Beyond Bitcoin: Banking on the next innovation kick starter

The global financial crisis managed to spark a start-up renaissance in the UK, but can the so-called end of the resources boom prove to be a similar catalyst for Australia's start-up sector?

The media’s fascination with Bitcoin has seemingly skimmed over a raft of start-ups that are changing the face of the financial services sector. And Bitcoin is just part of the story, there are many worthy services innovating in industries as diverse as personal banking, courier services and systems that support budding entrepreneurs.  

Interestingly, the innovation isn’t coming out of Silicon Valley but rather the traditional centre of finance and banking: London – which is fast becoming home to financial services start-ups, all vying for office space and seed funding.  

This start-up renaissance in London may still be in a nascent state but it does provide some pointers to how innovation can effectively provide the building blocks to a new economic future and needs to be on the top of our national agenda.

The Silicon Valley of Europe

At the Old St. roundabout in East-London there are an estimated 1300 digital or media start-ups and there is a strong representation of innovative financial services in the growing swarm of lean and hungry businesses.

These include: Market Invoice, which provides small operations with up-front fees when they are struggling with cash flow due to long lead times of invoice payments; Lend Up, which offers short-term loans to individuals and businesses; and Zopa, a peer-to-peer lender that facilitates loans between individuals with the minimum of interference.

Despite a number of high profile success stories this tech hub is yet to reach the feverish levels of cash splashing that exemplifies Silicon Valley. However, that may be about to change.

While London is said to be the most vibrant hub in Europe, the city still lags in access to funding. Reports suggest that in London “81 per cent less capital than Silicon Valley is raised in the second stage for early stage start-ups before product market fit”.

It isn’t clear whether investors in London are more risk averse or whether UK entrepreneurs simply don’t have the drive of those in California; but the UK government is taking notice.

British Prime Minister David Cameron has thrown his support behind digital innovation offering start-ups an exemption from capital gains tax, an income tax credit up to £50,000 pounds for the first £100,000 invested in a start-up, they have made a £25 million investment in broadband access and they now offer an ‘entrepreneur’s visa’ which makes it easier for innovators to relocate to London.

These investments come amid poor growth figures in the UK and while many government projects are being cut the government has committed to the creation of “Europe’s largest indoor civic space, dedicated to start-ups and entrepreneurs in East London.”

How fertile is Australia for start-ups?

London isn’t the only city hoping to emulate Silicon Valley’s formula for success. A vibrant ecosystem and the promise of government support don’t guarantee success but they’re a start and there’s no reason why Sydney or Melbourne can’t follow in London’s footsteps.

There are a number of Australian success stories – Atlassian99 DesignsOllo Mobile – that have turned heads both at home and abroad, however, we are still a bit player in the global scheme of things. Which begs the question just how fertile is Australia for start-ups?

One major catalyst for the exuberance in London was the global financial crisis which rocked the foundations of London’s finance industry. The crisis forced a realignment of priorities and as businesses emerged from the rubble, innovation was suddenly on everyone’s to-do list.

Australia may have managed to navigate through the GFC relatively unscathed but the so-called end of the resources boom could prove to be the catalyst we need. However, the feverish talk around transition needs to be more than just about political posturing. CEO Matt Barrie, says that Australia is lagging behind in encouraging start-up funding, with funds raised by Australian venture-capital firms falling from $160 million in 2010 to $40 million in 2012.  While superannuation firms should be a major source of funding, Dale McCarthy, the founder of Sydney-based start-up incubator Foundrysuggests that there is a lack of exit opportunities for investors to ‘cash-out’.

Can the government come to the party?

Governments may not be renowned for their skills in technological innovation, but they can still provide a fertile base from which innovation can grow. The stuttering role out of the NBN is a good start as it will certainly add pace to the growth of local tech start-ups, but there are a plethora of other policies that will help start-ups over the difficult infant stages. A review of taxation policies will be key.

The incentive system of giving start-up employees a financial interest in the business has proved successful in the big names in Silicon Valley. However, current Australian regulations stifle this opportunity. In the US tax is paid when options payout, but Australian companies must pay tax when the option is issued. This quirk in the system makes the opportunity prohibitively expensive for cash-strapped start-ups. This is contradictory to the aim of the exercise which is to reward staff without needing cash on hand.

On a more positive note there are programs such as the Research and Development tax incentives that are administered by AusIndustry. It offers a 45-cent credit for every dollar spent on R&D (but only if you’re making a loss); this could cover rent, software development and web hosting. There is also the Innovation Investment Fund which has the broad aim of expanding the stock of venture capital activity in Australia. Meanwhile, small to medium size operations can now access Export Market Development Grants (EMDG) which reimburses firms with up to 50 per cent of their external promotional spending.

These initiatives may have been flying under the radar while the resources boom was in full effect but as those halcyon days fade the innovation conversation needs to start in earnest.

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