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Australia's unregulated tech incubator scene could be doing more harm than good

Date

Greg Twemlow

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OPINION

Could fledgling tech companies be wasting their time in incubators?

Could fledgling tech companies be wasting their time in incubators?

News about Aussie tech start-ups succeeding here and then overseas may suggest a thriving incubator scene. The reality for most of our the majority of Australian incubator participants is very different, argues Sydney start-up business consultant Greg Twemlow.

Australia has a seemingly vibrant tech incubator ecosystem where budding entrepreneurs can find basic funds, advice, like-minded co-located buddies and free rent from a number of initiatives.

But these unregulated schemes and their results vary and without major changes, Aussie incubators will struggle to deliver the successes enjoyed by Silicon Valley incubators.

My most recent trip in May to San Francisco has reinforced my views about the performance of Australia's tech incubator industry.

Unlike California, Singapore and the UK, Australia has allowed tech incubators to proliferate without any substantive level of control, co-ordination and guidance from our federal government and the venture capital community. As a result, a majority of start-ups camped in incubators could be wasting their time and facing a significant opportunity cost.

As a business consultant I frequently see that start-ups are putting too much faith in incubator programs when they should instead be entirely focused on building their product, relationships and market understanding.

At the same time, Australia lacks some of the characteristics possessed by other economies – characteristics that are crucial for start-ups to thrive.

In Silicon Valley and now in other large US cities such as New York, Seattle, Austin and Miami, in Singapore and in the UK, the model is of the utmost simplicity: brains attracts risk capital and risk capital attracts brains.

While Australia does not lack brains, it does lack risk capital and start-up skills, and that’s a major impediment to making the Silicon Valley incubator model work here.

In splitting my time between Sydney and San Francisco, I've identified a lack of capital for mid and late-stage start-ups as a major hurdle for young Aussie companies that have managed to secure incubator or angel investment.

It’s no coincidence that fast-growing tech firms relocate to Silicon Valley and increasingly Singapore for a better start in life. 

I liken the start-up funding situation in Australia to a drip-feed system that should run for a year but dries up after three months. There’s just nowhere to go after the early support stage.

By contrast in the US, pension funds are major investors in venture capital  funds that seek out start-ups in America’s tech incubator hubs, meaning start-ups have ready access to the capital they need just as they begin to grow rapidly. 

A 2013 PricewaterhouseCoopers report identified that Australia’s economic and social climate seems to show a much higher sensitivity to failure than business cultures in North America.

This combination of a higher fear of failure and higher consequences of failure are toxic to the start-up scene. It could also be the reason so many of our entrepreneurs are putting their faith in incubator programs rather than garnering the courage to tough it out by getting direct access to the skills and experiences most relevant to their ideas.

Other commentators have argued that the risk of failure is a bigger hurdle to overcome for Australian entrepreneurs than for those in competitor economies.

Without regulation of its incubator programs, Australia runs the risk of unethical exploitation. In the past few years we have seen slick operators making grand promises and giving what amounts to false hope.

Start-up CEOs should be especially wary of fee-based operators promoting fast-track processes. These incubator programs offer training and packages to supposedly enable start-ups to ''graduate'' their programs and embark on a journey to success – in return for fees and a sizeable chunk of equity.

The reality is regularly that of time and money down the drain. Budding entrepreneurs are best advised to maintain a healthy scepticism of incubator training schemes. Their programs have a great way of keeping participants busy without progressing with the real work of building their product and finding a market. 

Despite their patchy track record, Australian business incubator programs are booming. Our federal, state and some local governments are running programs. Universities and large telcos have started incubators. Fortune 50 companies have launched incubators and venture funds. Successful entrepreneurs have opened programs of their own; high-net-worth families are scouting around to invest in tech; angel investors are active with modest investments and capital boards like the Australian Small Scale Offerings Board work hard to find funding for start-ups.

But only a handful of these programs is established enough to have valuable experience or be able to point to consistent past successes. Would-be participants in an incubator are strongly advised to speak to past ''graduates'' of the program. Make a point of asking what their experience was of the scheme and whether it had any positive impact.

Australia does have effective start-up incubators, such as the pioneering Australian Technology Park in Sydney, recently awarded a major gong by the international incubator industry.

Yet not all incubator experiences are as worthwhile when it comes to moving start-up founders closer to building a successful company. Many incubators are very good at renting out real estate and keeping people busy, while taking them away from the essential work of product development, market testing and securing foundation customers. 

It’s certainly possible to make a successful start-up happen in Australia. The absolute cream of Aussie start-up ideas will probably manage to find support here or more likely offshore.  

Budding entrepreneurs are advised to be wary of false prophets as they work to realise their dream. While start-ups are almost universally funds poor, an even more valuable commodity is time and unlike funding, wasted time is a resource that can rarely be recovered. 

Greg Twemlow is a Sydney-based business consultant.

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13 comments so far

  • Great to see an article on the AU startup scene which calls it like it is. We investigated seed/incubator programs in Australia for our startup but quickly realised they would add little more than a few months of capital and were more than likely to limit our future options when we finally made the move overseas. The 'business models' of some of the so-called incubators are alarming too - e.g.: targets to invest in 100 companies within 24 months. They seem more like churn factories aimed at generating work for their tech partners.

    Commenter
    Sam
    Date and time
    June 17, 2014, 8:02AM
    • Some argue for more process and control others for less. When I look at the way great inventions are made, in almost all cases the invention is not the startup objective. It is new thinking and knowledge that has evolved through the R&D process. In Australia in all cases that require funding you have to set the commercial objective at the start of the process and not deviate.This is not how discovery and invention work. In Australia the emphasis is on ROI, not future technology. It is small thinking as opposed to big thinking. I don't know how you change that or even if it's possible.

      On another topic, the DTCA is a truly draconian threat to Australian innovation. It simply reflects another area of very small thinking by successive governments.

      Commenter
      Jonathan
      Location
      Melbourne
      Date and time
      June 18, 2014, 6:37AM
  • Aussie high-tech startups will also soon be subject to the Defence Trade Controls Act. They'll need to get permits from the public service to communicate with others about their work and have to hire lawyers to ensure compliance with the DGSL. Just a phone call or an e-mail could land you in jail for 10 years. This will drive research offshore.

    University of Sydney Deputy Vice Chancellor of Research on the DTCA: "It would impede top scientists in developing technologies for tomorrow's high-tech manufacturing industries, new vaccines and potential cures for cancer. The Australian government worries about a brain drain in advanced technology, but is poised to pass legislation that could force our best and brightest offshore"

    Robert Oakshott MP on the DTCA: “The McCarthyist intent may be honourable, but the delivery through this legislation is dangerous. It is jeopardising our commitment to a research sector in Australia that I would have thought is important to all of us in the many fields that we deal with in this chamber, from food and fibre production all the way through to the medical and health sciences. ... why on earth are we therefore including a criminal offence for a researcher in that space?”

    Google "How the DTCA threatens Aussie High-tech companies" for details.

    Commenter
    Vod
    Date and time
    June 17, 2014, 10:10AM
    • I was interested in what you were saying until I read 'rob oakeshott'...

      # awful era.

      Commenter
      Alex
      Location
      Finley
      Date and time
      June 17, 2014, 12:32PM
  • I am not sure we should be so harsh on Australian tech start-up incubators. They exist for the seed funding stage of a business. They don't expect many of the start-ups to go on to further success as it is a high-risk area.

    Much of what the incubators do is support a large number of start-ups and prepare them for the next round of funding which is usually their first round of Angel funding.

    So their main role is to take people from idea through to initial product and clients and then on to further funding. Hence the name incubator. Their role is to hatch the egg, not raise the chick to adulthood.

    Commenter
    Flingebunt
    Location
    Brisbane
    Date and time
    June 17, 2014, 10:53AM
    • We need more companies like 'Aviato' and vulgar visionary parasites like Erlich. ;)

      { oh, and Halt and Catch Fire is truly the only show I HAVE TO WATCH at the moment- the way Joe MacMillan will do ANYTHING at all to make his computer a reality is addictive viewing. I hope you techies out there aren't at all like him though because he's scary }

      Commenter
      Alex
      Location
      Finley
      Date and time
      June 17, 2014, 12:42PM
    • Re: "incubators ... exist for the seed funding stage of a business."

      My only experience as a customer of an incubator was over 10 years ago. I had no interest in getting outside money - I just wanted co-working space, a new idea then.

      Next thing I knew I was in front of an investment board with very famous VCs on it asking questions that were relevant and some that seemed nuts: "what's your exit strategy?" and I hadn't even written a line of code.

      In the end I found myself being offered $35,000 for a share of a business that didn't exist yet, and a proviso that most of the money had to be spent on services from the incubator.

      I also found myself being pestered by others in the incubator wanting a share of my business for "sweat equity".

      For a bunch of reasons I quit and decided to build my product at home with my own money.

      Things are quite different now I hope.

      Commenter
      workable
      Date and time
      June 17, 2014, 5:00PM
    • ... forgot to add: no, I didn't take the $35,000.

      Commenter
      workable
      Date and time
      June 17, 2014, 5:09PM
  • Thanks for adding your comments. No intention to be "harsh" only to highlight there needs to be a serious debate as to how the Aussie Tech Incubator industry is developing. Reality is any company can setup and hang a shingle saying "Incubator". Startups enter Incubators with plans and expectations and give up their most valuable asset being time. It's time for the Incubator industry here to develop standards & processes and to vet their capabilities & performance using standardized metrics like the US industry has - http://www.nbia.org/resource_library/peer/benchmark/index.php

    Keep the discussion going. Need many points of view for there to be meaningful improvement.

    Commenter
    Greg Twemlow
    Location
    Sydney
    Date and time
    June 17, 2014, 12:13PM
    • If the proposal is that regulation will fix the problem, is this backed by any evidence. Has it worked in other countries and regions - does the US have regulation?

      Commenter
      Ian
      Location
      Brisbane
      Date and time
      July 06, 2014, 8:27AM

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