Government Policies for Startups in Australia

July 2017

(Based on a report to the Australian Government)

 

“We make a living by what we get, we make a life by what we give”

– Winston Churchill

 

“I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”

– Thomas Jefferson

 

A few years ago, I helped make a law.

Rather, I highlighted a huge problem that had a simple solution and I wrote about it, after interviewing the best people in the industry and how they were fixing that problem. Until then, nobody had taken the time to really investigate and write in an easy to understand way, a) what the problem was and b) how to fix it.

I did that, and it was used by the Australian Government to create policy to fix that problem. Everybody won. The future is brighter. Recently, I was asked to help do it again.

The thing about Governments is they are big and they are slow and the people in them don’t really know the intricacies of the problems that face the people whom they are trying to help. A government minister doesn’t actually know or understand first hand the problems they are trying to fix. They rely on the expertise of people who work in or are at the top of that industry.

A lot of people see this as a conflict of interest. But sometimes conflicts of interest can also mean that person has expertise. It’s like an ex banker helping the government create policies for banks. A lot of people see this and think: something wrong is happening.

But if you needed to make bank policies, of course you would ask a banker wouldn’t you? Because they are an expert and know the most about it. You certainly wouldn’t ask an architect. But you might ask an architect for advice on how to make construction or real estate policies.

I happen to be something of a burgeoning expert on technology companies. And that’s why I think I’m being asked – to create policies that help create more and better technology companies in Australia.

Technology companies are great for the economy because they do three things; they build new things, they hire lots of people and they grow very fast. They are an untapped growth sector of the economy. And governments everywhere are trying their best to figure out how to better enable them as a wealth creation engine for their countries.

Australia has a number of very successful technology companies that are the best in the world, but ask the founders of nearly all of them and they will say the Australian government is not very good at helping to create them. I know this because I have. I asked a lot of them; they all said the same thing. In fact, this entire blog is filled with knowledge from some of the best in the industry.

But often when you ask people for suggestions of what a government can do to help, they come up with some variation of “spend more money”. Which is unhelpful. Government doesn’t like to spend more money than it has to, yet it sadly almost always does, because the money comes from its citizens in the form of taxes. That tax money can nearly always be better spent on education, healthcare and infrastructure.

There is often a negative correlation between spending more money and positive outcomes for technology companies on that money spent. Meaning, well-intentioned politicians accidentally waste a lot of money on things that don’t help at all. This is why I’ve been asked by government policy-makers how to effectively spend money to create better outcomes for technology companies.

So when deciding to do this, I asked myself: what are some major problems I faced and how can they be fixed so the next generation of entrepreneurs don’t face those same problems. Or better still, what are some policies for how the government can create more and better technology startup companies, while spending zero money doing so?

That was an interesting question. How can you have a big impact while spending zero money?

The first thing you need to do is to narrow in on your goal. The goal is not more technology companies, but better ones. It doesn’t matter how many companies start, it is about how many succeed. And the second thing to understand, is that you don’t create great tech companies and good startup hubs by focusing on creating great tech companies and startup hubs.

It’s the same way you don’t get good at tennis by focusing on hitting the ball. You get good at tennis by being fit and learning the proper racquet technique. A person who is those things is naturally better at tennis. The way you create great technology companies is by being a good place to be and a magnet for the kinds of people who start technology companies. A subset of that group are brilliant founders. Then you just need to get out of their way and let the magic happen as they start those great technology companies.

Here we go….

 

0. Great Artists Steal

Problem

Australian policy makers don’t want to copy what Silicon Valley is doing right. They want to forge their own path and likely make a lot of mistakes as a result.

In software development there is an idiom. If you hear a company say they are not going to re-use any code and are going to make their software or write all their code from scratch. You know they are doomed. They think they are being innovative by creating everything from nothing. But really they just end up re-creating the wheel and wasting their time making the same mistakes as people that came before them.

Great software is built by taking the best ideas and pre-made codebases and software libraries and adding them together. If somebody has already put in a lot of time and effort and money and figured out how to solve a problem, you can just use their solution. You don’t need to try and figure out a brand new solution to a problem that’s already been solved.

But for some reason, this doesn’t work with policy. For some reason. When it comes to technology, everyone thinks they’re an expert. You literally see Australian politicians or business leaders saying, “we’re not going to try and emulate Silicon Valley, we’re going to create our own.” That is a very inspirational soundbite. But it doesn’t work. That is a recipe to just waste all your time and money recreating the wheel.

Nearly 50% of all of the venture capital money in all of the United States is located on one street. Sand Hill Road. That isn’t an accident. Stanford is one of the best research universities in the world that attracts some of the smartest people in the world to move there who have started the most number of billion dollar companies. That isn’t an accident. You know where they both are? Silicon Valley. They tested what works and this is what works.

Solution

Copy what already works.

If someone is the best at something and you want to do that thing. Learn from them and emulate what they’ve done well. Don’t try and do it your own way because you’re literally going to make all of the mistakes that they did. If you want to be the best at something. Steal from the best. If you want to learn how to make great movies. Steal from Hollywood. If you want to be great at finance. Steal from Wall Street. If you want to build great technology companies. Steal from Silicon Valley.

Learn what they did well. Copy all of it. Silicon Valley is literally a playbook of how to create the kind of soil that allows great technology companies to foster and grow. Countries shouldn’t be trying to write their own playbook, they should be reading theirs and copying as much of it as they can. This sounds like it should be obvious. But it isn’t.

I think it’s because people grow up being told in schools not to copy other people’s work. But in the real world, we call it standing on the shoulders of giants. There aren’t any participation awards or medals for trying hard. You either get it right and win, or you get it wrong and you lose. But if you’re really copying their playbook, all it takes is time. You will eventually succeed at it.

 

1. Make More Investors

Problem

Australia has a very clever policy for stimulating more money to go into venture capital (VC) called the Early Stage Venture Capital Limited Partnership (ESVCLP) and Venture Capital Limited Partnership (VCLP).

The programme commenced on 21 June 2007 when the Tax Laws Amendment (2007 Measures No.2) Bill 2007, which amended the Venture Capital Act 2002 and both the Income Tax Assessment Act 36 and 97, received Royal Assent. The programme is jointly administered by the Committee with the support of AusIndustry, and the Australian Taxation Office (ATO).

Essentially, if you want to create a venture capital firm in Australia, you create a limited partnership and have it registered with either of these programs. All of the profits earned from the fund are then tax free. Assuming the fund makes any money. VC funds are famous for being so high risk and high reward that badly performing funds do not return any money at all.

This is a brilliant concept as it is a tax incentive that allows more money to flow into venture capital funds, which then invest in new companies and grow them into big companies, which then hire lots of people and pay lots of taxes. And the government derives greater benefits to the economy in the form of having more large companies than they would have received by taxing the proceeds of these VC funds if they hadn’t offered the tax incentive.

This is a brilliant policy that has positive returns. But it can do better.

More money flowing into VC funds is a unanimously good thing. They are good for everyone. Public companies are one of the primary drivers of wealth creation for an economy. According to research conducted by Stanford Business School, VC backed companies account for 43% of all US public companies, 57% of the total market capitalisation of all US public companies, 38% of all employees of US public companies and 82% of all research spent by US public companies.

Those are some startlingly good numbers. In the US to generate these kinds of figures, those companies are backed by 6,206 VC firms, of which only 2,917 are considered to be “active” meaning they make at least 1 investment a year. So in reality, there are nearly 3,000 active venture firms in the US which back close to 40% of all US public companies and nearly 60% of all the wealth in the US stock market and 80% of all research money spent by companies.

This is an example of the amplification effect venture capital has on an economy.

If we contrast this to Australia, based on the data published by AusIndustry, there are only 61 active VC funds registered with the ESVLP since the program was created in 2007. That amounts to only 7 new funds created per year since the start of the program. What this shows is an ipso facto for why a policy like this is even needed in the first place, to stimulate money flowing in this direction.

Because that is an atrocious figure when compared to the US figure above, when it is readily apparent how large of an impact having more venture capital has. The reason Australia doesn’t have a more flourishing technology ecosystem is because we don’t have as flourishing an investment ecosystem. If we fix the latter, we will also fix the former.

In theory, the ESVCLP and VCLP is the most brilliant incentive to start a venture capital fund. All the money you make isn’t taxed. Because venture capital is the riskiest area to invest in, it creates the incentive that makes the risk tolerable since none of the profits are taxed, immediately improving all positive returns by 30%, the corporate tax rate.

But in practice, there are two very hard to overcome restrictions.

A) To be registered for the ESVCLP, you need to have a fund size of over $10 million in committed capital for investing and B) You cannot have more than 1/3 of the fund raised from one source or investor and C) You can only invest this money in technology companies.

This is a huge amount of money to raise for your first fund and is also why there are so few new VC funds in Australia. Anecdotally, I know dozens of people who were able to raise $1 million – $4 million to start a new VC fund, but then gave up because they knew they could not get to the $10 million required.

There is a bias that technology investing is the realm of the ultra rich. But actually it isn’t. In fact, often the best in the industry started when they were far from that. If you took some of the most prolific and famous Silicon Valley angel investors today, almost all of them started with far less than $10 million dollars when they began angel investing.

Ron Conway, Paul Graham, Dave Mclure are all individuals who fund dozens of companies per year, who have funded and helped grow multiple multibillion dollar successes. Ron Conway is famous for funding Yahoo, Google, Facebook and Twitter. Paul Graham funded Dropbox, AirBnb and Reddit. Dave Mclure funded Lyft, Twilio and Zenefits.

They all began investing with less than $10 million to their names with funds that were much smaller than $10 million. Dave Mclure is famous for beginning his investment career with a net worth of $300,000. They also began investing with their own money, not using money raised from outside investors.

This is an important point because of the second requirement.

The ESVCLP limits the amount of money raised from one source. It basically says that if you have a VC fund, you have to have lots of investors in the fund. One investor cannot have invested more than 1/3rd of the total amount of money in the fund.

But what if they want to? What if an investor wants to invest more money into the fund? If you’re making a policy to promote more investment? Doesn’t it seem a bit strange to then limit how much someone can invest?

They actually can’t invest more because of this 1/3rd rule. Because if they did invest more money, suddenly they would be more than 1/3rd of the fund. And the fund manager has to then go find 2 other equivalent investors who will invest the same amount. To keep any single investor at less than 1/3rd of the total amount.

This is a silly requirement made by a government that doesn’t really understand where capital comes from. The idea behind it is to attempt to level the playing field. By saying, if one investor gets tax free treatment for money invested in venture capital, then all investors should get the same benefit and restrict how much an investor can invest.

It’s also trying to stop venture capital funds from becoming a tax loophole for rich people, where very rich people can park money and invest it tax free. Because of the fear that too many rich people will invest too much money into venture capital. But isn’t that the point? The point is you want more money in venture capital. Because of that HUGE amplification effect on the economy from above.

Why have something in the VCLP program that tries to limit how much money that can be allocated to it? This runs antithesis to the entire point of creating the VCLP in the first place. They’ve created this beautiful program and then built within it the brake that slows it down, and then wonder why it isn’t running as well as it could.

It’s like creating the best sail for a ship, but then saying the sail can’t be larger than a certain size. Effectively stopping the ship from using the sail to go as fast as it could. Limiting how much money can come from one source in a fund also shows a poor understanding of where money comes from in this industry.

Capital often sits in these big pools such as superannuation funds or family offices or corporate balance sheets or pensions or universities or charities. The managers of these pools actually WANT TO invest more money into venture capital. But they can’t. In the US sometimes a venture capital fund can be made up of only one or two big investors. In Australia, we have literally set a minimum of 3. And they have to all invest the same amount too, nobody can invest more than 1/3 of the fund.

Because of the economics of these capital pools, they often want to put more money to work. A lot more money. Some superannuation funds want to invest $50 million dollars into a venture capital firm. But it will be really difficult for a venture capitalist to find 3 such investors. They may only find one.

Because of this 1/3rd rule. You can have an investor willing to give you a huge amount of money but physically not be able to accept and register as a VCLP or ESVLP due to this rule. If a superannuation fund or family office wants to invest $5 million dollars into a venture capital fund that is raising $10 million. They physically cannot accept that much money. Because it is over the 1/3rd requirement.

I know someone in this position. They want to register a $10 million dollar ESVCLP venture capital fund. And they have a wealthy family ready to give them $5 million to manage. But because of this rule, to accept the money from this wealthy family, he would actually have to turn it into a $15 million dollar fund.

And they’re not confident that they’ll be able to raise $15 million, but are confident they can raise $10 million. But if they do raise only $10 million, they physically cannot accept the $5 million from the wealthy family because it would be more than 1/3rd of the total fund.

So this person is in a position where they have to spend time raising more money than they think they can even get and the fund cannot start its primary business of investing in technology companies. The fund may in fact just go out of business if they cannot get the remainder of the $10 million they need.

Managers of big capital sources actually know this. They know that by wanting to invest more money into a venture capital firm that wants to register with this program, they are accidentally forcing that fund out of business. Or forcing that fund away from doing its primary activity which is finding and investing in great technology companies.

Admittedly, this is a niche and complex problem. It doesn’t affect a lot of people. But we’re talking about amplification. Small changes that have a big impact. And this is something that can be fixed with a small and simple change but will have a big impact.

This is a bottle neck that is stopping the flow of money from going into venture capital firms. And we already know that they have a positive effect and are good for the economy.

Solution

Policy suggestion 1: Lower the capital threshold to be registered as an ESVCLP from $10 million down to $1 million.

Policy suggestion 2: Remove the requirement that more than 1/3 of the fund can’t be raised from one source. Do not have any restriction on how much can be raised from one source.

Based on the Australian Bureau of Statistics household data, there are only 17,000 households in Australia with a net worth of over $10 million. But there are close to 2 million households with a net worth of over $1 million. This would widen the funnel of potential technology investors considerably. Going from 17,000 to 2 million is a massive jump.

Any person with a liquid net worth of $1 million could immediately become a Venture Capitalist. If this is done while also removing the 1/3rd requirement. Then these individuals could actually invest in their own venture capital funds. There would be no hurdles to jump through. The investors would be in business immediately.

It would mint an entire generation of new angel investors, which would find and fund the next generation of large Australian technology companies. We would finally start having our own Ron Conways, Dave Mclures and Paul Grahams.

Having a flourishing financing and investor community is the first step to enabling the next generation of big technology companies. If you get the flourishing investor community right and have lots of capital from many sources, you naturally see a lot more successful companies spring up as a result.

Because where does capital come from? Experienced and battle hardened people who mentor entrepreneurs starting their businesses. This reduces the failure rate of startups considerably. Because a lot of what an investor does is just helping the founder avoid the mistakes that will blow up their companies.

If there are more investors, then there are more sources of capital, meaning investors compete for the best deals, increasing their prices, making it more lucrative for founders to start companies because they own more of it, which means more founders start companies to capture that financing, which means bigger and better companies.

The tax offset for the government implementing this policy (to provide VCs with the tax exempt returns from their investments under the program), won’t even matter because these newer growing companies that are formed as a result of their investments will grow and hire people and pay taxes. The government will actually grow their total taxation base by the taxes paid by these companies.

The net taxable revenue base of fast moving, high growth companies actually increases as a result of providing the tax offset. If you unlock the capital, you unlock the industry. Because the industry struggles to exist without the capital to back it. Australia is already very good at creating big technology companies. We just need to create a lot more of them.

If Australia ever increased from 60 venture capitalists to 3,000 venture firms, then maybe 40% of the Australian stock market and 60% of Australian wealth and 80% of Australian research and development will be created by venture funded companies. That is the goal. It would create a self sustaining and self perpetuating economic growth mechanism that would benefit the Australian economy.

 

2. Stop Rent Seeking

Problem

Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection.

This is something you see in the technology world a lot. When you ask a series of technology leaders what the problem is and how to fix it. Then they blame the government and their solution is just: “spend more money.”

The government then listens and creates all these different programs that are some variation of throwing money at the technology industry without really measuring the impact of that money. Things like the Innovation Investment Fund, LaunchVic, Research and Development Tax Incentive, Startup Grants, etc. These represent close to a billion dollars in industry handouts.

These organisations then put the money to work to make some wheels spin and all you have is a bunch of meaningless indicators that pretend to look like success, but doesn’t really mean anything. Metrics like: “Number of startups funded increased 1000%”. That doesn’t mean anything. How many companies funded doesn’t matter. What matters is the number of companies that become successful and grow into large companies.

Or “job creation increased by 400%”. Again, meaningless. Of course you create jobs if you literally hand out money. But it isn’t sustainable. When you stop handing out money, do those jobs keep going because the company is really good? Or do they disappear when you stop handing out money? The latter is usually what happens with programs like this.

If you are attempting to grow very large technology companies. The only metric that is important is how many very large technology companies are created. And if you look into the history of very large technology companies, very few of them are created by being given handouts from the government.

Do you know why? It is because it is a distraction. Filling out government forms and going through 6 month long applications are a waste of time. Successful businesses don’t do this because they are too busy working on their companies and succeeding and growing. When you have a growing business, dealing with the government is just a distraction.

The companies that need the government money are the ones that aren’t able to generate the revenues from their consumers or can’t get it from private markets and investors. If a company is succeeding, there is no shortage of private capital funding available to it. In fact, when a company is winning, private capital chases them. They usually have too many options for funding.

A company usually only turns to the government for funding when they can’t get it privately or from private markets. Why can’t they get money from private markets? Because private capital tries its best to seek good returns. And if they can’t get good returns from these companies the implication is they are not doing very well. So they can’t get funded because they’re not succeeding. These are secretly the dying ones.

The other reason worth mentioning when a company approaches the government for funding is when they are trying to do something so astronomically large that they require the government to support it. Something like sending a rocket to Mars or connecting every house in the country to Broadband or curing a disease. Those are companies that need government funding. They are not most companies. Particularly not in technology.

So what you end up creating is a system where companies that are succeeding are not approaching the government for funding, because they are busy growing, while companies that are not succeeding are approaching the government for funding. You are funding the failures. You’ve created adverse selection.

The government spends taxpayer money funding failures. The companies that are spending their time and efforts not on growing the company but on filling out forms and spending 6 months on dealing with government. That is the exact opposite scenario than what the government wants to create when it allocates taxpayer money for funding technology companies.

You have literally created an asymmetric incentive that rewards rent-seekers. Handing out government taxpayer money to companies that end up failing and producing zero value for society, beyond the people within the company. And also – this industry has a 95% failure rate. Most of the companies that are started end up failing. The ones that end up succeeding make their founders and executives extraordinarily wealthy. The system of founding and supporting companies makes people very rich.

What these programs are; is the government trying to play investor. But that’s not how the game works. Even the best technology investors in the world still lose money on 7 out of 10 of their investments. The government trying to emulate them has absolutely no hope of coming anywhere close to it.

I do not think that taxpayer money should be given to a system that a) 95%+ of companies accepting investment fail and b) the 5% that succeed makes people very rich. You are spending taxation money on either making a few people rich or wasting the money altogether. Neither sound like very good outcomes for the bulk of society. That money should better be spent on investing in universities, healthcare, education or research. Things that everyone benefits from. Save tax payers money for big research. For farms. For agriculture. For infrastructure. For education.

It is true that there is a lot a government can do to help great technology companies start. But arbitrarily throwing money at the problem in good faith is not one of them. What they should really do is to remove all the red tape and then get out of the way. If the government really wants to hand out money to the technology industry, they should give money to the various not for profits and conferences and call it a tourism expense.

Things like Above All Human, Startup Victoria, Future Assembly, Startup Australia, Sydstart, Agile Australia, CeBit, Startup Musters, Agile Australia etc. Events that bring successful entrepreneurs and overseas capital to Australia and organisations that are set up for the good of everyone. That kind of community and ecosystem building would be an effective use of capital. Creating big funds to hand out money is not.

Trying to play investor just creates a lot of noise and makes the signal harder to get through. It makes dying companies compete with healthy ones for the same handouts. Do you know what is the best thing for a government to do when it sees a struggling technology company? It should let it die. Do not spend taxpayer money keeping the wheels spinning and the company alive for a few more years when very little value gets created. Let it die. That’s what private capital does. It lets the losers lose and tries to help the winners win faster and win bigger.

The government should make it easier for private capital to invest in companies in Australia. Not try to act as or replace private capital. Don’t play VC and fund companies directly. It just wastes money. Fund them by creating great soil. You don’t win in technology by trying to pick individual companies, you win by creating a situation where a rising tide lifts all boats.

My favourite example is this question: What is the best thing the government has done to create big technology companies in Australia? The answer is making university free and affordable for everyone. It is unintuitive but accurate.

Solution

Policy suggestion 1: Stop giving grants. Remove all investment bodies that invest directly into technology companies. The impact it has is negligible and would save hundreds of millions of dollars annually. With very little difference in impact on the industry.

Or instead spend the same amount of money on technology infrastructure and ecosystem building. Fund conferences, education and university research. It will go a lot further. Something Australia does really well is having well funded prosperous research universities that become launching grounds for breakthrough technology.

 

3. Remove Hurdles

Problem

University hurdles are a big problem for entrepreneurs.

A university hurdle is a system of grading that universities use to grade certain courses. They were introduced in Australian universities around 2002 and most degrees in Australia will have at least a handful of courses that have hurdles. In my computer science degree, of the 24 subjects I studied. 18 were hurdle subjects and 6 were not. Nearly a quarter of my degree had hurdles.

The way hurdle grades work are that you must pass all assessment tasks within a course – not just receive an overall pass for the course. So for example a course might have 4 assessments each worth 25% of your total grade. In a normal grading system, you would take your mark in each one and then average it over all 4. If you scored above 50% on average over all assessments, you would pass the course.

But in a hurdle grading system, you would need to pass all 4 separately. Even if you passed 3 out of 4, your overall mark would still be over 50% in the course. But you would fail it. Because you failed 1 of the 4 assessments. This is an important concept to grasp because it doesn’t actually matter which assessment you failed. Just that you failed one.

Most university courses run for 12 weeks. And if there are 3 or 4 assessments with hurdles, you will usually complete a hurdle assessment every 3 or 4 weeks of the course. You could be getting full marks in every assessment but at any point you fail one, you have failed the entire course and there is nothing you can do to pass that course from that point onwards. Which means it is possible and common to fail a 12 week university course in the 3rd week of it.

In fact, that’s exactly what happened to me. Almost all of the units I failed in my degree were because of this hurdle grading system. The particularly insidious thing is that some hurdle assessments are completely dissociated from what they are worth in your grade. I once had a hurdle assessment that was only worth 10% of my grade. I was achieving a Distinction grade for the subject but I failed the 10% hurdle test and so I failed the course. But worse still, you then have to retake the course again the following semester to receive the degree.

And it happens to hundreds of thousands of university students across Australia every year.

Who is most affected by hurdles? The good students are going to pass anyway (>50%, pass all hurdles). The bad students are going to fail overall anyway (<50%, fail the course overall). The students who hurdles affect the most are the students good enough to pass (>50% overall grade) but failed a hurdle therefore failing the course. Why are these students able to pass the course but fail one assessment? Because they are usually busy doing something else.

The cross section of students that get affected by hurdles are good students WITH lots of extra curricular activities. The athletes, the artists, the entrepreneurs, the small business founders, the charity volunteers, the people who are working part time already (possibly to pay for university) the people who produce value for society, whilst in university.

The people trying to start companies or play professional sport or make great art or raise money for charity while they are at university – things that are good for society and should be encouraged – are the ones most negatively affected by hurdles.

Why is this a problem?

Firstly, it’s because I suspect a lot of people who drop out of universities do so because of the hurdle grading system. It traps you in it. I know people from lower socio economic brackets who have to work full time to even afford university. They’re constantly terrified of failing an assignment worth only 10%, but is a hurdle. And they do. All the time. And then you incur the student debt without being able to do anything to pass the subject.

I know this because it happened to me a lot. I would be getting excellent grades on assignments but then miss an in class test because of a really important meeting and then fail the course outright. The reason I failed every single one of my hurdles was because I was trying to start a fledgling software company.

I know dozens of some of the most talented people who failed courses because of hurdles while trying to start businesses or perform comedy shows or raise money for charities. It shouldn’t doom your whole year to fail an assessment worth 10% of your overall grade, but be able to pass an exam worth 50% of your grade yet still fail the course. That should be a pass.

Secondly, the fails that occur due to these hurdles are expensive. And in Australia, it usually isn’t the student who pays for the course, it’s the government. We have the HECS system. HECS or the Higher Education Contribution Scheme is a system in Australia where the government pays for a students university degree upfront and then the student pays back the government over their lifetime via an additional 2% in taxation after they are earning over a certain amount.

There are 1.3 million university students across Australia studying at one of 43 universities. Of which 522,000 are domestic students paying for their degrees using HECS. This scheme costs the government $1.7 billion dollars to implement annually.

With the average university course costing between $800 – $1,200 for an undergraduate course and nearly $4,000 for a postgraduate course. And a full time student is usually studying 4 courses per semester or about 8 courses per year. Every time a student fails a university course under HECS, the university bills the government $800 – $1,200 if they’re an undergraduate course or $4,000 if they are a postgraduate course.

Even if the student failed the course in week 3 because of a hurdle and never went to class again; or passed the course overall (scored above >50%) but failed because of a hurdle. Perhaps because they did an assignment with a group that didn’t work very hard or didn’t speak English well. Both cases I’ve seen.

This hurdle system traps students in cycles of accruing student debt and slowed potential. Many brilliant student entrepreneurs that are running businesses while studying, who would have otherwise graduated and gone on to run their businesses, are currently still in university.

A particularly ironic example is a female founder of a recruitment website I know. They help tens of thousands of people find jobs. But she is still studying for her exams. She hurdle failed 4 units, delaying her graduation by nearly a year. She passed those 4 units overall, but failed the hurdles. That’s why she’s still there.

Solution

Policy suggestion 1: Remove the hurdle grading system from all 43 universities in Australia for all courses. This will save over $100 million dollars annually in unproductive student debt that is currently created every year.

Data isn’t publicly available on how many students fail courses because of hurdles. But it’s a lot. Let’s try and put some numbers on this with some guesses.

There are 522,000 HECS university students in Australia. Let’s say 1 in 10 students generates at least 1 hurdle fail out of 8 subjects each year (to adjust for really bad students who fail a lot of subjects that brings up the average).

For a total of 52,000 hurdle fails a year. Every fail costs $1,000 for undergrad and $4,000 for postgrad. Let’s average that to $2,000 per fail to account for their being more undergrads than postgrads. For a total of 52,000 x $2,000 or $104 million dollars spent per year in taxpayer money. About 5% of the annual $1.7 billion student HECS budget is created by this grading system.

This is money that could go into something else more productive for society. The hurdles cost a fortune and has very low utility. Making this a very high yield policy. This is a tremendous amount of unproductive student debt that is being taken on by students and the government and it’s because of this grading system.

Many universities believe that hurdles are necessary to maintain a high standard of education but studies have shown this to be false. I think universities like hurdles because they get an extra $100 million in student fees from repeat students without really doing anything. It creates repeat students out of people who should not have been repeat students.

Studies have even found hurdles have a negligeble effect on the learning outcomes of students. Removing them won’t have a significant impact on students or reduce the quality of education provided. It costs nothing to implement and there is a huge impact. By strongly encouraging universities to stop grading with this system.

You reap a government saving of close to a hundred million dollars per year, reduce the student debt by close to 10% per year, graduate more students per year, lower the drop out rate for universities and do not affect significantly the quality of education provided. All without spending any money.

It will stop the successful entrepreneurs and artists and sportspeople who are students from being stuck in a cycle of failing their degrees and allow them to run their companies and create their art.

 

Conclusion

The results are a handful of counterintuitive policies that are easy to overlook but are low hanging fruit, are straightforward to implement and will have a big impact and are high yield – as in they will have a very profound effect on the technology industry without spending a large amount of money to do so or by saving a large amount of money. So it creates force multiplication on the outcomes. This will hopefully accelerate the creation of big Australian tech companies and be beneficial to the economy as a result.

Advertisements