Why Startups Struggle in Australia

Nov 2012

(Based on a talk at an Entrepreneurship in Australia event)

 

“Keep away from people who try to belittle your feelings or ambitions. Small people always do that, but the really great make you feel like you, too, can become great.

– Mark Twain

 

“A society grows great when old men plant trees whose shade they know they may never sit in. “

– Greek Proverb

 

Why would you want to start a company? I have no idea. If I told you that statistically starting a company is the worst decision you could make for your financial future. You would probably never do it but that’s exactly what it is. Most startups fail, wasting energy, money and time and the founders walk away burnt out in some way.

It takes a special type of person who knowing that, wants to start a company anyway. The ones that end up successful are anomalous in the same way becoming a rockstar is anomalous. But the process of becoming successful is a lot like a game. Money and happiness are the points, luck is the multiplier. Like any game, you can’t play until you’ve learnt all the rules. But the rules in Australia are a bit different.

Why are the rules different? It’s mostly due to culture. So we’re going to explore what culturally causes startups to fail in Australia.

 

When you look around in Australia the only thing consumers seem to care about is price. Why is that? I think it’s because when you look at big companies in Australia there are a large number of firms that essentially own or provide everything or in economic terms an oligopoly.

But most oligopolies in Australia are also government supported increasing the barrier to entry. The government gave the airline industry to QANTAS and the telecommunications to Telstra. In any oligopoly, the products are largely undifferentiated so the firms compete primarily on price. And when big firms are only competing on price all of their marketing dollars are indirectly conditioning the consumer to only care about price.

When firms are competing for who can be the cheapest, the business model switches to leveraging economies of scale. They basically try to get huge, cut out all of the distributors and middlemen, lower quality and benefits to their employees, then use huge volumes and low margins to buy in bulk which lowers the price of purchasing. It’s the Walmart strategy and is employed by everyone from Chemist Warehouse to JB HiFi to Coles and Woolworths. What makes this especially difficult to compete against is the GST. It’s a 10% tax on all goods and services sold in Australia.

When a business can get economies of scale large enough to go below the price a manufacturer or supplier can offer to low volume customers. They immediately become untouchable on price. They become an Ivory Tower and the GST becomes their moat. No competitor will be able to come within 10% of the lowest price leader. Which means for startups, it makes these types of industries particularly inaccessible. Which is why Australia is unsuitable to sustain sophisticated business models that don’t rely on price for their differentiation. They have to diversify or go premium.

So immediately a startup with a sophisticated business model will not do well in Australia. This is why when you look at all the large Australian technology companies they fall into two categories. You’ll notice there are inwardly focused ones that cater to the Australian market like Kogan and realestate.com.au and outwardly focused ones that focus on other markets like Atlassian and 99Designs. You’ll see immediately that anything with a not-straight forward business model isn’t initially widely successful in the country it’s based in and the ones that are use price as their differentiation.

This is particularly relevant for businesses that ship real things. Australia is a big country. Shipping is expensive and it takes a long time for something at one end of the country to get to the other. Because Australia was slow to embrace the internet, shipping companies were slow to develop mature logistics services that could handle the demands of ecommerce cheaply and quickly. So in a lot of cases, there is no incentive to buy something online. It will be just as expensive and take a long time to arrive.

 

You will also see a tendency to gravitate towards the enterprise – usually in property, cars, jobs and mining. Now right there is something important. What is the typical kind of person that goes into those fields. It isn’t an intellectually rigorous nerdy technologist but a sales person. I’m not trying to deface or belittle anyone. I’m just describing an observation.

It is indicative of a lack of intellectual rigour in the mainstream. The mainstream in Australia doesn’t fully understand technology and the side effect is it’s not yet accepted to work on something nobody understands. Hidden in that is an unwillingness to try new things and a very subtle intolerance or prejudice against those that do.

How can you tell mainstream doesn’t understand technology? By looking at mainstream media. Any time a founder of a startup is mentioned it’s followed by a self gratifying remark like whiz or brainy or genius next to it. What that implies is that these people are a different breed while in reality they might just be slightly better than the average or really good at something very specific.

You can also tell by a misunderstanding of what a funding round means to a startup and how much mediocre funding is celebrated. Terms and investment rounds are almost universally lower in Australia almost to the point where a lot of fundraises are borderline taking advantage of the entrepreneurs. It’s due to a scarcity of capital. But raising money is treated as if it is the goal. Raising money isn’t being successful, it’s a catalyst and what happens before. It’s like celebrating putting fuel in the car, not winning the race.

 

Similarly it is a society that doesn’t like to see its peers succeed. I never fully understood that until I realised it’s a sporting society and most still retain the idea from childhood that if someone else is succeeding then they are succeeding instead of them. As in if you treated life like a sport, then they are losing to the person succeeding.

The resultant is that being ambitious in academics or business is not yet seen as a good thing. I think this is something that starts in school. Sports focused society invariably values it higher than academia. That’s not to say being good at sports is better than being smart but if your goal is to create a knowledge economy then the latter is preferable.

How do you do that? I think the mistake is treating something like it should be commonplace, which in reality is subversive. The popular ideas are all based in the welfare model. That everyone is equal and should be normalised. Sport is participatory and rewards are distributed. Whereas academia rewards only the brightest and they are not.

So the meritocratic ideal intelligence is based on is incompatible with the mainstream conscious. I think it’s because nobody really knows what intelligence is so the proxy model of it is devised by schools. Whenever an institution grades or ranks something, over time the value is assigned to the grades, not the thing itself. It’s why awards work and why a lot of intelligent people don’t think they are.

So alternatively, I think the fix is more sniper rifle and less shotgun. To focus on a subset of people who value a specific trait until it crosses a critical mass at which point the idea becomes self sustaining and spreads itself. Only preach to the converted because they’re the ones most likely to give donations.

In school I remember there were two awards considered to be the highest accolades. There was an award for sporting achievement and one for math. The sporting award was nearly $5,000 whereas the math award was only $500. I remember thinking it would probably be harder to be the best at calculus in the school than it would to be the best footballer, yet the incentives didn’t reflect that.

If you walked down Silicon Valley you’ll notice pretty quickly nobody really cares about sport. In Australia you could get promoted if you like the same team as your boss. Sport is what is culturally celebrated. Which is fascinating since a large number of world-class innovations come from Australians. But you’ll notice something interesting, they all have funny sounding names. That’s largely because Australia has imported its intellectual and innovation elite from other countries.

Why doesn’t it cultivate its own?

I think it has something to do with this. When you’re wrong about something in front of Australians they will call you an idiot or say how stupid you were or some other ad hominem. So it creates people who are afraid of being wrong. I’ve lived for a while on nearly every continent but this is a habit I’ve only seen in Australia and people develop it quite young, even children. It’s like as a culture they haven’t learnt how to argue efficiently. The real goal of an argument should be for both parties to win not a zero-sum game. One wins and the other learns something new.

 

There is a word in Japanese that means wishing for a bird to fly whilst holding onto its feet. If you took that adage and mixed it with another adage, penny wise but pound foolish. You would have an approximation of what is happening. A large part of this is because the previous generation doesn’t really want the next generation to succeed.

The easiest symptom of this I’ve only seen in Australia is a concept called board. It’s when a family charges their children to live with them after they reach a certain age. It’s supposed to teach discipline but probably does the opposite where the next generation is hindered by its predecessors. I feel like that’s important. A culture that supports the idea of charging its children for existing is one that isn’t going to reinvest in those same children.

I think the reason for this is because it is not self-made wealth but inherited wealth. Inherited wealth always comes with it a sense of entitlement and that filters through into the mainstream. It’s the pervasive belief that you are owed something instead of having to earn something. Australia is a mineral economy which means it did nothing to become a wealthy nation, it just existed. The same notion holds true with the current wealthy in Australia, they typically inherited it.

A generation that inherits its wealth does not know how to create new wealth so it just spins its tyres. I don’t mean wealth in the literal sense but in a moral fabric of society sense. In the sense of the whole country benefiting from the actions of a few in a whole is greater than the sum of its parts situation. The new money not realising what the old money has forgotten.

 

Another point is it isn’t a culture that saves. The average Australian lives paycheck to paycheck and doesn’t save for the future. This is largely because it is a society that values its tradesman. The side effect of this is reallocating value from formal education into other areas. Why should it? Australia is a welfare society which caters for it’s citizens. But if its citizens are taken care of then they won’t have the same level of ambition as a society that doesn’t.

Australians have a reticent belief that it is the responsibility of the government to take care of them. This belief in itself cause them not to strive to be better since the onus isn’t really on them. In many cultures families are taught to stick together to preserve wealth because they have to.

Something perhaps taken for granted. The government in Australia will try very hard not to let its people die. There aren’t many countries that do that. There is a civic pride which keeps us nice to each other and the society accepting and generous. The ones complaining have likely never lived outside it so have no point of reference.

If you’ve ever been to a country like India you’ll know how cruel people can be. It’s a type of market generated oppression. But that same cruelty spawns innovation since hyper-competition also creates extreme differentiation, so new products are created in greater volume at a higher rate.

People forget entrepreneurship didn’t develop out of choice but historically out of desperation. 15th century artisans started businesses or else they would die. Over the years it has been refined and developed into a job title that is synonymous with the creation of wealth.

That isn’t a bad thing. I like living in a country where the distribution of wealth is even. It means the quality of life is high. But that also means there will be less competition and therefore less innovation. And that’s a necessary tradeoff. There are few places that have managed to get both elements right. Innovation is born from chaos. But chaos for the mean and median is quite bad. It’s why so much of what is new comes from the fringes.

 

I think it’s due to a lack of the right education. Startup education is largely a new concept but I think it is contextual to its ecosystem. Israel has its own version of Israeli Startup education. Europe has its own version of Startup education. Each has an iteration of it as needed, tailored to their own ecosystem. I don’t think Australia does yet. Australia’s is about a 30 degree inflection shift away.

It’s worth asking, how does an education develop? I think education develops largely after a critical mass is exceeded. Like after a field exceeds a level of popularity – a stream of education evolves to accommodate that. After enough Aus startups are started there will probably be a stream of company education specifically for Australia.

For example something I’ve noticed. Since it is difficult to raise money in Australia, companies in Aus have to make money. If they don’t make money, they die. They also have to be profitable quickly or they die. That actually isn’t intuitive and would probably save a number of XYZ apps-social networks from unnecessarily dying. But if you said that to everyone here working on one they would treat you like it was heresy.

When in a low oxygen environment you are taught to take fewer breaths and breathe deeper. It also means the next big social network wouldn’t be able to be founded here, there isn’t enough capital to provide the runway. So we should be trying to build less Facebooks and Googles and instead more Microsofts and Ebays.

But why? What if I reframed the question and said it was an optimization process. Optimizing the chance of the startup succeeding, then you would probably agree with it, but that’s essentially what it is. Startups win not by succeeding but by not dying. A startup that doesn’t die is de facto successful.

So the Australian landscape is a lot like that game where if you step on the wrong colour the buzzer goes off. If you know what colours to avoid then you will be successful. Like a framework for not dying. If someone gave you a framework for not dying, you would follow it wouldn’t you?

 

Why is it difficult to raise money in Australia? There are a lot of reasons. One of the most overlooked ones is because the country is doing so well. Everything is so great that they don’t need to take undue risks. Most numbers are going up and there are many and much better places for capital to flow. Macroeconomic indicators usually need to be pretty dismal for capital to flow into such a risky asset as entrepreneurship and venture capital. That it doesn’t is actually a good sign for the economy at large.

For example, three of the safest bets in Australia for a long time have been mining companies because there has been a resources and commodities boom, the public stock market in the form of the ASX and the property market which has been nearly constantly thriving. Housing prices have gone so far up and returned so much money to investors there is even discussion that it has priced outthe next generation from home ownership who can’t compete with decades of savings and investment returns.

Most booms usually come to an end is why people are starting to talk about entrepreneurship in Australia. There needs to be something new that grows to supplement the decline in demand for minerals and metals. And technology seems to be growing everywhere else in the world so it’s safe to say it will work here also. When housing prices eventually taper off and as the mineral boom ends, the stocks of mining companies on the ASX will also go down and investors will flock to a better performing asset. This will likely be the stocks of high growth technology companies.

The housing price is a great example because it so underpins what is going on and is case in point. When people have taken out a large mortgage, they can’t afford not to have a decent and predictable salary to pay it off. But also, that house is a great investment for that person because the price of the house will go up. But a population saddled with high mortgage debts is going to struggle to create new businesses.

The reason would-be entrepreneurs choose to pay off their mortgage as the bulk of their net worth instead of investing it into their startup is precisely because it’s safe. Because they, the founders do not see their own company as a better investment than a house. For comparison, in the US property assets make up 25% of the average household’s wealth while in Australia they make up 60%.

The startup ecosystem is highly volatile and the minority of wealth creation in the country. Property prices, anywhere in the world, is directly tied to and is a measure of a healthy economy. When property prices go down, even though startups thrive, for the bulk of people they aren’t doing a startup and is a sign of poor economic progress.

Because when an economy is in trouble the leading indicator is housing prices. So high housing prices that grow sub inflation are almost universally a good thing even if the tradeoff is a risk-averse culture. The converse would be trading what is relative economic health and security for a minority highly volatile industry with few winners and many losers.

This is a good thing. Because for most people, the notion of a startup is foreign whereas the idea of buying a house isn’t. The way to fix this is not to reduce the cost of houses but to make better startups that can succeed with less capital. Step 1 is not to remove the safety net. It is to learn how to build a company with or without it. But it should be noted, it is very difficult to buy a house in Australia while also trying to fund and found a successful startup.

 

Something else I’ve noticed is there isn’t much optimism in Australia. Not enough delusional people. I think it takes a certain degree of insanity and self-delusion to do a startup. Being delusional is actually a good thing. But here you would be attacked for it, which I think is what people mean when they talk about tall-poppy syndrome. It’s another way of saying people are too realistic, almost to the point it is detrimental.

It’s the same notion with failure. Failure isn’t something which is celebrated yet, not in the mainstream. I think that might be because Australians take a very unilateral approach to things. When Australians fail they tend to fail spectacularly. There isn’t really soft failure or incremental small failures.

It is the difference between a scientific approach to failure as in repeated trial and error or the risk it all on the lottery kind of failure. When you imagine failure the default is the latter. You imagine bridges collapsing and huge amounts of money being wasted without anybody benefiting. That kind of failure is hurtful for everyone. I think there are different types of failure and most of them are actually good.

Failure is a misnomer because there is a difference between failure in the binary sense of coming up with a zero or failure in the sense of that scene in Toy Story – when Buzz Lightyear knowing he can’t actually fly, glides to the ground instead. That’s the kind of failure that’s good, the first kind is bad.

Another word for that is creative destruction. It’s when people fail but they learn lessons from their failure and become better because of it. After you’ve burned toast enough times, you tend to stop burning toast anymore. The path to creative destruction means failing a lot and that failure should be seen as a good thing. It should be encouraged.

 

I’m going to draw a parallel that may not exist. But Australia has one of the highest revenues and profitability for the lottery industry and an intolerance for failure. I feel like those two things are interellated as a de facto proof. A culture that focuses on lottery do not believe they’re able to make it themselves.

Who’s to blame for that? Probably the previous generation. Wealth should always be passed forward, the most useful of which is education so the next generation may stand on the shoulders of their predecessors and the torch gets passed forward. That is how a society flourishes. But for some reason in Aus it isn’t.

My grandfather grew up in a slum in India. Without electricity or running water. When he emigrated into Australia it was in the middle of the war and he was 45, a chain smoker and an alcoholic who had nothing. He studied, worked hard and became a doctor. He saved constantly and when he retired he was a millionaire and one of Australias leading tuberculosis specialists. Because of that my dad got to have an education and became an architect, who then built a house which I grew up in and I got to go to university.

He’s kind of my role model.

 

Which is another thing lacking in Aus, role models. Another way of saying that is mentorship. Implicit in the relationship between an investor and an entrepreneur is the relationship between a teacher and a student. The corollary is possibly a jedi master and a padowan.

There aren’t enough role models. People that young Australians can look up to. This means more than just people who are rich. The equivalent is probably a technology entrepreneur who is admired for intellectual rigour or curiosity, not simply for being rich. What young people want is very telling, it’s a signal of what’s coming next. What they want isn’t money or fame, it’s this weird blend of happiness, freedom and achievement.

I was once told that you can judge the quality of a society by the quality of their rich and their celebrities. I don’t know if Australia really produces quality of either yet. In Silicon Valley rich people go on to start medical device or rocket companies – things that are good for humanity and capture the imagination. In Australia, they buy TV stations or sports teams.

Being rich is not something in and of itself worth looking up to a person for. The mechanics of admiration are different. You admire a person for their insight. The social value to their wealth. Or at a personal level, guidance.

A good example is something you see frequently with successful Australians and is why few look up to them. All they seem to care about is money and themselves. In books written by them, you will sometimes see their name printed on every single page. The first time struck me as the oddest thing, by the tenth time it was adaequatio intellectus et rei.

The best example which illustrates the opposite is probably the mathematician Grigoriy Perelman. He was awarded a Fields Medal and became the first person in history to win a Clay Millennium Prize for solving Poincares Conjecture. The Millennium Prizes are a set of math problems so difficult just by solving one you are given a million dollars. After solving the problem he declined to accept either prize saying, “I’m not interested in money or fame, I don’t want to be on display like an animal in a zoo.”

That one act inspired a generation of mathematicians.

 

It is also fairly common for successful entrepreneurs in Australia, the ones who would otherwise become role models and thought leaders, to just buy a house and go into hiding. This loses most of their insight. It’s a lot like a battle hardened soldier who won’t teach the lessons of battle to new recruits, the ones that might benefit from them most.

At the other end of the spectrum is a lack of a sense of urgency in Aus. Innovation breeds urgency but it also works backwards. Urgency breeds innovation.

When you walk down Silicon Valley you’ll feel an urgency in the air. The byproduct of urgency is energy. There is energy in the air. I think this stems from people in Silicon Valley genuinely believe they are working on something bigger than themselves. Australia doesn’t have that same energy yet. I’m not sure why that is. I think it’s because Australia as a place is really relaxed. The quality of life is too high. Whenever a place is relaxing it means the quality of life is high.

But a founder who is relaxed is probably not being as productive as they need to be. It’s quite common to hire a service firm and for the business to wait a week to actually complete the work. Then you’ll get billed for down time such as coffees and meetings.

In a startup each founder has to be as productive as an army of employees since they are going up against big companies. It is the classic David and Goliath situation but David has to be an order of magnitude more productive if it is going to outrun Goliath.

I’m originally from Darwin, arguably the most relaxed part of Aus. Moving to Melbourne the pace of life seemed faster and going to Sydney, it shifts up a gear again. Which is probably why Sydney has a higher concentration of wealth. Because the atmosphere breeds it.

If you walked into any office building in Sydney CBD you would see plaques that say things like Capital, Partners, Offices etc. A friend of mine once described the difference as “in Melbourne girls want you to love them without makeup. In Sydney, girls know they look better with makeup on.” I don’t know what that means exactly but it felt like a good explanation.

 

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