In terms of business growth, Sewell says Australian entrepreneurs, in general, frequently make the decision not to grow their businesses over a certain point.
“Often Australian business owners who are making $200,000, $300,000 or $400,000 a year decide they’re happy with it and they don’t have an incentive to scale the business,” he says.
“People make lifestyle choices that we don’t necessarily understand either. I think, why don’t you try to grow the business to $10 million or $20 million, because many could do that with what they’ve got, but they’re happy.”
Sewell says business owners find once the business exceeds 15 or 20 people “the game changes”.
“People decide they don’t like it past 20, it’s a different game. This is possibly a lifestyle choice or a business size choice,” he says.
“You make the decision at $5 million that that’s as big as you want to be. But the market changes and if you have a profitable niche today and haven’t capitalised on it, then someone will either compete with you, or the market will change and leave you behind.”
Sewell says too few business owners realise it’s better to change the business structure and become an investor, rather than an operator, allowing a professional management firm to run it, than to fail to adapt and grow.
Attitude to growth isn’t the only way Australian businesses differ to their US counterparts. Sewell says the Australian approach to failure limits the entrepreneurial environment.
“We don’t accept failure, if a business person fails here, that’s it, they’re done. But in reality you have to fail, it’s a part of life,” he says.
“You’ve got to work with your customers and sometimes your customers don’t even know what they want, so you invest in the wrong things and you fail.”
Co-founder and lead investor of AngelCube, Adrian Stone, told SmartCompany the US’s big advantage is their embrace of business failure.
“Failure isn’t seen the way it is here. In Israel too, a country which has the greatest number of start-ups per capita and the second largest in the world, failure is actually a badge of honour.”
Stone says in order for entrepreneurial communities to work, fundamentally the drive has to come from the entrepreneurs themselves. Changing this attitude to failure, he says, is crucial to Australia’s entrepreneurial capacity.
“We need to get to this point, but it’s a cultural thing. Maybe we can talk about our failures more often. It’s moving this way in tech start-ups, there is a move toward the lean start-up and it’s all about failing often and failing fast,” he says.
Barnes says there is now a negative stigma around business failure.
“The media publishes things when businesses go into voluntary administration and say they’ve collapsed. But going into administration is a normal business process.
“There are other people which have had four, five or six successful businesses, and going into administration or “failing” is the realisation you’re not going to hit your goals.”
Motivated by the ease of attracting funding in the US, including its extensive entrepreneurial environment and positive start-up culture, a goal of many Australian entrepreneurs is to shift their business to the US.
Chief executive of the world’s largest outsourcing platform Freelancer.com.au Matt Barrie told SmartCompany the venture capital model in Australia is “completely and utterly broken”, with the exception of groups such as Blackbird and AngelCube, and this is driving entrepreneurs away.
“The traditional model of Australian venture capital is they’ll finance you early on if you can find someone, everyone will write you a cheque for $20,000 or $50,000 and maybe $100,000, but that first $1 million to $5 million is very difficult,” he says.
“Even if you manage to attract $1 million or $2 million in funding, the venture capitalist will do all the hard work with you and then tell you to go to the US for further funding.”
At this point after a round of funding the Australian tech start-up might have won $5 million to $10 million in funding, and Barrie says the Australian company will be under pressure to move to the US.
“The US team then says you need a US chief executive and the team partially moves to the US, and then comes a US management team. This eventually dilutes all the Australian shareholders. Then they say the company is undercapitalised, which it is, you need to raise $20 million,” says Barrie.
“Then the Aussie venture capitalist runs out of money gets kicked off the board and the US CEO then has a US management and US shareholders, but an offshore development team. When the Australian dollar is 60 cents or 70 cents it might make sense to have an offshore development team, but when the Australian dollar was $1.05, it was more expensive to hire a Sydney graduate than a Stanford graduate.”
The net result, Barrie says, is that the Australian company’s operations are eventually moved to a cheaper location and the business becomes effectively another American company.
Barrie says to counter this problem the Australian Securities Exchange needs to be “built up” as a route for financing technology companies and arousing liquidity.
“We do it in mining tremendously well. You can have a PowerPoint presentation, not even a drill hole in the ground, and raise $20 million on the ASX.
“The Australian mining industry is a world powerhouse and we need to do it with technology because mining is running out. There has been more money raised on the ASX in the past five years than NASDAQ, so it’s one of the biggest financial markets in the world and we need to be doing this for start-ups,” he says.
The experts were unanimous that the push for change needs to come from the entrepreneurial community, rather than government action, but all agreed there are a number of policies which could be altered to better the entrepreneurial environment.
Barnes says payroll tax is harming the small business community.
“Payroll tax is just a joke – no business owner likes paying payroll tax,” he says.
“Businesses are going to move their staff offshore so they can lower the costs of doing business. It seems unfair to incur a 4-5% payroll tax for employing people when we’re also paying the superannuation increase. It’s another 7-8% on top of the base wage just to employ people.”
Sewell says the government would also be able to restructure its tax system to better favour investment.
“The tax deductibility of losses and capital losses, you could change the way they are treated to encourage investment. The system now is that you quarantine your losses against particular assets, but there would be a more effective tax structure because at the moment it’s not conducive to investments,” he says.
Stone says the government needs to “chip in and put their money where their mouth is” to help fund Australian businesses.
“Commercialisation Australia does a lot to help entrepreneurs, but they need to take their lead from Singapore, UK, and Israel where they give loans to match those of investors,” he says.
“The government needs to recognise that it’s worthy of investment. The way it works is it provides a loan which is repayable, almost all the loans get paid back and this goes a long way to fostering the community.”
Stone says the education system also needs to be changed to better encourage entrepreneurialism from a young age.
“I’d like to see all kids to try and start an online business and I think the support of doing this would help them a lot. My son started his first business when he was 12 and he’s now onto his third business and earning enough to support himself.
“For me entrepreneurship, I believe it’s learning by doing. You can do university courses, but it needs to be like vocational training almost. Start a business and then get right. It might succeed or fail, but it doesn’t matter.”
Ultimately, Stone says it’s about encouraging more people to have a go.
“Be willing to have a go and withstand the consequences. Don’t be results driven, do something you love and don’t be hung up on your result good bad or indifferent,” he says.
