Digital Richmond

How significant is one suburb’s contribution to the startup ecosystem in Melbourne, if not Victoria or even Australia? Well, if the recent panel on Digital Richmond (plus the Victorian Minister for Small Business, Innovation & Trade) are to be believed, VIC 3121 is the epicentre of all things startup.

According to the event description, Richmond (and the adjoining area of Cremorne) is “the stomping ground of choice for Melbourne’s established tech companies and aspiring start-ups alike”.

Hosted in the offices of 99Designs (celebrating bringing their HQ back to Richmond), a panel representing some of the biggest names among Australia’s tech companies (and all local heroes) explored what makes “Digital Richmond” tick – but also identified some of the challenges of growing and sustaining scale-up ventures beyond the confines of a few co-working spaces in converted warehouses and textile factories….

Facilitated by Rachel Neumann former MD of Eventbrite Australia (whose Australian HQ is in Melbourne), and briefly head of 500 Melbourne, the panel comprised some key Richmond/Cremorne tenants: Patrick Llewellyn, CEO at 99designs; Jodie Auster, General Manager for UberEATS in Melbourne; Cameron McIntyre, CEO of Carsales; Nigel Dalton, Chief Inventor at REA Group; and Eloise Watson, Investment Manager at VC fund Rampersand.

To set the scene, mention was made of other established Australian tech-based companies also HQ’d in Melbourne (MYOB and SEEK, the latter of which is also relocating its offices to Richmond), recent local successes such as Rome2Rio and CultureAmp (both born in Richmond), and the steady stream of global tech brands that have come to call 3121 their regional/national home, such as Stripe, Slack, Square and Etsy.

It was evident that each of the panel have previous business connections with one or more of their fellow panelists – so maybe there is simply value in being in close proximity to each other. Success begets success, especially when people are more willing to share connections and introduce new contacts into their networks. (Although, what might this say about diversity? And does it reinforce the notion that “it’s not what you know, it’s who you know”?)

Despite the number of co-working spaces and tech companies based locally, there are very few substantial, modern office buildings in the area, and only one business park of note. Local startups that need more space will likely have to relocate elsewhere.

Property aside, the panel considered other local infrastructure is generally conducive to success – access to public transport (although Richmond and East Richmond stations are both in serious need of an upgrade), a solid talent base, great coffee shops and proximity to the CBD.

On the downside, there was criticism at the lack of NBN access in such a concentrated pocket of tech companies and startups (with the associated numbers of contractors, freelancers and other members of the gig economy who live in the area and work from home). Car parking was also an issue, although with Richmond being a major public transport hub, I was surprised that this came up. A lack of child care facilities was also mentioned.

Being an inner city suburb, with strict planning laws and designated “heritage overlay” regulations, there are limits to the amount of development that can take place, especially as Richmond and Cremorne are also established residential areas, with medium to high population density. Getting the balance right between economic growth, urban renewal, modernisation and local community preservation is tricky – pity that the organisers had not thought to invite anyone from the local council.

The panel also bemoaned the absence of any tertiary education facilities in the area (by implication, does that mean the Kangan Institute campus in Cremorne doesn’t meet local requirements?). But maybe there are other ways to connect with academia?

The panel discussion then moved on to topics that are beyond the control of the local council or even the State government, yet each has an impact on the startup economy: corporate tax rates; employment visas; the schooling system; vocational education and training; and the need for inter-disciplinary and inter-generational hiring. (They may as well have added industrial relations laws, the productivity debate and smart cities – oh, and the National Innovation and Science Agenda.)

I was also surprised at one of the reasons given for 99Designs bringing their global HQ back to Australia – the appeal of an ASX listing. I know that Australia has one of the largest pools of pension funds in the world, and nearly every person in Australia has direct or indirect investments in Australian equities within their superannuation portfolio. But despite being ranked 15th by market capitalisation, the ASX represents less than 2% of the global market, and even after 25 years without a recession, Australia’s capital markets risk being left behind. If we are to grow the local tech sector, there needs to be much more alignment between where (and what type of) capital is needed, and where the pension funds and other institutional investors like to put their money.

Finally, I always get worried when the likes of Carsales, REA Group, MYOB and SEEK are held up as poster children for the local tech and startup sectors – great businesses, sure, but all about to be totally disrupted by the next wave of startups, and not quite the high-tech sectors that the Victorian government wants to champion (FinTech, MedTech, BioTech, NanoTech, AgriTech, Cyber Security, Smart Manufacturing, EduTech….).

Next week: The NAB SME Hackathon

 

FinTech and the Regulators

What’s the collective noun for a group of financial services regulators? Given the current focus on FinTech sand box regulation and the cultivation of innovation, but also the somewhat ambiguous (and sometimes overlapping) roles between policy implementation, industry enforcement and startup monitoring, may I suggest it should be an “arbitrarium”?

Whatever, a panel of regulators (ASIC, RBA, APRA and AUSTRAC) came together at the recent FinTech Melbourne meetup to showcase what they have been working on.

First up, ASIC talked about their Innovation Hub and Sandbox, designed to accelerate the licensing process. Most of the FinTech startups engaging with the Innovation Hub are operating in marketplace lending, digital/robo advice, payment solutions and consumer credit services. Meanwhile, ASIC is seeing a growing number of enquiries from RegTech startups, and as a result, the regulator will be running a showcase event in Melbourne in the near future.

Next, the RBA gave an update on the new payments system (NPP), which will operate under the auspices of the Payments System Platform Mandate. A key aspect of this “pay anyone, anywhere, anytime” model is ISO 20022, the data standard that covers “simple addressing” as part of the payment interchange, clearing and settlement protocols. The system is due to go live later in 2017.

The biggest news came from APRA, in their role of licensing Authorised Depository Institutions (ADIs). According to APRA statistics, 26 new ADIs have been approved in the last 10 years. Most licenses come with significant conditions attached, so APRA is looking to simplify the process and encourage more competition. Similar to ASIC’s sandbox model, new entrants will be able to apply for “restricted ADI” status, under a 2-year license, with certain limitations on the size and volume of their book of business. Essentially, there will be a less onerous startup capital requirement, and the new regime is expected to be operational in the second half of 2018.

Finally, AUSTRAC gave an update on their responsibilities under the AML/CTF Act 2006. While AUSTRAC has selective oversight of FinTech startups, it has responsibility for 14,000 reporting entities, including businesses holding gambling permits. Acknowledging there is something of regulatory lag when compared to new business models and new technology, AUSTRAC pointed to the Fintel Alliance, launched earlier this year, and which may run its own pilot sandbox. Currently undertaking a legislative review and reform exercise, a key aspect of AUSTRAC’s work is undertaking product and sector risk assessment.

During the audience Q&A (including some interesting contributions from ASIC Chairman, Greg Medcraft) there was discussion of cryptocurrencies and blockchain solutions vis-a-vis the NPP, and how to address the potential conflict of laws, for example between KYC and privacy and data protection.

Next week: YBF FinTech pitch night

 

Spaceship launches the future of superannuation

Backed by some stellar names in the tech and startup worlds, Spaceship describes itself as a superannuation fund designed to “invest where the world is going, not where it’s been”. Squarely aimed at 18-35 year-olds (and savvy people in their 40s and 50s….), it is the brainchild of Paul Bennetts (a Partner at AirTree Ventures), Andrew Sellen (ex-Marketing Manager at Australian Ethical Investments) and two tech co-founders, Dave Kuhn and Kaushik Sen. Their central thesis is that global tech stocks are the future, and that these assets should form a greater part of a fully diversified portfolio, with a 10-year plus investment horizon.

spaceship-logo-03I first connected with Paul a couple of years ago, when I was working with a legal technology startup that was an early graduate of the Melbourne Accelerator Program. He was interested in what we were doing at Ebla, but the company was at too early a stage for him to invest in. But I’ve kept an eye on what Paul has been doing since, and have followed the Spaceship story quite closely. We last caught up very briefly during a recent roadshow event in Melbourne, as part of the Spaceship beta launch.

Any new superannuation brand, especially if it is neither an industry fund nor a retail fund backed by a major financial institution, is going to struggle to attract members: the industry and public sector funds have the benefit of workplace incumbency (sometimes backed by industrial awards), and the big retail funds have extensive distribution channels via advisor platforms, dealer groups and financial planners. As for corporate superannuation funds, in my experience, many of these employer-run funds are often a re-badged or customised version of an existing retail fund, or a highly outsourced business that retains the company name for brand recognition among employees.

Spaceship is challenging the market by using technology (and very targeted marketing) to streamline the recruitment and on-boarding process. As evidence of its marketing success, Spaceship claims to have built a waiting list of 12,000 prospective members in just 30 days, mostly through social media and word-of-mouth. And as evidence of its success in attracting “smart” money, witness some of the big names who have backed the venture as investors, or joined as members themselves.*

Not surprisingly, Spaceship is also developing some interesting content marketing and social media tactics to drive member engagement. This includes thought leadership on portfolio diversification, understanding investment horizons, accessing investments in early-stage tech companies, and investing in tech brands that its members love and use.

But while much of the media coverage for Spaceship has been positive, it has already drawn detractors (almost in the same breath…). Some of the latter reckon that it won’t achieve necessary scale to be sustainable (in light of APRA moves to drive consolidation among smaller funds), it will be highly concentrated in its exposure to tech stocks (which have a tendency to be more volatile), and without face-to-face contact with members, it will be harder to drive customer engagement.

Given that, following some delays, Spaceship does not launch to the general public until the end of this month (it is still running a waitlist), it’s probably a bit churlish to say it is doomed to failure before it has even really begun. Equally, having worked in financial market research myself, I have met with a number of industry, public sector, retail and corporate superannuation funds who cite member engagement and retention as one of their biggest challenges. The main issue is this: how do you interest an 18-year old in something from which they won’t derive any benefit for at least 40 years?  And once you have got their attention, how do you sustain that interest over the lifetime of their membership and into retirement?

Now technology is having a larger part to play in disrupting the superannuation industry, and changing the way members interact with their fund. As the COO of a major industry fund said recently at a FinTech Victoria event, “consolidating your super balances is only three clicks away” (to which Spaceship, replied “it’s now only one click!”). But it’s not enough to have a smart phone app to check your balances, switch investment options or make voluntary contributions. Members are looking for other services, such as financial education, estate planning, insurance, loans and mortgages, and tailored advice. Plus, they expect much more streamlined processes and pro-active member support.

I suspect that a key factor that will likely contribute to Spaceship’s potential success is the growth of the gig economy:

First, with more people working as freelancers, contractors or becoming self-employed, they will have no ties to a fixed workplace or a single employer – so they will be drawn to a fund product that appeals to their independence and flexibility.

Second, much of the gig economy lies in the tech and startup sectors, so again, prospective members might well be looking for a fund that invests in what they are interested and involved in themselves.

Third, if we are all expected to live and work longer, and if we are going to have to rely more on our own accumulated retirement assets, a fund that fully aligns with this long-term investment philosophy is hopefully going to be better placed to help us meet our financial goals.

Of course, it’s worth remembering that the Australian superannuation industry is both large ($2.1tn in assets as at September 2016, and the 3rd largest pool of pension funds in the world), and highly regulated (for very good reason). Equally, it has been slow to adapt to a changing economy and to different market factors, and is increasingly dominated by just a few big funds. Among some large industry funds, there is almost a cosy, symbiotic relationship between their members (who work in say, construction, energy, mining) and some of the assets the funds invest in (infrastructure, buildings, utilities). (But that may prove to be Spaceship’s USP – representing members who work in the tech sector?)

Although the Australian superannuation and managed funds sectors have established strong capabilities in administration, trustee, custody and asset management services, many of these back-office operations run on legacy IT systems which are potentially ripe for disruption. Plus, while government initiatives look for ways to attract more offshore institutions to place their assets with Australian fund managers, under various financial passport arrangements Australian institutions can invest in offshore funds domiciled and managed in key investment centres such as Luxembourg and Singapore.

Finally, new entrants to the superannuation industry are less likely to be reliant on incumbent and legacy service providers, and more able to take advantage of emerging technologies such as blockchain solutions (distributed ledger platforms), and fully integrated end-to-end CX (mobile apps and tools).

* Declaration of interest and disclaimer: I was successful in signing up to Spaceship in beta/waitlist, and have allocated a small portion of my own super to the fund. I do not have any other commercial connection with Spaceship or its founders. I have not been paid to write this article, nor should it be construed or interpreted as financial advice – it has been provided for general information only. BE SURE TO SEEK YOUR OWN INDEPENDENT FINANCIAL ADVICE BEFORE MAKING ANY FINANCIAL INVESTMENT.

Next week: Gaming/VR/AR pitch night at Startup Victoria

Talking Innovation with Dr Kate Cornick, CEO of LaunchVic

As a nice segue to last week’s blog on Techstars, I was fortunate to hear Dr Kate Cornick speak, just before the latest LaunchVic grants were announced. Organised by Innovation Bay, hosted by Deloitte, and facilitated by Ian Gardiner, the fireside chat plus Q&A was a useful insight on a key part of the Victorian Government’s innovation strategy.

launchviclogo innovationbay-feat-800x500At the outset, Dr Cornick stressed that LaunchVic is not an investment vehicle, and it doesn’t fund individual startups. Rather it seeks to support initiatives that help grow the local startup eco-system. (See also my blog on the consultation process that informed LaunchVic’s formation.)

Commenting on why Victoria (and Australia) has the potential to become a world-class centre for innovation, Dr Cornick pointed to a number of factors:

  • A collaborative culture
  • Positive economic conditions (comparatively speaking)
  • Governments (mostly) open to innovation
  • Strong research base

However, a few of the obstacles in our way include:

  • The notorious tall poppy syndrome, whereby Australians are suspicious, sceptical and even scathing of local success – except when it comes to sport and entertainment!
  • An inability to scale or capitalise on academic research
  • Insufficient entrepreneurial skills and experience to “get scrappy”
  • Lack of exposure for highly successful startups (c.$20m market cap) that can help attract more investment

From a startup perspective, Australia also has the wrong type of risk capital: institutional investors are more attuned to placing large bets on speculative mining assets, typically funded through public listings, and with very different financial profiles. (Or they prefer to invest in things they can see and touch – property, utilities, infrastructure, banks.)

So there is still a huge gap in investor education on startups and their requirements for early-stage funding. Part of LaunchVic’s remit is to market the local startup community, promote the success stories, and foster the right conditions to connect capital with ideas and innovation. After all, Australia does have one of the largest pool of pension fund assets in the world, and that money has to be put to work in creating economic growth opportunities.

As I have blogged before, we still see the “expensive boomerang”: Australian asset managers investing in Silicon Valley VCs, who then invest in Australian startups. Although when I raised a question about the investment preferences of our fund managers, Ian Gardiner did point out that a few enlightened institutions have invested in Australian VC funds such as SquarePeg Capital, H2 Ventures and Reinventure.

Dr Cornick also provided a reality check on startups, and added a note of caution to would-be founders:

First, it tends to be an over-glamourised sector. For one thing, founders under-estimate the relentless grind in making their business a success. And while eating pizza and pot noodles might sound like a lifestyle choice, it’s more of an economic necessity. Thus, it’s not for everyone (and not everyone should or needs to build a startup…), so aspiring entrepreneurs would be well-advised to do their homework.

Second, the success of any startup community will be reflected by industry demand. “Build it and they will come” is not a viable strategy. And I know from talking to those within the Victorian Government that unlike their inter-state counterparts, they are not willing (or able) to fund or invest in specific startups, nor in specific ventures such as a FinTech hub. Their position is that industry needs to put its money where its mouth is, and as and when that happens, the Government will look to see what support it can provide to foster and nurture such initiatives – particularly when it comes to facilitating between parties or filling in any gaps.

Third, don’t expect too many more unicorns, and don’t bank on coming up with simple but unique ideas that will conquer the world – meaning, new businesses like Facebook, Uber and Pinterest will be few and far between. Instead, drawing on her earlier comments about research, Dr Cornick predicts that it will be “back to the 90’s”, where innovation will come from “research-based, deep-tech solutions”.

If that’s the case, then the LaunchVic agenda (for the remaining 3 years of its current 4 year lifespan) will include:

  • Getting Victoria on the map, and positioning it as a global innovation hub
  • Raising the bar by educating startups and investors
  • Bringing more diversity to the startup sector, by providing greater access, striking better gender balance, and building a stronger entrepreneurial culture
  • Introducing a more transparent and interactive consultation process
  • Continuing to support the best accelerator programs that focus on startups
  • Making more frequent and smaller funding rounds, each with a specific focus

Asked what areas of innovation Victoria will be famous for, Dr Cornick’s number one pick was Healthcare, pointing to the strong research base coming out of both the Monash and Melbourne University medical precincts. Also in the running were Agriculture, and possibly Cyber-security. (Separately, there is a list of priority industries where the Government sees growth, employment and investment opportunities.)

If one of the biggest hurdles is commercializing research, Dr Cornick suggested that Universities have to re-think current IP practices, including ownership and licensing models, developing better career options in research, and doing more to re-calibrate the effort/reward equation in building research assets compared to building companies and commercial assets.

Finally, Dr Cornick offered an interesting metaphor to describe the current state of Victoria’s innovation potential:

“We have everything we need for baking a cake, but the missing ingredient is the baking powder to make it rise.”

Next week: Gigster is coming to town….