Reading through the list of companies on the ASX100 these days is like peering into a history book. The top companies are born from industries and ideas very much belonging to the previous century. What we don’t see on the ASX100 are the smart Australian start-ups that are most likely to lead the charge into Australia’s economic future.
The ASX100 is dominated by dinosaur industries. Mining creates great value – 50 per cent of exports – but natural resources won’t be cheap forever. Financial services, property trusts and retail are big, but they don’t export and they only perform well when the broader economy is thriving.
The next wave of Australian start-ups is set to absorb the massive market share of slow-moving dinosaurs. For these agile, scalable new businesses, Australia’s relative geographic isolation is no handicap. Small, web savvy companies can sell easily to the rest of the world because of their increasingly global, personal and business networks, while services like Braintree are coming to Australia and making it far easier to take payments in foreign currencies.
We often hear complaints from the Australian start-up community that attracting local venture capital is near to impossible. But the positive effect of their struggle for scarce capital is that Australian start-ups have to work harder to access funds to test their ideas, and this in turn means we are growing more resilient start-up businesses that are less likely to fail.
This is confirmed in a study carried out by the Australian Centre for Entrepreneurship Research, which compared Australian start-ups to their US counterparts and found that Aussie start-ups were more “sophisticated and ambitious”.
The study also found that better performing start-ups were made up of highly educated teams of entrepreneurs, rather than the glorified mavericks like Branson and Zuckerberg who receive much of the media’s attention.
It’s this entrepreneurial team that is the key.
There are swathes of Australian IT graduates who are hungry to be a part of something new and potentially game changing – even though start-ups are less financially secure than the usual career path for IT graduates which sees them progress cog-like through the ranks of the big consulting firms. These ambitious graduates look to start-ups for the opportunity to become an important player in an entrepreneurial team.
In turn, these graduates also provide a competitive advantage to the local start-up market.
IT and tech graduates, who have received high quality education, are far cheaper to hire here in Australia than in other countries such as the US. Graduate salaries for developers in Silicon Valley are $160,000, compared with $60,000 here, yet the labour quality is comparable.
Considering the unique advantages of Australian start-ups – resilience, access to affordable talent and sophistication – our ambitious start-ups have the potential to be the next generation of corporate leaders. This is particularly true for those start-ups in the online sector that have the capacity to truly threaten established big business. They aim to steal market share from established players and for this reason the dinosaurs should be worried.
Still, too many Australian companies view the internet and digital media as an outpost of their marketing function, rather than an essential part of their business. According to Australian Bureau of Statistics figures released in August last year, while the proportion of businesses engaging in internet commerce activities has increased, still only 28 per cent of businesses accept online orders, even though consumers are increasing their online spend. This means that the other 72 per cent of businesses are missing out on market share and are ripe for disruption.
The Australian economy is evolving and many of the big companies are set to lose out in the new landscape. The problem for the dinosaurs is deep. Their business models are biased against innovation in the online space and they will never understand the internet because of this. We will see them surpassed by agile new players who will pop up unexpectedly.
Some of our smart start-ups are making it big on a world scale and revelling in chipping off market share from the established players.
Out of Sydney, Atlassian has captured clients across the globe – from the BBC to BMW, and directly taking business from IBM and Microsoft. 99designs started in Melbourne and has launched sites which provide crowd-sourced graphic design to markets from Italy to the Middle East. Or consider Seek, carsales.com.au and realestate.com.au taking the core market share of online classifieds from Fairfax and News Ltd.
And then there’s retail. The Book Depository is based in the UK but is a big part of the demise of bookshops in Australia. Locally, The Iconic and Shoes of Prey have stepped in where the major retailers like Myer and David Jones have switched off. Catch of the Day is challenging Coles and Woolworths and Appliances Online is taking big bites from Harvey Norman’s revenue. Traditional retailers don’t realise it yet, but they’ve already lost the battle they thought had just begun.
The same thing threatens to happen to other staid old industries and brands.
A recent report by Deloitte identified half a dozen industries, representing 32 per cent of the Australian economy, which it expects to see disrupted by digital innovation in the next three years. The authors predict the finance sector will be disrupted in almost the same measure as retail, in as little as two years from now. A further 33 per cent of the Australian economy will be significantly affected by 2018.
As the axiom goes, this is both a massive threat and a massive opportunity.
With these advantages on their side, Australian start-ups won’t merely disrupt the big corporates – sooner than you might think, they’ll replace them. It’s tough for the dinosaurs, but great for consumers.
Dave Slutzkin is General Manager of Flippa.com, the world’s biggest marketplace for buying and selling websites.