The high-tech brain drain: lobotomising our economy

Our high-tech entrepreneurial ecosystem is arid and hostile, but greater collaboration between entrepreneurs and government could lead to economic growth.

To investors, technology entrepreneurs seem unambitious or uncompetitive. To those entrepreneurs, Australian investors seem risk-averse and ungenerous.

One venture capitalist has remarked, “in terms of the availability of capital and risk appetite we are in the Dark Ages.” 99dresses founder Nikki Durkin agreed, lamenting, “in Australia failure is seen as a bad thing... It's a bit of tall poppy syndrome.”

The result has been a steady brain drain of entrepreneurs overseas in search of a more fertile environment – larger investments, accessible markets, collaborative networks and mentorship. Media outlets from Fairfax to Vibewire have tried to generate public concern about this attrition rate, and to attract the attention of policymakers.

But government has been unresponsive.

Besides the occasional overture in the Australia in the Asian Century White Paper or the Innovation Statements, politicians are apathetic towards the development of knowledge-intensive, innovation-driven start-ups. MPs are accustomed to hard hat, fluorescent vest photo-ops in factories. They earn no political capital by supporting lone-wolf entrepreneurs who operate out of garages or solicit venture capital firms.

The high-tech start-up community struggles to articulate the reasons government should intervene. Why should the public care about e-commerce websites and software algorithms?

In part, this is a problem of representation. There are 1,500 tech start-ups in Australia, but the community does not have a visible peak advocacy body. This might change in the near future with initiatives like StartupAUS, a new collaboration between Google Australia and leading entrepreneurs to campaign on behalf of high-tech entrepreneurs. But until then, the voice of the start-up founder remains conspicuously absent from the conversation.

As the start up community grows and coheres, it must press its case. The public returns from a vibrant entrepreneurial society are great. High-tech start-ups are a valuable resource, not a poachable export commodity.

And they could hold the key to our future economic growth.

According to a recent PricewaterhouseCoopers report, high-tech start-ups (encompassing everything from biotechnology to online retail) could contribute 4 per cent of GDP to the economy by 2033 and directly employ 540,000 people. It would be comparable to the GDP contribution of the entire retail trade sector. But at present, high-tech start-ups comprise a mere 0.1 per cent of GDP.

This optimistic vision of a post-mining economy depends, firstly, on increasing the number of new start-ups. Unfortunately, it is here that high-tech entrepreneurs encounter a significant funding gap. According to a report by Deloitte, Australian start-ups receive a mere one-fifth of the early-stage funding available to those in Silicon Valley.

Secondly, it requires that at least one per cent of firms are high growth enterprises earning more than $200 million in revenue by their eighth year. Of the total jobs created by entrepreneurs, “high impact” start-ups like these account for almost half.

Yet scaling-up the operations of a high-tech firm is difficult. Silicon Valley start-ups attract a hundred times more venture capital funding than those in Sydney, and are twice as likely to successfully scale-up.

The Federal Government has responded by establishing a series of programs to financially assist the development of early-stage, tech-oriented venture capital funds. But given the size of their investments, attitudes to risk, and their expectations for growth, venture capital remains unavailable for many small start-ups. Private investment correlates with the size of the ecosystem, and neither Sydney nor Melbourne is active enough to attract domestic investments equivalent to those enjoyed overseas.

Governments should focus on other priorities, leaving the ecosystem to gather its own momentum and “critical mass”. It takes more than money to develop a healthy entrepreneurial ecosystem.

They must develop collaborative networks between start-up firms, public research bodies, and incumbent firms. As the Federal Government concedes, these networks are broken and “handicapped by fragmentation.” The $500 million “innovation precincts” announced in 2009 are one tentative step in the right direction, as are the public incubator workspaces established by the City of Sydney Council.

Governments should also accommodate the transfer of workers in established industries into the high-tech start-up community.

According to the Global Entrepreneurship Monitor, Australia has the second highest entrepreneurial activity rate in the developed world, behind only the United States. Some 12 per cent of Australian adults express entrepreneurial intentions, across all sectors, although the lack of seed capital means that very few can pursue an enterprise fulltime. Whether by reforming share option plans, taxation or leave arrangements, government is well placed to convert this interest into action.

Perhaps most crucially, governments must recognise the role tertiary institutions will play in the future of domestic entrepreneurship.

29 per cent of Australian high-tech founders hold computer science degrees, yet less than 2 per cent of students graduated in that field. Science and technology graduation rates in general are declining, and the federal government needs to consider more aggressive incentive strategies to reverse this trend.

Likewise, governments should drive efforts to commercialise university knowledge. Universities have produced some of our most iconic medical and environmental innovations, including the cochlear implant. But after the exhaustion of research grant funding, tertiary researchers rely on discretionary university funding to test the commercial viability of their products. Knowledge Commercialisation Australia argues that this should be matched by public funds.

Collaboration and dialogue between entrepreneurs and government is hampered by poor communication. Entrepreneurs need to let governments know what initiatives work, and what support they need; policymakers need to make themselves more available to this emerging community.

But private investors need confidence in the ecosystem as a whole before entrepreneurs begin to enjoy the free-flowing funds available in Silicon Valley. Governments here do not appreciate their potential contribution to the growth of the sector: they must foster conditions in which the high-tech ecosystem can expand, increase productivity, and become viable in its own right.

Only then will the brain drain become a brain recirculation.