Banks, Health and Insurance Companies
Problem
In Australia, some of our largest and most profitable industries are banking, health insurance and general insurance. The market is huge, the margins are huge, the industries are effectively oligopolies whereby it’s controlled by only a few large old companies who own the entire market. This usually is a recipe for a slow pace of innovation, collusion and in some cases corruption. All things we have in the Australian banking and insurance industries.
There’s little competition incentive to innovate or reduce prices when there are only a small number of companies who own an entire market. Each of these industries have the same big companies offering the same products with the same margins priced the same way. The pack moves as one in fact, which means the whole industry moves as one and almost always in the same direction at the same time. There are no industry incumbent threats or competition forcing them to create new products or different ways of doing things.
These are all companies worth hundreds of billions of dollars in markets worth trillions of dollars in Australia alone. So you may wonder why there aren’t more innovative startups or technology companies competing in these large profitable markets with slow legacy incumbents? Here’s why. It’s because they can’t.
In Australia banking licences and insurance licences are both regulated by the Australian Prudential Regulation Authority (APRA) who regulate a minimum starting capital for a bank of $50 million and a minimum starting capital of $40 million for a health insurance or other type of insurance company. This is an impossibly high threshold to meet and practically insulates the entire industry from startup competitors.
The big secret of these industries is that the regulator of the industry is also the gatekeeper of the industry. Those gates have been fixed firmly closed by making the barrier to entry impossibly high to overcome for small companies. It is practically impossible and is why there are no new banks or insurance companies and minimal competition in these markets.
Lots of people asked me when reading this, aren’t there a lot of new banks and insurance startups in Australia? Seemingly independant names like UBank or Up Bank in banking or Honey Insurance or Huddle Insurance in insurance. Actually, no. What these are is often companies onselling or renting larger Big 4 banking licences or insurance licences. But actually their “banking and insurance product” is offered or underwritten by a big brand like Medicare, Open Insurance, or Bendigo or CBA.
Why is this a problem? Because it’s like trying to build a social network on top of a social network. If you get big enough, they just turn you off. That’s what happens to most of the new banks that try to start and compete, while renting a banking licence from a big 4. They get big enough that it’s a threat to the larger bank so they basically get offered a choice of having their banking licence turned off or be acquired. Not really a choice. This is why we don’t have truly new standalone finance, banking or insurance companies. If they’re reliant on a bigger company for the licence to exist and operate, they’re always under their thumb in unavoidable ways. They only choose to start like this on a rented license because it would otherwise mean not starting at all.
To anyone who has been in the technology or venture capital industry knows that raising $50 million or $40 million dollars in funding just to start the business to a brand new independent licence is an impossible undertaking. Even if you achieved it, you would have sold over 90% of the business to do so to external investors (usually the banks or insurance companies themselves, the second barrier to entry) and there would be no incentive for entrepreneurs to start or grow this company as their starting dilution of equity is already into the single digits. They’d then need to raise more money on top of this to build the product itself and market it to customers.
What the regulator maybe doesn’t appreciate is that future big companies always start as present small companies. So when you prevent new small companies from starting in an industry, you’ve also prevented any new big companies from starting in that industry. This is very nuanced and most people don’t understand it. You have to widen the funnel for small companies being created at the beginning for large companies to show up at the end of the funnel a decade later.
Solution
So what’s the fix? Here’s the interesting part, APRA the regulator themselves realised the problem they had created and came up with the solution. In 2017, APRA tabled to government a white paper innovative plan to lower the capital threshold to start a bank and insurance company from $50 million and $40 million respectively in starting capital to $3 million in starting capital. To give startup technology companies a pathway to getting off the ground. To increase competition in these industries and to eventually create new big banks and big insurers.
But trained political historian eyes will see that year 2017 and remember that 2017 was also the year the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was started. In 2017 in political history, there was a Liberal federal government in power and an ongoing Royal Banking Commission into a lack of regulation with the banks.
The conclusion from the royal commission was that the banking industry needed more regulation, not less regulation. It would have been extremely politically difficult for APRA at that time to be trying to reduce regulation to allow new banks and insurance companies to start. When the commission findings was to regulate more and create more red tape, not remove red tape. So as an accident of history, just sheer bad luck with timing and a byproduct of the banking royal commission, we threw the baby out with the bathwater.
A single piece of small legislation that APRA themselves wanted to introduce to lower the barrier to entry for new insurance and banking companies was discarded altogether and still almost a decade later there is no new banks and no new insurance companies in Australia. So that is the recommendation. It’s as simple as bringing back what APRA themselves wanted to do under a new political climate.
Policy Recommendation: Lower the starting capital requirement for a new bank or insurance company from $50 million to $3 million.
How to Implement: Using APRA’s own implementation mechanism to lower the starting capital regulation threshold for new banking and insurance licences.
If you did this, it would cost nothing to do and you would see an explosion in new startups and new technology in these old legacy industries. It is straightforward for technology startup companies to raise $3 million in funding and still have enough equity leftover to stay motivated and build a meaningful company with.
It will lead to the creation of new banking and insurance markets, products, technology and hundreds of billions of dollars of economic movement. Which will only benefit consumers. The proliferation of technology companies here would bring more competition to the big banks and big insurers and make them innovate and lower prices which would benefit millions of Australian consumers.
2. ESVCLP’s don’t need AFSLs
Problem
In Australia, to stimulate the then nonexistent venture capital industry, in 2007 the federal government introduced the Early Stage Venture Capital Limited Partnership Program (ESVCLP). It is a program administered by AusIndustry for an entity, the Limited Partnership, which is a Venture Capital fund (VC), that is able to invest in high risk startup and technology companies while giving investors in those funds tax free treatment to compensate them for the high risk they’re taking.
That’s a bit of a mouthful but basically it’s a tax program that allows investors to invest in venture capital funds and not get taxed on any of the profits or returns because of how high risk it is. Because at this point in history, noone is investing in venture capital funds because in all likelihood doing so meant losing all the money invested. Which is what had happened in the decades before this.
In 2007, the preceding 20 year history of Australian venture capital was negative returns meaning every single dollar of investment by investors into venture capital as an asset class lost money. This harmed innovation in Australia because startups and technology companies need this funding source to start. Investors in these funds, particularly Australian Superannuation Funds, fled the venture capital market in waves after the industry lost all their money after the Dot Com crash of 2000.
But without venture capital how are new companies going to start and get the funding they need to commercialise new technology? Traditional financiers like banks aren’t in the habit of giving millions of dollars to 3 X 25 year olds in a garage working on a new technology startup. But that’s exactly how Apple, Google, Facebook, Microsoft et al all started and they’re the largest companies in the world.
This in itself is the proof for why a flourishing venture capital industry is important for a country to have. If we want our own Apples, Facebooks, Microsofts and Googles to start here and get the economic benefits of them starting here in employment and taxes, we need venture capital to work and succeed as an asset class.
The ESVCLP was a government program designed to kickstart the industry all over again and it was very successful. The 20 year returns history after 2010 for Austalian venture capital as an asset class, after this program was started, is extremely positive and has led to the creation of generational global companies worth tens of billions of dollars like Canva and Atlassian. That employ thousands of people and pay hundreds of millions in taxes.
Why are the returns after 2010 so good compared to the returns before then? Personally I think it is because we have a better pedigree of investors than we did before. The current generation of venture capitalists are usually themselves ex founders of technology startup companies that have been acquired. So they understand technology better and are therefore better investors in that technology. I think also the world got smaller. Today you can build technology in Sydney and sell to San Francisco or Spain from the press of a button.
This is a high order bit. If you help the ESVCLP program, which in turn attracts more capital into the sector, this produces a flywheel that then funds the creation of more technology startups which grow into more mature companies worth billions like Canva and Atlassian, which then hire thousands of people which the government gets the taxation revenue from. This is force multiplication at its finest. Every $1 the government supports the sector with, they often receive multiples in excess of that $1 in economic value back from.
But importantly without trying to be a venture capitalist themselves which would warp the industry entirely around them. Markets function best when the government supports and reduces red tape but stays out of the way of the market forces to avoid rent seeking. So the best way to help is just to remove the biggest problems in the way of the operators of the ESVCLPs.
I have asked over a dozen such ESVCLP VC fund partnerships what the hardest part of starting their venture funds was. Apart from raising the capital itself, in unison they all said the hardest part was getting an Australian Financial Services Licence (AFSL) and maintaining compliance to keep it active. If everyone is saying the exact same thing, then that’s the bottleneck that we need to focus on.
An AFSL is a licence issued by the Australian Securities and Investment Commission (ASIC) and is required to do any one of the following: “provide financial product advice to clients, deal in a financial product, make a market for a financial product, operate a registered scheme, provide a custodial or depository service, provide traditional trustee company services, provide a crowd funding service, provide a superannuation trustee service, provide a claims handling and settling service, or operate the business and conduct the affairs of a corporate collective investment vehicle (CCIV).”
An AFSL is a mechanism by which ASIC regulates the financial services industry and maintains consumer protections within that industry. They’re there to essentially protect consumers from bad investment decisions and losing their money. In other types of funds like real estate or shares or stock markets, you’re not supposed to lose any money. And AFSLs protect consumers from losses in those types of funds. But here’s how that goes awry when it specifically comes to venture capital funds.
A VC fund is definitely a type of managed investment fund but in a VC fund, you’re supposed to lose money on 9 out of 10 investments, where the 1 that succeeds returns so much that it makes up for all the losses. In fact you’re supposed to lose money on 99 out of 100 investments, where the 1 that succeeds becomes the next Google or Microsoft or Facebook. The losses are a feature of the industry not a bug because it means the investors are taking big risks trying to commercialise new technology that may not work because it’s so new and innovative. In fact the losses are so common there’s a whole extra regulatory framework around it.
Currently when an investor invests in a venture capital fund, their accountant has to sign a certificate saying that they’re a sophisticated, professional or wholesale investor. The definition for that in Australia is someone with more than $2.5 million dollars in capital. This is the regulatory framework because the certificate is meant to show that since a person has amassed this much wealth they are experienced with the risks involved with investing in an illiquid asset class where they may lose all their money. And that they have enough wealth to absorb the losses. Experienced startup and technology investors know this going in and are prepared for it.
By signing one of these investor certificates, the investor in the fund actually waives all their consumer protection rights they may have had from investing in a managed investment fund, which a venture capital fund is a type of. So if the fund loses all their money they have no recourse and rightly shouldn’t if the VC fund tried its best to invest in startups that just all failed. Most startups companies will fail. That’s also normal.
So what is happening here is the VC fund has to get an AFSL to provide protections to their investors. But then all those investors sign a certificate giving up all their protections. Meaning the AFSL in this circumstance literally does nothing but add costs and overheads to the VC fund. Substantial costs. An AFSL costs in the order of $100k – $200k per year to keep active and compliant.
Meaning every venture capital firm over a 10 year life will spend $1 million to $2 million just keeping an AFSL licence active that they don’t even need and doesn’t do anything. And all their investors have already waived the investor protection rights having an AFSL is trying to give them. This is for a fund that is often only $10 million dollars in size.
Meaning somewhere between 10% and 20% of every early stage venture capital fund is spending their investors money on unnecessary regulation, licencing and compliance that could instead be going into investing in more new startups and technology companies. So there’s a double red tape thing going on here.
If you really wanted to keep the double red tape, it only makes sense for a VC fund to need an AFSL once they take capital from institutional investors like superannuation funds and charities and university endowments. Because when you’re managing the retirement savings of teachers and policeman and charities, then it makes sense for the extra layer of an AFSL to be needed. But when you’re managing the money of just other very rich people who know what they’re getting into, it doesn’t make sense to need the double red tape.
Solution
Policy Recommendation: Remove the requirement for ESVCLPs to need an AFSL if they have no institutional investors.
How to Implement: Add ESVCLPs as an exemption to the managed funds list for AFSL licences. Because the ESVCLP program requires its own certification registration, it’s as simple as a checkbox. If you have ESVCLP registration then you automatically become exempt from needing an AFSL also.
Removing the need for an ESVCLP to need an AFSL will reduce the time burden and cost overheads by 10% – 20% that VC funds have to take on to operate. That fundamentally achieve nothing anyway. As a second order effect, it will increase the amount of funding that goes into startups by 10% – 20% representing hundreds of millions of dollars of more funding into startups.
It’s a way for the government to significantly increase the amount of technology startup funding by diverting hundreds of millions of dollars per year away from regulatory capture cottage industries like AFSL compliance and into investing in technology companies, without spending a dollar of tax payer money to do so. This will lead to hundreds of additional companies getting funded each year and improve the success rate of the probability of a new Canva or Atlassian emerging as a result.
3. Venture Funds Don’t Need Investment Restrictions
Problem
Here’s an interesting fact. An ESVCLP conditional to their registration is not allowed to “invest in entities where the predominant activity is property development, land ownership, finance, insurance, or construction. They also cannot invest in entities primarily focused on generating passive income like interest, rents, dividends, or lease payments.”
This is an extremely broad investment restriction list. The construction, insurance and finance industries are 3 of the largest industries in Australia, each worth trillions of dollars with big legacy companies worth hundreds of billions of dollars owning most of the market share. These are industries you want new technology startups to innovate in. So why would you prevent them from being funded?
If you combine this restriction with the first recommendation above. You have a third layer of red tape that effectively kills the ability for new banks, finance and insurance companies from getting funded in Australia at all. The first line of red tape makes the bar of capital to raise too high. Then this rule prevents the capital providers from investing in them at all. Both policies taken together, likely unintentionally when it was designed, are the most harmful things you could do for innovation in a sector.
You can sort of understand what was in the minds of the policymakers back in 2007 when they designed this and what they were trying to achieve. They were trying to prevent a situation where a venture fund raises capital and then just uses it to invest in companies that lend money, buys shares for dividends and rental properties and becomes de facto landlords or loan sharks. Buying property or shares of public companies is not the high risk innovation capital the program sought to foster. Which is why they tried to regulate this by creating an investment restriction list.
This is a particularly blunt instrument. Basically choosing what can receive capital and what can’t and accidentally creating industries that can have innovation and others that can’t. I think now that we are almost 2 decades later since the program was created and the VC firms that were created as a result of the ESVCLP program are established, mature and profitable now. Firms like Blackbird, Airtree, Square Peg et al. They don’t need to be restricted in what they invest in anymore. The industry isn’t where it was in 2007 when this was a real but unfounded fear.
None of them are going to turn around now and become landlords after they’ve tasted what it’s like to be the seed investor at a $10 million valuation into a technology company like Canva that grew into a $50 billion dollar company. A staggering 5,000X return on invested dollars. Something every new generation of venture capitalist and ESVCLP VC fund is trying to emulate. No property or public share is going to deliver returns anywhere remotely in the same universe as that.
Removing this restricted list will unlock capital into industries that need it most. Because right now some of the industries in the restricted list are industries that innovation and startup companies are most needed in. I’ve lived this experience. My company has invented a new way to develop and build houses. We can build houses in close to half the time it currently takes to build a house, at a higher level of quality.
We’re no longer a startup but we are an extremely innovative next generation construction company, in a country in the middle of a housing crisis. But construction is on the restricted list and so outside the investment mandate of the ESVCLP program meaning we are ineligible for investment from the majority of venture capitalists. My first startup, which set me on this life path was a public transport insurance startup, basically a new type of insurance, was also ineligible for investment by VC funds. And that became the biggest app in the country before turning into Melbourne’s free tram zone.
Thankfully, banks support us by the nature of being in the property industry. So we don’t need the venture capital industry to help us. But I think that is a higher order bit example of the failings of this investment restriction mandate. If your high risk capital is not allowed to fund a high risk company inventing new types of construction methods and innovating on how to build houses in the middle of a housing crisis, you can very clearly see the problem that this list has created. If we had venture capital support, maybe we could build 10 times or 100 times more houses per year. Not that we are trying to but the point is illustrative.
I think maybe the Government has forgotten that Australia is also at the forefront of construction innovation. We invented the Kangaroo crane that unlocked high rise construction for literally the entire world. Whole cities like New York or London or Hong Kong or Melbourne would not be able to exist without it because its invention opened up the ability to build upwards.
Probably the largest sector outside of construction is finance, which is also on the restricted investment list. This one is more like an elephant in the room. Because Australia is also very good at creating new financial technologies. Two of the worlds biggest financial technology companies founded recently were actually started in Australia – Afterpay and Airwallex.
Both global companies worth over $10 billion dollars each, with next to zero local venture capital support at their early stages. Both were created in spite of Australia not allowing venture capital to invest in them. Meaning the gains from those companies is concentrated in the hands of a small number of individuals instead of being spread around an entire ecosystem. What did they do to get capital? They had to go overseas, so overseas investors got the lions share of the returns.
Imagine how many more Airwallexes and Afterpays we would create if venture capital as an asset class was allowed to invest in financial technology companies at the earliest stages to help them get started? Probably a lot more. These both are particularly good examples because they’re companies based locally but export globally. Which means billions of global international dollars flow from overseas into Australia. We want more of them and that means allowing our venture funds to be able to invest in them.
Solution
Policy Recommendation: Remove the restricted investment list for ESVCLPs.
How to Implement: Abolish the restricted investment list for ESVCLPs and retroactively apply the abolished list to all previously established ESVCLP funds.
This won’t necessarily unlock more capital to flow into venture capital. But it will allow the existing dollars in venture capital to flow into other areas and innovate those areas through the creation of new technology companies. I think Australia would benefit significantly from new banks, new types of construction companies and new types of finance and insurance.
It might vicariously encourage more capital to flow into venture capital as an incidental benefit. Because I suspect a lot of capital that would want to fund new types of banks and new types of construction technology through VC is waiting on the sideline because it currently physically can’t because it isn’t allowed to. I would bet the moment you abolish the restricted list and allow this, large real estate companies and large insurance companies will all start investing in VC as an asset class to find those new technologies for their own businesses to utilise.