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Sydney, Australia - Relay Foundation

Sydney, Australia

Sydney

Australia: A New Hope

Overall Trends:

I was a bit locked up on writing the Sydney piece. There just wasn’t much outstandingly good or bad to say about it. There weren’t the huge gaps you would see in DC in terms of finance, but there wasn’t a massive focus on the ecosystem by schools like in Silicon Valley. There is cross-city support like the New York-Boston-Providence triangle, but the angel community is a bit weak and impact funding is kind of hurting but has massive potential. It’s a strictly middle-of-the-road city in terms of overall startup support and growth.

Let’s start with the good. You have local universities that teach social entrepreneurship and Design Thinking (actually a bit more than most areas I’ve seen so far), a history of collaboration with nearby cities Perth, Brisbane, and Melbourne which has led to some interesting scaling models on the support-side, and a variety of coworking spaces and startup events to get you moving like the obligatory Hubs (yes, Hubs. They love impact here) and Fishburner.

On the less-than-good side you have one of the most expensive cities to live in in the world, low startup density similar to what you see in LA but not as bad, and a high youth unemployment rate. Granted, there are two types of unemployment assistance that could arguably ease young people just graduating into the social innovation space. However, when you look at the amount provided and then compare it to the cost of living in Sydney, then things can get tough.

In a strange way, this high unemployment rate could actually help the startup ecosystem, and not just because you have a bunch of driven dreamers that offer cheap labor. The government support for students after they graduate is still a thorn to the government in terms of budgeting, and so it has strong reason to get these graduates working to lower spending.Elected officials, then, might have stronger reason to push the startup lifestyle with tax or finance incentives, which would be great for everyone. We do see a conscious effort on the government side to push for impact reforms, but the energy expended is small and you can’t really attribute it to government spending on unemployment benefits without more research.

 

Why does any of this matter to social entrepreneurs?

When it comes to the acceptance of social innovation, the public sentiment is around the same as Boulder. People don’t think you are crazy, and top graduates enter the space all the time (rather than heading over to Bain Consulting or a safe IT job). The best piece of evidence I have seen so far is that Australia sent a delegation to the 2013 G20 YEA program and this delegation had over a 30% impact focus. This percentage is higher when you take into account the delegation members’ side projects. No, it isn’t the 100% we all want to see, but it’s better than the dismal proportion that other countries sent. And let’s not forget to check out Vibewire’s program for young entrepreneurs (hint: it involves funding and is excellent).

When it comes to support through education, Sydney has multiple educational programs, from UTS to SSE, for students who want to take the next socially entrepreneurial step. We were able to chat with the SSE program there, a branch of the UK-based School for Social Entrepreneurs, and we weren’t disappointed. And it’s far from just education; the school offers acceleration and incubation to solid student ventures. I could almost be very, very happy with this program, but there are gaps and considerations that must be taken into account when looking to start a social venture in Sydney (and Australia overall). The key issue is that most of the people who would qualify to get into the program are at a stage where they are too busy to go through the executive training provided. This mismatch is common between service providers working with nonprofits and those serving for-profits, but it looks like Sydney is moving towards a way out of the confusion.

This pitch is part and parcel of the massive number of events going on nightly in the city. Check it out.

Question 1: Social Enterprise. What the heck is it here?

Key Handoff: Transformers, Impact in Disguise

According to SSE and CSI, Australia has no tax attack that comes from switching a registered not-for-profit into a for-profit. They also don’t have much early-stage impact support that isn’t grants and many types of nonprofits are not tax exempt. Put these three, probably linked, pieces together and you get a bunch of ventures that would in any other country register first as for-profits instead claiming to be social ventures, getting grant money, and then, after generating revenue, switching over to the for-profit status. In some countries, there’s a cost associated with doing this, for instance the taxes that would have been paid on the revenue you made over some years before you made the switch. The idea is to stop people from getting unfair advantages in the competitive economy.

This clever switch, seen as necessary by most of the people we talked to in the space, might very well be excellent in getting competitive companies going (history says it isn’t but we’ll get back to that in the finance section). But what this does is undermine the need for impact investing. If the impact companies can reach positive revenue on grants and then switch to for-profit status without requesting concessionary capital (money for less than market rate returns), where is the demand going to come from? It wouldn’t make sense to the investor because the only companies asking for investment will be those who didn’t get the grants. This means the investor is getting either bad ventures and they’ll need to take a larger portion of the company to justify getting involved. This isn’t good for many more reasons, but I move on.

My own thought on the matter is that the idea is amazing for early stage social ventures but could be greatly distorted or taken advantage of by less-than-well-intentioned companies. It could lead to green-washing on a massive scale as startups without any social impact get the money, pivot away from impact, then grow from there. With the excess impact just sitting around looking for a good venture to enter into, a convincing non-impact company could do some damage. The other model of taxing or putting a cost on the switch forces people to stick with the impact they highlighted first, which is great. The downside to this, of course, is that nonprofits that could do better as for-profits are given a strong reason not to. As always, more data is needed but I would shoot from the hip here and say I would rather have the tax on the switch and just pour more support into building the venture philanthropy and impact angel sectors.

The last point I want to make on the legal side is related to taxes. In Australia, startup founders don’t really have the option of using equity in the company to get good people working for them. Small-scale or slow-growing social startups lose out because of this. The tax is that any shares a new employee receives get taxed right away. The reason this is terrible for startups is that they don’t usually have money to pay employees to cover this tax and so the grant of ownership of the company, some stake of equity, is actually a tax liability. New employees are punished for taking the chance to do something awesome. In the States we don’t tax the shares until the employee actually cashes them, which makes it easier to get people involved in the space.

In Australia, this just makes it harder for young people to get started because startups that get a lot of money early (i.e. those that are standard tech and not confusing, hard-to-measure social ventures) will have a leg up on hiring the best new talent. This also means they want to be safe with the talent and will tend to hire proven quantities. Combine it all and we get young people not being in a financially safe space to get involved and the startups not being able to adequately ‘take a risk’ on younger people due to strapped cash. Lastly, the amount raised by even the best companies is still on average less than the States, so the theory that the AU companies raise more money to pay salaries doesn’t really stand up to scrutiny. To get around it all, some AU startups have been incorporating outside the country to dodge this tax; others have left for the States.

UTS is pioneering a Design Thinking Program that preps the next generation of social entrepreneurs.

Question 2: Getting people involved. How’s it happen here?

Key Handoff: Impact is a Joint Venture

I never felt alone in Sydney. True, I was over seven thousand miles away from home in the Bay, but I never felt that I had no one to talk to in the space. It turns out that most of the people I talked to felt the same way.

Sydney isn’t an oasis fighting against the desert. It works alongside Perth, Brisbane and Melbourne (nationally) and quite a few organizations from the EU (internationally). The trends you see in Sydney you can also see in its partners, and it leads to interesting relationship opportunities across oceans. In Sydney you see the heavy acceptance of social innovation and ventures commonly found in the UK. Hub Sydney chats and emulates the best practices of Hub Melbourne. Also, the energy and resource focus of energy startups is similar to the push for the same in the LA and so the clean-tech and energy markets are connected (if weakly). Because of Australia’s size, startups have to, have to, have to think globally if they are to succeed; they need to think globally from day one. The bad thing is that the impact entrepreneurs we learned of don’t seem to be.

Allow me to explain. From what we’ve seen in the city, there has been a trend for social innovators to see ‘scale’ as Nation-wide. When a US impact company wants to do that then it’s ok because there’s a market of over 330 million people that could be plagued by the pain. In Australia, there are only 22 million people. To put this in perspective, the combined greater Los Angeles area has 18 million people. Just one US city (granted it’s one of the biggest) has almost as many people as the entirety of Australia. Scale cannot mean National for AU startups without limiting access to resources, networks, and impact. Startups in Sydney and AU must consider what region they’re looking to grow into (southeast Asia or the US) if they are to reach meaningful scale because the decision affects almost everything they do in terms of networking, branding, and market positioning.

For those who don’t care too much about meaningful scale or view the idea of scale as an option rather than a requirement of a social venture, I present this next point. Getting money as a social venture is hard enough as it is. The promise the big social startups make to get this funding is scale. They promise the venture is going to be huge and make everything and everyone better, especially the funders. Pretty much, funding is tied to social impact. If you limit your market, you limit your impact, and you make the process of getting money even more difficult for yourself. Perhaps looking to get revenue from Day One is good. But not every company can do that because their business models might be more focused on building economies down the line. If that’s that case, and as a hero from Inception has said, “You musn’t be afraid to dream a little bigger, darling”.

This concept of connectedness and support is visceral on the local level, too. There are service providers everywhere, but a good many are startups themselves. Without a doubt, you can have impact branding consultants, impact social media consultants, impact measurement consultants, and on and on. I actually talked to more service providers and consultants than I did entrepreneurs at some events! The small issue that I see is that these consultants cost money. Of course all things cost money, but because the providers aren’t established enough (because the for-profit impact space is too young) to give out things for free as prizes for competitions or partnerships similar to the way many providers in the States can, access to these services across the entrepreneurial spectrum is sharply divided between those with cash on hand and those giving it the old college try.

The hurdle here is that, as we have seen, money isn’t one of the things most social startups have, especially if they were started by young people just out of college. This glut of early stage service providers looks to distort competition for younger entrepreneurs not out of anything unjust, only that more established groups can pay these service providers to both accelerate their way through some stages of the startup process. Sure, good ventures win and bad ventures lose in the long run, but in the short run a lot of young startups end up dying in the process because of the stage of development the local service providers are in. With a 40% restart rate (the rate of an entrepreneur starting another venture if their present one fails), however, it appears this extra challenge isn’t keeping anyone down.

This is just one of the pro-environmental ventures coming out of Fishburner. Smart grids for everyone!

Question 3: The finance. What’s going on there?

Key Handoff: Get the Grand ol’ Gov’ Involved

You are in for a treat, much like I was. There are two innovative kind of financing that you’re going to want to keep an eye on (well, one is a vehicle and one is a source), and both depend on government interaction (governments and innovation in the same sentence? I know!). The first kind of financing is Social Impact Bonds, and these things are growing fast all over the world. The second is something unique to Australia and is called a Superannuation Fund. These are two sources of potentially billions of dollars of venture capital, convertible notes, loans, and more. These two sources of funding can unify capital markets, take mid-stage impact ventures to scale, and even take scale-stage companies to growth or maturity. We’re talking big change. Huge.

A Social Impact Bond is at its base a relationship between the government, private enterprise, and a social venture. The first one was pushed out in the UK back in 2010 and other countries have been giving the model a shot. New York has a SIB out and will be the first US city to have one. The Centre for Social Impact is the voice for them in Australia.

The way it works is like this. A social venture (at any stage of growth) goes to the government and says that the venture could do something the government is doing but better. The venture could cut government spending if this venture succeeds. However, they don’t have the money to get moving. The government then, rather than give the venture money outright (which is just plain tough to do), calls on private sector companies or funders and says that a bond can be built around this project and the interest rate on the bond is linked to the amount of impact had. The more impact the social venture has, the more money the funders get.

Up until this point the governments and funders are taking safe bets by working primarily with late stage nonprofits. Pretty much everyone wants success stories and putting money into a successful charity to fund a new program makes the most sense. From them the risk appetite can open up and eventually bonds can be offered at varying sizes to for-profit social ventures. Indeed, once we start including for-profit impact companies the investors can start getting mixed returns. They get financial returns from the company and impact returns for the government.

This is all very early speculation and it should be another five years or so before the capital really starts entering the space, but Australia already has some successes. New South Wales started programs for three Social Benefit Bonds, each under $10 million to get the pump primed, for groups that can reduce adult recidivism rates. They’re working with Social Finance and Mission Australia, all groups worth looking at.

So for your social startup, maybe SIB might not be the best bet. But for your next one (we’re all serial entrepreneurs here, right?) you should definitely keep this in mind.

The second kind of funding is actually more a general source of capital that is slowly entering the impact investing space. Australia instituted and administers a compulsory payment by employees into their retirement account (set at 9% but will grow to 20% by 2020). Think of it like a massive, massive retirement fund. Now here’s where everything gets fun.

Australia has just under $2 trillion (with a T) dollars under management and need to find solid places to invest it. They are playing the role of an investor looking for dealflow. Now, of course they are going to put a large portion of this money into safe bets and standard for-profit companies. That’s their prerogative. But an alternative exists that could be quite powerful. A recent publication called for Australia to put 5% of its superannuation funding into Positively-Screened or explicitly impactful for profit ventures. The idea is simple: pension plans like the superannuation fund tend to have their benefits canceled out because the money they hold is raised in such a way that increases costs and debt for future retirees before they retire. Pretty much, yes you save more but you use that savings to pay off the debt you had to take out to reach the finish line anyway.

So here’s the rub, investing in impact ventures and community empowering startups could build more resilient communities and actually cut costs to both the government and citizens in the affected region. If you reduce recidivism, yes you reduce government costs but you also allow that funding to either be given back in reduced taxes or put to education, investment in better infrastructure (like nationwide broadband), or other cost-reducing, people empowering platforms. Assuming the financing is provided at market rate like many SIBs are (though they may drop in return once more groups have access to the funding), you get more bang for your buck at all stages of life. Even if you take a reduced rate of return from riskier or less financially motivated ventures, the reduction in costs to people before retirement because of the stronger communities could at least reduce the need to take on more debt and therefore be a wash in terms of absolute value provided to retirees. And this path has the benefit of building the impact investing and impact startup sectors!

So much is possible! Get on it, Australia!

Venture philanthropy and training programs are there in droves with links to the international market. It’s why we’re smiling.

Let’s keep it moving,

Bruce