“Technology is the great wealth creator, the great driver of efficiency, the great productivity multiplier, and the great job creator. Without technology we’d still be still be living in caves and hunting animals with sticks and stones” - Matt Barrie, Freelancer.com CEO
There is no other industry that can create such immense wealth and long term benefit to the world, with such capital efficiency as the technology industry. Today, the largest public company in the world, Apple, is a technology company. Apple’s market capitalisation is bigger than the entire US retail market sector. Its revenue of over US$140 billion generates almost 3 million dollars per employee per year. And that’s just the company directly. Think of all the business, jobs, wealth creation and benefits to society that have come indirectly from using the company’s computers, mobile devices, software, services and products. And that’s just Apple. Microsoft, Google and IBM also rank in the top 10 globally, with market capitalisation in the hundreds of billions.
The top 150 companies in Silicon Valley, the powerhouse of the US technology industry, generate annually US$620 billion dollars in sales, employ 1.2 million people directly, net over US$100 billion in profit, and have a market capitalisation of US$1.8 trillion. They average over half a million dollars in sales, per employee, per year. Over 37 percent of the nation’s total investment is made in the Bay Area. Silicon Valley has generated more millionaires- and billionaires- per capita than anywhere else in the USA. Facebook alone created around one thousand millionaires when it went public.
They are creating this wealth faster and faster; it took Apple about eight years to reach US$1 billion in revenue. It took Google 5 years. Today, companies like Groupon and Zynga are doing it in 2.5 to 3 years. Why? Today there are two billion people on the Internet. That means two billion potential customers. Businesses selling through websites or mobile apps have the ability to reach those customers instantly.
Technology companies are also getting going with ridiculous capital efficiency. Today, the combined valuation of the top 21 companies that the technology incubator Y Combinator has invested in is around US$5 billion dollars. This is an incubator that seed invests no more than US$20,000 per company to get them going and over the last eight years has spent a grand total of only US$9 million or so.
Startups are also the only industry creating jobs today; from 1978 to 2008 according to a recent Harvard study, almost 100 percent of the job creation in the United States came from startups. In 2012, Silicon Valley alone added about 92,000 jobs, which is on par with the days of the first boom of 1999/2000. This is causing ripples across other categories; construction is one of the fastest growing industries in the region as buildings are rapidly being built to house this workforce. Virtually zero job creation comes from the established mature industries that governments like so much to hand out grants to. Labour productivity in Silicon Valley averages US$157,000 of value per employee - and this is across all businesses in the area, including the local diner and corner store, and over the last decade this has grown by 47 percent (compared to US$113,000 and 29 percent for the US as a whole) [US Bureau of Labor Statistics].
Of course, startups are also the great disruptors, being responsible for 70 percent of job destruction as inefficient industries are reshaped. But it’s job destruction in a good way and job destruction that is as inevitable as the invention of the fridge made door to door ice sellers obsolete. The great challenge for countries is to quickly educate and retrain this unlocked labour force into the newer, higher wage paying, more productive jobs and opportunities being created by this disruption.
By technology, I don’t mean “digital”, a stupid wishy washy categorisation that we tend to use for some ridiculous reason here in Australia, that includes the music and film distribution industries (business models are bust, so are suing their customers), advertising companies (hello, Google), service providers (non-scalable), telcos (slow growth, infrastructure heavy) or media industries (“What’s black and white and red all over? Your balance sheet.”). No wonder that the NSW Task Force for the Digital Economy, which I recently left under acrimonious circumstances, couldn’t come up with a coherent strategy. Librarians were debating with cable TV companies over whether it was better to give away free wi-fi in the City of Sydney, roll out smart traffic lights or automate the Botany container terminal. No joke.
By the technology industry I mean high growth, scalable, long term, job creating, intellectual property based, value producing businesses. I’m talking software companies, Internet companies, life sciences, hardware companies. Companies like Google, Amazon, Samsung, Apple and Facebook. I’m also talking about companies that are working on promising new areas for the future like next generation applications of machine learning and artificial intelligence, robotics, nanotechnology and biotechnology.
It is an absolute national imperative to build the technology industry up in Australia. With our population of 22 million and labour force of 12 million, there’s no other industry that can deliver long term productivity and wealth multipliers like technology. Today our economy is hailed by our Prime Minister, Julia Gillard, as a “miracle”, but the reality is it’s in the stone age. Literally. Our GDP of US$1.6 trillion is 69 percent services. Our “economic miracle” of GDP growth comes from digging rocks out of the ground (mining 19 percent), shipping the byproducts of dead fossils (natural resources 5 percent), and stuff we grow (agriculture 3 percent). This is great while commodities are going up and we still have stuff left in the ground to dig up, and people still want to buy it.
When global economic growth falters, the wealth from these industries will be destroyed as fast as it was created; it’s the nature of the commodities cycle. When you dig stuff out of the ground, costing 90 cents, and you sell it for a dollar, you make 10 cents profit. If the price of that commodity doubles, suddenly you’re making US$1.10 (11x). Profits explode. They also implode just as fast when the cycle inevitably falls. It’s all very primitive, if you think about it.
And where do you think we are in that cycle when the CEOs of the two biggest mining companies in the world, BHP and Rio Tinto, have both exited in the last few weeks?
Australia is also particularly in need for the productivity gains and export earnings that a robust technology industry would offer due to the macroeconomic pincers the country currently faces. As David Llewellyn-Smith pointed out recently, on one hand you have the federal guarantee on Australian banks offshore debts forcing government to constrain spending to maintain a surplus so the banks don’t lose their two notch ratings upgrade, and on the other increased tightness on credit as interest rates remain low and deposits remain weak which will force the banks to ramp up offshore borrowing as this continues. The only way out for the economy is growth driven by internal productivity. This is what the technology industry offers.
There is an absolutely incredible opportunity before us right now. I can’t think of one industry that isn’t rapidly turning into a software business. We’re in the grips of a technology gold rush.
And we’re missing out.
Most worrying to me, the number of students studying IT in Australia has fallen by over 60 percent in the last decade [Kaplan, NICTA]. Likewise enrolments in other hard sciences and STEM subjects such as maths, physics and chemistry.
All this in the middle of a historic boom in technology. This situation is an absolute crisis. If there is one thing, and one thing only that you do to fix this industry, it’s get more people into it. To me, the most important thing Australia absolutely has to do is build a world class technology curriculum in our K-12 system. Instead we lump in a couple of horrendous subjects about technology in with woodwork and home economics. Meanwhile, in Estonia, 100 percent of publicly educated students will learn how to code starting at age seven or eight in first grade, and continue all the way to age 16 in their final year of school.
Our technology industry is desperately trying to hire educated technologists. Desperately. At my company, Freelancer.com, we’ll hire as many good software developers as we can get. We’re lucky to get one applicant per day. On the contrary, when I put up a job for an Office Manager, I got 350 applicants in two days. Mike Cannon-Brookes, the Chief Executive of Atlassian, one of Australia’s great success stories, told me the other day that he is trying to figure out where he will hire his next 400 software developers from. He lamented that he would love to do this here in Australia but it’s impossible because we simply don’t have enough good graduates. I face the same problem- while we’re half the headcount of Atlassian globally, we’ve just signed a lease on a second office here in Sydney. I can’t find the people to fill it quickly.
At the same time as this as going on, you wouldn’t believe what our Prime Minister said. Julia Gillard proclaimed this morning that the IT industry was “rorting” the 457 visa and that she would restrict the number of workers a business can sponsor and make it generally more difficult to hire foreigners. Is she a raving lunatic?!?! Such desperate vote mongering shows no understanding of how the Australian IT industry is forced to function today. Here’s one statistic to consider: of the 12,000 IT graduates each year in Australia, 8,000 are overseas students. Yes- two thirds of the graduates in IT are foreign. Our entire industry is powered on skilled foreign IT workers. It says something when 19 percent of Atlassian’s 320 Sydney based staff are on 457 visas. This the flagship global technology company of Australia.
Great work, Julia. We would all love to be hiring local software developers, I personally think that Australian engineers and software developers are the world’s best (PS anyone want a job? Email me). But unfortunately the curriculum in high school pays lip service to technology and while kids would love to design mobile apps, build self driving cars or design the next Facebook, they come out of high school not knowing that you can actually do this as a career. While there are some small changes underway with the ACARA national curriculum changes, they’re not enough. We need to make computer science education compulsory in our school system, make it robust, pulled out of woodwork and compulsorily taught all the way to year 12.
Likewise our universities have turned into visa factories for overseas postgrads at the expense of local bachelors students. Mind you I’m not knocking this at all, half my team at Freelancer are from overseas. They’re great engineers, work really hard, are totally awesome and will contribute a lot to this country through skilled migration. But when you cut back funding to universities, what did you expect would happen? The universities had to figure out a way to pay for themselves, and this is it. They have reoriented themselves to focus on educating the best and brightest from other countries, because they simply make more money this way.
Likewise, our venture capital industry is stillborn; according to the AVCAL 2012 Yearbook, we have the lowest active number of VC managers doing deals compared to any time in the last 10 years. In the entire of 2012, outside of renewable energy, only $40 million was raised by three venture capitalists for new funds. Forty million. Total. Half of 2011. In 2011, two funds raised $80 million, which was half of 2010. Forty million for financing the entirety of Australia’s new software, hardware, Internet and biotechnology companies. Atlassian raised US$60 million in one round not so long ago. The entire venture capital industry in Australia, as a whole, didn’t even manage to raise enough in 2012 to fund that round. You may as well say there isn’t a venture capital industry in Australia any more, because in 2013 Australian startups would have more luck hitting up Eddie Obeid than going to an Australian VC.
The venture capital industry has been choked by a horrible tax landscape, both for investors and for entrepreneurs. There is plenty of money available in funds (super funds, mutual funds, overseas investments funds) looking for good investments. The need isn’t for government handouts but for an accommodating investment environment. Australian companies that look to incentivise their employees with a share in the company (not unreasonable in startup environments where the first few employees are taking large risks themselves) pay ridiculous rates of tax before they ever have made any money.
As a result, total investments by Australian venture capital has declined monotonically for the last 5 years. In 2003, $220m was invested by local VCs, and this was coming out of the tech wreck. In 2012, that stood at $122 million, or about 4% of what private equity spent in the year. This was spread thin across 133 investments. Total exits in the year fell 72 percent to US$28 million, representing 14 companies (can anyone say, liquidation?). A lousy US$6 million was generated from IPOs (traditionally the highest potential generator of venture returns). The industry is suffocating because it doesn’t have the firepower to do anything; a death spiral because it can’t raise enough money to get into the successes, and subsequently can’t show a return to justify a big raising.
The government’s response? To announce US$350 million funding for the IIF program. That sounds a lot until you read the fine print. It’s spread over 14 years, which is US$25m a year, and is actually less in nominal dollars than the US$361 million committed by the government over the last 14 years from 1998! When you consider this in inflation adjusted real terms, we’re going backwards. This is in the middle of the greatest economic transformation of our time thanks to technology and the Internet.
By comparison, the graduates of Y Combinator, a single incubator in Silicon Valley, have raised over US$1.5 billion dollars in venture financing after leaving the program, resulting in the creation of household names such as Dropbox, Airbnb and Reddit. This is a single incubator program run by ten people.
“Software is eating the world”, said Marc Andreessen not so long ago. Only it’s going to be someone else’s software and it’s going to be eating us.
Australia puts more money per capita on the Melbourne Cup horse race (US$7.27 per capita) than into Venture Capital (US$4.09). At least we are risk takers. Our venture capital industry is on par per capita with countries that herd goats as a core industry.
Thank heavens all the big US venture firms are starting to prospect here. The only problem for this country is that the companies that they invest in will likely move or flip up to a US holding company, complete with a US management team, and the Australian operation will diminish as it all too regularly does to be an offshore R&D subsidiary. This would have had a chance of at least delivering some long term high technology employment in the country, and used to be cheap, but the dollar is no longer at 60, 70 or 80 cents, it’s at US$1.02. Inevitably what happens is someone usually makes a decision sooner or later that hiring should be frozen in the Australian sub, and a development office in somewhere like Austin might be more appropriate (and easier to manage for the US CEO). Finally,the big successes will end up listing on NYSE or NASDAQ (as Atlassian surely will), not the ASX. Our big success stories will all inevitably end up becoming US companies, with US shareholders, a US management team and end up building US offices, hiring US workers and paying US tax.
Perversely, some angel investors are now telling their portfolio companies to skip incorporating in Australia altogether and to do it in Delaware. Go figure.
Well, enough is enough. It’s time to do something about the technology industry.
For the last two days, 50 of our top technology leaders, educators, venture capitalists, angel investors, incubators and entrepreneurs have been in a design forum for an industry action group.
Today we’re proud to announce Startup Australia.
Be part of it! Join us in the conversation right now on #startupaus
This blog post was originally posted by Matt Barrie in his LinkedIn Top Influencer Post
Matt Barrie is an award winning entrepreneur, technologist and lecturer. He is Chief Executive of Freelancer.com, the world’s largest outsourcing marketplace connecting over 7 million professionals from around the globe, and in the top 250 websites globally.
Freelancer.com primarily connects small businesses and individuals from the western world with freelancers in the developing world, empowering entrepreneurs on both sides of the globe. To date, over 4 million projects have been outsourced through Freelancer.com.
The International Academy of Digital Arts and Sciences awarded Freelancer.com the “Internet’s highest honour” in the 15th Annual Webby Awards as best Employment Site of the Year, as well as the Webby People’s Choice Award for the same category- from a field of 10,000 entrants from 60 countries.
Matt is serial entrepreneur, previously as founder and CEO of Sensory Networks Inc., a vendor of high performance network security processors. Matt has raised over $40M USD in financing from venture capital, strategic investors and through government grants while running or assisting technology companies.
For the last ten years has been an external lecturer at the Department of Electrical and Information Engineering at the University of Sydney, teaching Network Security, and starting in 2010, Technology Venture Creation. He is the co-author of over 20 US patent applications.
Matt is a prolific speaker globally and has spoken at or featured in the Summit Series, The Next Web, SXSW, the New York Times, Bloomberg TV, Wall Street Journal, TechCrunch, Sunrise, Switzer, BRW and the Economist.
In 2006, he was awarded the State Pearcey Award for contribution to the IT&T industry. In 2010 he was named Alumnus of the Year for the Faculty of Engineering and IT at the University of Sydney. In 2011 he was named inaugural BRW Entrepreneur of the Year, by Australia’s most prestigious business publication as well as the Ernst & Young Technology Entrepreneur of the Year.