From R&D to P&L

Last week, the leader of the Federal Opposition announced a $15bn reconstruction fund aimed at job creation if Labor wins government, saying Australia must be a country “that makes things”. With a specific focus on cars, trains and ships, this policy pledge sounded like a clarion call to the metal-bashing industries of old (and recalls either an 80s movie or a 60s pop song…). This followed the launch by the Victorian government of the $2bn “Breakthrough Fund”, aimed at enhancing the State’s R&D capabilities.

While this type of government largesse and targeted economic stimulus sounds welcome, I can’t help feeling the money could be better spent on covering some basic building blocks in the search for innovation and economic development – upgrading the primary, secondary and tertiary education for the 21st century (e.g, an integrated STEAM curriculum); funding budding entrepreneurs (e.g., job maker for the newly self-employed, especially those under 25); enhancing the SME loan market (e.g., making it easier to access working capital without first having to own real estate); and overhauling the procurement and “panel” regimes in the public and private sectors (e.g., giving more equitable access to start-ups and scale-ups).

The “reconstruction fund” talks about making equity stakes, and co-investing with the private sector and superannuation funds. This sounds great, but is it the role of government to pick winners? Surely it should be in the business of enabling innovation and facilitating the growth of SMEs (which is where much new employment is created, rather than in legacy industries and/or declining sectors). Also, because of the way their mandates are written (as well as their ROC models and fiduciary duties), traditionally, superannuation funds and other institutional investors find it very difficult to write cheques for less than, say, $200m. Such a figure is generally far beyond what most start-ups or scale-ups are seeking – so these institutional funds are often placed with external managers who can slice them up into smaller allocations, which adds to the overall investment costs.

The role model for the $15bn fund is the Clean Energy Finance Corporation, which returned a cumulative 4.75% as at June 30, 2020. Certainly a higher return than the cash rate, but hardly competitive with other asset classes or investment returns, if that is a key measure of success. The CEFC performance is currently running below its own benchmark, and while the efforts of the CEFC have no doubt led to more jobs in the renewables and sustainability sectors, hard data is not easy to come by. In its favour, the CEFC has made a large number of small scale investments, which may well provide a template for Labor’s manufacturing fund (although it’s not evident what form those investments have taken).

In speaking to a range of people over the past few weeks (civil servants, start-up founders, VCs, CEOs of listed companies, etc.), the following mixed messages emerged:

  1. Well-meaning government officials tell you that they are “here to help” founders, start-ups, entrepreneurs, SMEs etc. Problem is, these bureaucrats can’t effect necessary systemic change in the way innovation is funded – they can only operate at a transactional level. Also, many entrepreneurs would politely suggest that the government could do more by getting out of the way…
  2. One VC took issue with my suggestion that Australia needs a better manufacturing supply chain that produces more local components that are interoperable/interchangeable, and which also encourages more user-serviceable (and therefore more sustainable) devices and appliances – he was advocating in favour of sealed units and thus a continued dependance on the manufacturer/distributor service model; whereas I think self-sufficiency in manufacturing also means more consumer choice in post-sales support.
  3. An innovative Australian fintech chose to list overseas because the local capital markets did not “get” its business model, while another locally-listed fintech faced similar obstacles with its own listing.
  4. A start-up founder looking for a modest amount of money for an R&D project (in the sustainability sector) had already secured an equal amount of funding “in kind” from a government agency – but was finding it somewhat difficult to match it with the equivalent private capital.
  5. Neighbours building a passive house have had to import energy-efficient triple-glazed window units – because they are not easily available locally, and the only supplier they could find would have cost at least 50% more.

Finally, the new Labor policy (especially if it aims to support the EV sector) will need to demonstrate it has learned the lessons of Australia’s subsidised car industry, and that the proposed fund is part and parcel of an integrated approach to public transport infrastructure, encompassing high-speed inter-city trains, smart cities with self-drive vehicles, better orbital routes connecting suburbs, and regional hubs that aren’t reliant on cars.

Next week: Synchronicity

Victorian Tech Startup Week – Pitch Night

As part of the recent Victorian Tech Startup Week, Silicon Beach Melbourne and YBF Melbourne hosted the city’s first in-person pitch night for over a year (thanks to the 3 lock-downs we have had in that time). Compered by Karen Finch of Legally Yours, and supported by OVHcloud, the esteemed judges for the evening were Farley Blackman (YBF), Yian Ling Tan (OVHcloud) and David Hauser (Silicon Beach).

The usual Silicon Beach rules applied – Round One featured 90-second pitches from each founder (and no slide decks), from which the judges shortlisted 3 startups for Round Two. The Round One presentations in order of appearance were (as usual, website links are embedded in the names):

TwistedXeros.com

Using “emotional phase shifting to accelerate personal growth and transformation through Insight, Manifestation and Neuroscience”, the impetus for this startup came about from the founder’s own experience. Designed to help overcome certain mental health issues associated with anxiety, the founder claims his technique can help practitioners overcome events such as panic attacks within 6 seconds (as opposed to 600 seconds with traditional CBT methods). Had been accepted into the Founders’ Institute, then COVID came along.

The Leaf Protein Co.

There is a growing demand for plant-based foods, both as a source of sustainable protein, and in response to the increased prevalence of food-based allergies (e.g., gluten and soy). Add concerns about GMOs, unsustainable agriculture and climate change, the founder is looking to develop a scalable process for extracting specific types of leaf protein, including arid-climate plants and Australian natives such as saltbush to counter soil salination. Currently seeking funding to pay for a CSIRO pilot to scale the protein extraction.

E-Toy Library

Essentially a toy-lending app, that provides an end-to-end process (source, distribute, cleanse, circulate) via a subscription model. In trials, already secured 50 customers and over 100 subscribers. Estimates there is a $2.4bn toy market in Australia – but it wasn’t clear how much of this market the founders aim to capture.

Kido Paint

This app aims to bring childrens’ drawings to life, using AI/ML to scan a photo of the drawing, and convert it into an animated 3-D digital file that can be rendered within the app using augmented reality.

Thorium Data

Using the oft-heard tag line “data is the new oil”, this B2B solution is designed to help companies organise, manage and extract more value from their data. It does this by resolving issues of data inconsistency, privacy, risk and governance. It also derives and assigns numerical factors to to individual datasets to assess the “value” of this data, and uses indices to benchmark that value.

QuestionID

This product feels like a cross between a wiki for academic research papers, and an open text search tool to find answers within the wiki database. I know from experience that repositories of published research reports (especially refereed and peer reviewed papers) are highly structured and tagged, with the emphasis being on classification, authorship and citation. Often, you sort of need to know in advance the rough answer to the question you want to pose. Significant resources are already allocated to maintaining and commercialising these existing databases, so I’m not sure how QuestionID will deal with IP and other rights associated with these reference resources.

HiveKeepers

HiveKeepers is designed to support beekeepers by helping them to establish and maintain healthier hives, and enhance their own livelihoods at a time when the industry is facing numerous challenges. At its core is a smart phone app that monitors IoT sensors (temperature, weather, weight, motion, sound, etc.) attached to the hive itself. Over time, the data will enable predictive analytics. With the launch of its MVP, HiveKeepers has already attarcted 700 customers globally.

Round Two

The three finalists selected from Round One were KidoPaint, LeafProtein and HiveKeepers. Each founder made a longer pitch, and then answered questions from the judges:

Kido Paint – The Q&A discussion centred on the commercial model (B2B/C, gift cards, in-app vouchers), the file conversion process (turnaround time can be 24- 48 hours), options for scaling, and getting the right price pint for user prices. So it’s not an instant result (which may disappoint some impatient younger users), and the 3-D rendering and animation is somewhat limited to the imagination of the AI/ML algorithms used in the conversion process.

LeafProtein – There was a further discussion on the approach to producing sustainable and allergen free plant proteins. For example, the attraction of pereskia is two-fold – a higher protein ratio, and an arid climate plant. Also, the aim is to counter mono-culture and GMO crops. A D2C brand has been launched (using small-scale production processes), while the CSIRO project is to designed to scale protein extraction, as well as develop an emulsifier for use in the food industry.

HiveKeepers – The founder talked more about the need to address climatic and environmental impact on hives. Having benefited from support from the La Trobe University and SVG Thrive AgriFood accelerator programs, this startup is seeking funding for product development – current price point is $105 USD per smart hive per annum. While the industry is seeing a 2% growth in new hives, it is also suffering significant hive losses due to parasites and diseases.

The overall winner on the night was LeafProtein.

Next week: From R&D to P&L

Victorian Tech Startup Week

Last week, I mentioned that Australia’s headline employment numbers appeared to be making a strong post-lockdown recovery – however, the latest ABS data shows that while the unemployment rate has declined, the overall participation rate has remained the same, and the underemployment rate has actually increased. “Underemployed” is defined by the ABS as the number of “employed people who would prefer, and are available for, more hours of work than they currently have”. For many people, the traditional solution to bridging the gap between the amount of work they have, and the amount they want, is to juggle multiple part-time jobs, while others may choose to seek freelance work. Another approach is to create your own role, by becoming a startup founder, or joining a startup.

Of course, as I have written elsewhere, startups might not be for everyone. But until you try (or at least explore the idea), how will you know? This was one theme to have emerged from the recent Victorian Tech Startup Week, hosted by YBF Melbourne, with support from OVHcloud, AirTree Ventures, Silicon Beach Melbourne, the Victorian Government and YBF’s network of mentors, programme partners and community of members.

In part an effort to rekindle the local community of startups, in part a celebration of YBF’s Startup Immersion Programme, the week also showcased the benefits of co-working, and included sessions on startup funding, R&D grants, engaging with corporate clients, and a pitch night (more on that next week).

Of course, as a YBF member, and having worked with startups and founders for more than 10 years, I’m naturally biased. I have been working from their Melbourne co-working facility for the past two years (lock-down permitting), and I have been attending events and workshops there for many years (including participating in my very first hackathon….). I have also worked with some of their earliest startup founders.

Even though I am used to working from home and working remotely, the value of being on-site with other startup teams and founders within a supportive environment cannot be overestimated. And it’s not just about access to great facilities, and the many benefits that YBF offers. For one thing, as a member I get invited to meetings and events not open to the wider public. For another, I can host clients and other visitors without having to maintain my own office. But most of all, it’s the opportunity for chance encounters with potential clients, partners and suppliers, often triggered by casual conversations by the coffee machine or during other networking sessions.

A few years ago, it was reported that there were over 300 co-working spaces in Australia, and more then 80 of them in the Melbourne area alone. I’m not sure what those numbers are now, post-pandemic, especially as offices in Melbourne are still not back to full operating capacity. Nevertheless, co-working spaces are in demand again as (ex-)employees consider their future career options in light of the COVID recession, and as startups and their founders are expected to support the anticipated economic growth in areas like new technology, sustainability, smart manufacturing, healthcare and financial services. Of course, before making a decision on where to locate your new business or where to start co-working, it pays to do your due diligence.

Next week: Victorian Tech Startup Week – Pitch Night

Rebooting the local economy

Continuing the theme from my previous, post-lockdown blog, there are definitely some growing challenges ahead as the local economy tries to gather momentum. Yes, the jobs recovery looks encouraging for the hoped-for recovery (at least, based on headline numbers); and property prices (that staple of banks and economists alike) are getting very frothy again. But the end of JobKeeper later this month will hurt both employees and employers – it will be especially hard to stomach when you consider that a few household brands have chosen to keep their government-funded windfalls, despite making significant profits even during (or as a result of) the pandemic, while these same public companies have also been paying out shareholder dividends.

It will be very interesting to monitor ABS data on the number of business entries and exits (CABEE), which is now also being reported quarterly, instead of just annually. The latest annual data released in February (for the period ending June 30, 2020) shows that there were more new businesses registered than the number of businesses that were de-registered – but the net gain was a lot lower than in recent years, as can be seen from this graph:

Even after a few months of the pandemic, the number of new entries looks to have declined significantly, with a corresponding rate of increase in exits – and the net increase was already on a steep downward trajectory from 2017-18.

According to the ABS data, “In 2019-20 three industries accounted for more than half of the net annual increase in businesses, these were:

  • Transport, postal and warehousing
  • Professional, scientific and technical services
  • Health care and social assistance”

None of this data should be too surprising; further, we should expect to see a significant number of exits from the retail, hospitality and tourism sectors. Government support in the form of domestic travel vouchers and discounted air tickets will only go so far to reverse the fortunes of airline, hotel and tour operators. (The folks in Queensland must be happy with the twin benefit of being a desirable destination for both domestic holidays and Hollywood film production.)

While on-line shopping has helped to keep retail afloat, bricks and mortar retail has been dealt a heavy blow, from which it will take a long time to recover – many people have no doubt got used to e-commerce, and can’t be enticed back to the shops.

From what I see in Melbourne, the CBD is still running at 40-60% capacity (depending on location, sector, and day of the week). Mondays are definitely quiet, it gets busier on Wednesdays and Thursdays, and then starts to taper off again on Fridays, with people opting to “work from home” as the weekend draws near. Last week, one business group wants companies to close at 4.00pm on Fridays, to encourage workers to hang out in the city after work – but Fridays has always been known as POETS day, so I hardly think anyone still here at the end of the week needs any encouragement to down tools any earlier…

There are still so many construction sites within the CBD, both new build and renovations. But who is going to be occupying this new and refurbished real estate – especially as offices are still limited to 75% capacity, and employees seem reluctant to come back to the office full time? Many shops (old and new) remain boarded up. Some cafes have not even bothered to re-open at all, let alone just on the busy days. Doubtless some current construction projects have been brought forward to take advantage of JobKeeper payments, quieter streets and low interest rates – but it means that in some areas, whole blocks lie empty and virtually devoid of any business, and it feels that many shops don’t see a customer all day.

Unfortunately, with politicians distracted by non-economic matters (plus the small tasks of managing hotel quarantine and rolling out a vaccination programme), we are only seeing short-term responses and band-aid solutions, rather than strategic and visionary policy-making. Neither our governments nor the opposition parties (of all persuasions) seem willing or capable of serious (and non-partisan) debate on things like Universal Basic Income, structural reform of the economy, and instilling innovation across all areas of industry. Instead, they prefer to tinker at the edges (tax, superannuation, industrial relations), engage in Parliamentary point-scoring, and maintain the status quo within their respective supporter base. Something has to change, and soon.

Next week: Victorian Tech Startup Week