Editors Note: This article was originally written in Nov 2016 and republished by a number of publications, it is due for a refresh which we will do with our latest perspectives before Q1 2018.
A new age begins with an $800 Billion APAC tech startup opportunity over the next decade.
We wrote recently in the Australian newspapers about a potential Golden Age for tech startups approaching.
But perhaps this is better described an an Emerald Age.
Our police force is often described as the thin blue line between law/order and chaos. Similarly the tech startup and global grade creators/innovators are the thin emerald line between the new economy developed nations and the new second tier nations condemned to merely consume rather than create.
Funding no longer an issue
Australia has superannuation. Lots of it. Over $2 Trillion give or take a lazy $100 Billion.
In our region we started saving for retirement relatively early. Thanks to PM Paul Keating who made it a little complex but mandatory and growing. PK also floated the dollar and gave us permission to wear Italian suits and collect antique clocks. Two out of four ain’t bad, especially for a Labour PM whom are rarely great when it comes to the economy and savings, hope that is not too frank for you.
But our Asian neighbours were close behind with Singapore, Malaysia and Hong Kong all fast to follow with their local provident funds CPF, MPF and EPF. Others too. But all less aggressive.
This pot of funds is growing, in Australia it would not be unreasonable to expect it to hit the expert predicted remarkable heights of $4 Trillion by 2030 probably more and as much as $10 Trillion by 2040.
Australia’s superannuation system ranks third globally, no mean feat for a country with a tiny population and the tyranny of distance challenges we face daily.
By a few measures, OECD sees Australia ranked fourth globally in pension GDP significance and growth and we are climbing on funds under administration / management globally and score very well against our region who are climbing too but well behind on a per capita basis.
So it is crucial with the relative demise of the resources industry that we find a place to invest our future.
Today Cooper & Co estimate less than 1% of domestic long term savings are invested in local technology and closer to 0.1% in local tech startups aiming for global markets with scalable products. Data is hard to get but this is our best guess and it gives you an idea of scale. These may well be very optimistic estimates and at the very least are tiny relative to the wider world activity.
We are basically not investing in the biggest opportunity changing every industry on our planet. This is the biggest wave of change to hit humanity ever and it is powered by tech and especially the internet.
Read that last line once again.
Was that too blunt?
Lets dig down and see just how there is hope here. But only if we act.
The perfect storm
Remarkably, ten forces have aligned. Eight largely global forces and two local ones.
Tech is transforming the planet. Every vertical. Particularly internet, mobile, machine learning, open source, crypto, standards, cloud and commoditisation (led by China manufacturing).
At the same time our superannuation pot is growing ahead of projections while simultaneously the recommended percentage allocations for super into tech sector are doubling.
Lets break it down.
Regular 10x growth in tech startup investments is just a taste of growth to come
As little as 2-3 years ago hearing about a $20m deal or investment for a local tech startup was rare and widely celebrated. Just a year or two before that even a $2m investment was considered news worthy. This year we have had a few at or above $20m.
Earlier this year we saw the first $200m allocation of funds from superannuation allocated to venture capitalists locally to manage with local target firms being prioritised.
As the year has rolled on we are now over the $2 Billion mark in funds earmarked for local tech startups. There are now a handful of funds with super and private family funds aiming for tech startups.
Hyper Growth and Hyper Connectedness
Just think about that for a moment. In the space of a few years we have seen order of magnitude jumps every year for four years. $2m then $20m then $200m then $2b.
Some of this was inevitable because we are an educated nation with high GDP per capita. But some of it is the ecosystem finally getting their act together.
We think it is reasonable to expect this level of investment to grow and maybe even hit an annual run rate of investment of $20b per annum in Australia. Mainly super into tech startups broadly defined.
That is just crazy but it makes some bizarre sense
Lets look at asset allocations and see why it is not so crazy.
Typical portfolios don’t exist really but lets assume most balanced ones for the long term superannuation style of needs have tech at 3-8% conservative and 5-12 if you want to crank it up on the risk scale.
Of course there are also rarely used specialist allocation models that focus on tech but lets leave that aside for now.
Probably more important is that since Clayton Christensen spotted it in the late 90s, disruptive innovation has been rolling around the planet upending every industry using the internet and mobile and now lots of other interconnected trends from machine learning to artificial intelligence and the internet-of-things in our homes and at work.
So asset allocations are trending up when it comes to tech. They have to because tech is impacting every industry. Especially tech startups powered by the above trends.
By 2030 this trend will see ranges of 15-20% and possibly higher as tech side allocations, simply because it will every impact every industry – cars, water, resources, labour, education, health, finance and so much more. Of course it may be hidden as vertical allocations but it will be there as a horizontal enabler or destroyer. The total investment ratio in tech will be higher, much higher, probably double or even more once combined across verticals.
Putting it all together
At 10% of today’s super pot of $2T, we need $200B in tech from super right now! But basically we have none and very few companies to put it into anyway. The overhang remains, we need to put in $200b yesterday or miss this once-in-the-history-of-humanity wave.
At 20% of the 2030 super pot of $4T, we need $800B in tech from super in a decade or so.
So the ‘wild and crazy’ projection of $20B per annum for a decade still leaves us with a tech portfolio that is below a typical model (let alone an aggressive model). It leaves us at $200b of $4t which is 5% when it should be closer to 20% a $600B shortfall.
And regardless of what we get or are aiming for, our industry can’t handle it right now because it has been under invested in for too long. The grassroots cradles of innovation are full but neglected, like orphanages in classic literature.
What will happen next
There are a lot of issues that will arise, I call them the broken funnel problems.
Basically so much new money flowing in to an industry that is largely unable to invest it wisely (buys and sellers) at such demanding scale.
2017 will see investors lining up to double down on VCs with even the least mildly good local records.
By late 2017 or early 2018 (assuming there are no wars or dramatic international trade impacts from Brexit, Trump and other forces) it is reasonable to expect inflows to tech startups will rise dramatically.
So startups should consider a scenario where they hold off taking investments, even just for a few months (in the face of an improving investment climate for their niche) to make sure their potential investors are operating in a competitive environment. Assuming of course they can bootstrap and not lose competitive global positioning and global markets are not too unstable.
Startups who rush to take money may regret the valuation later, probably within two quarters, certainly within two years. But the balancing act is a fine one, the rest of the world is charging ahead developing competing products in every industry.
More importantly, investors should consider rushing in to back the quality tech startups in good industries with ‘inevitable’ products or business models and quality teams.
Investors who delay will end up paying more and risk lower quality.
What about the funnel?
The rush of capital will have mixed impact as it ‘breaks’ the funnel.
The ecosystem has limited talent and limited quality tech startups. ‘Pulling’ tech startups down the maturity and funding funnel faster will break them in many cases. More importantly it will probably ‘break’ the industry pipeline. The demands and time available will put new pressures on the people and their process, especially if they are pre-market fit and still experimenting to find their way, some of this stuff is hard to rush.
Poor outcomes will probably result.
Funds will flow overseas instead but the upside of this is our local VCs will get better at global scouting.
Funds that remain and invest into local startups that can ‘handle it’ will do well but this will only be possible for a limited (probably less than 10% but that is a wild guess). There is simply not enough supply because our ecosystem has been under invested in for far too long. Fortunately it is not too late and the Federal and State Governments can still do more in time if they work on it ASAP.
New Wave of Aussie Global Back Packers
Funds into local startups that can’t ‘handle it’ may suffer lower returns but may also be able to encourage their investees to go global sooner and more aggressively and create a new wave of Aussie back packers. These travellers will still be in t-shirts except this time they will be flying business class and packing world class backing in the form of funds, tech, insights and connections.
We will write about the broken funnel and our fragmenting and re-forming ecosystem in coming articles.
Pete Cooper is Director at Cooper & Co a specialist Business Technology Strategy & Delivery consultancy for the mid market. Pete is also Founder of The Start Society the national independent grassroots industry body for tech startups helping over 350 founders.