While the Australian startup investment pool has almost doubled in size over the last couple of years, investors might be taking a few steps back in 2017, according to Trevor Townsend, managing director at Startupbootcamp Melbourne.
His theory is that investors are going to become more risk-averse due to the current political climate, and this will mean that startups will have to fund their own growth through customer revenue.
"On the investment front, as the world will move into strange and uncharted waters with Brexit, Trump, and the disenfranchised will look to exercise more and more political power, investors will move to cautionary themes and reduce risk in their portfolios and investment strategies," Townsend predicted.
"This will mean less money available for high-risk startup and scale-up investing and therefore startups will need to focus more and more on driving customer revenue for growth, rather than seeking outside investors."
"This trend will bode well for Australian startups, who have long had to deal with a paucity of investment dollars and have had to turn a buck to survive. Our ability to get a real business moving, rather than develop an investment thesis, will be the underlying strength which will make ... Australia's startup community come of age."
Townsend also believes the excitement towards IoT, VR, and AR technologies will fizzle out this year.
"Technologies such as Internet of Things, virtual reality, and augmented reality will start to enter the trough of disillusionment in 2017," Townsend said. "They have been much hyped, and although our industry will be working long and hard to make the technology vision come true, the overshoot of expectations and the reality of what is actually possible and the difficulties of delivering the vision will dampen the enthusiasm for these topics."
He added that issues of privacy and security will hover around IoT, and some large-scale innovations will emerge as early-stage solutions reveal their vulnerabilities.
"Startups and corporates will be working hard to devise solutions that solve the real implementation problems," Townsend said.
He also believes VR and AR will be solutions looking for problems.
"Like the ill-fated 3D TV; people will be slow to adopt such technology [and] that means they need to drastically alter the way they consume entertainment. Immersive experiences will arrive, but probably still not in the way we have envisioned," Townsend said.
The results of the third annual Startup Muster survey, released on Thursday, highlights how far Australia's startup ecosystem has progressed since the research firm was founded in 2013. Whether that progress will be impacted by global political instability is yet to be determined.
Nearly 1,500 startup founders participated in the nationwide study, as well as 430-plus aspiring founders and 800-plus ecosystem supporters, including incubators, accelerators, investors, co-working spaces, education providers, professional service providers, creative service providers, and government officials.
The study found that startups are present in all eight states of Australia; however, a majority of them, 40.9 percent, are located in New South Wales, with Queensland and Victoria accommodating 19.3 percent and 18.8 percent of the startup population. Western Australia, South Australia, and Australian Capital Territory aren't far apart, with 7.7 percent, 6.3 percent, and 6.2 percent of startups located there respectively.
Fintech is now the most prevalent industry for Australian startups, with 15.9 percent of the startups and 42.1 percent of the supporters operating in the fintech space.
While retail was the second most common industry, with 14.8 percent of respondents having founded retail startups, the percentage of supporters operating in the retail sector, 22.6 percent, was not as large as those in the fintech, healthtech (including medtech and biotech), Internet of Things (IoT), education, and artificial intelligence sectors. The Startup Muster survey found that 47 percent, 44.5 percent, 31.1 percent, and 30.5 percent of supporters operate in the latter four sectors.
The top areas investors looking to "support" are also fintech (56.2 percent), healthtech (52.1 percent), IoT (49.3 percent), and artificial intelligence (41.1 percent). Not far behind is software development and virtual/augmented reality (VR/AR), with 34.2 percent and 32.9 percent of investors eyeing those industries respectively.
While content/media was the third most popular industry for startups, with 14.4 percent operating in that industry, it was at the bottom of the list for investors, along with charity, fashion, and travel, with only 15.1 percent of investors indicating their interest to support startups in these areas.
Content/media, fashion, and travel startups sectors also seem to be difficult markets to crack, with many Australian startups in those sectors shutting down or becoming inactive such as Churn TV, Qrates, 99dresses, 99closets, Bindle, Thubit, and Triplify.
The vast majority of investors, 85.3 percent, were also found to be interested in startups with a B2B offering, compared with 42.7 percent that are interested in B2C. Other top areas of interest for investors includes SaaS, which came in at 57.3 percent, followed by big data systems and analytics at 44 percent, and marketplaces at 41.3 percent.
The average amount of funding raised per startup in the 2015-16 financial year was AU$448,300, up from AU$241,000 in the previous financial year. However, 72 percent of Australian startups indicated that they needed urgent funding to continue to operate.
Of the startups that raised equity investment in the 2015-16 financial year, 32.6 percent did so in Australia, up from 60 percent in the previous financial year, while 4.3 percent did so overseas, down from 7.3 percent in the previous financial year.
The study also found that one in three startups applied for government grants and one in five successfully received grants. However, 27.8 percent considered the application process time-consuming, and only 3.9 percent indicated that they were able to find information about the grants available.
According to Startup Muster, of those who had founded startups before, 50.2 percent indicated that their previous startup is still operating and 21.5 percent remain actively involved in it.
"There's a higher percentage of founders and new founders who have never founded a startup before, so that indicates growth. When you look at the reasons for founding a startup, the second highest reason was I'd already done it before, so of those that have founded a startup before, you're seeing that they're coming back to do it again," said co-founder and CEO of Startup Muster Monica Wulff. "That kind of continual learning is essential for building experience."
Meanwhile, of those who shut down or abandoned their former startups, 18.5 percent said they had a better idea to work on, 11.3 said they struggled to raise the funding needed, 10.5 percent lost enthusiasm for the idea, 9.8 percent struggled to gain a sufficient user base, 7.3 percent needed a better-paying occupation, 6.5 percent struggled to monetise, and 4.4 percent struggled to recruit talent.
Startups generated on average AU$345,200 in revenue in the 2015-16 financial year, though the majority, 45.5 percent, delivered no revenue. However, almost half, 49.8 percent, founded their startups after 2015.
A small percentage of startups, 5.5 percent, delivered annual revenues between AU$1 million and AU$10 million in the same financial year, while 0.4 percent delivered more than AU$10 million.
Of the startups with revenue, the largest source for 36.4 percent of them was subscriptions. Website purchases and transaction fees were second and third, with 14.3 percent and 11.2 percent of startups categorising them as their largest source of revenue. In-app purchases was last, at 2.2 percent, and the vast majority of startups, 92 percent, were found to have generated export revenue.
The survey debunked the idea that startups are predominantly founded by Mark Zuckerberg types. In fact, the highest percentage of startup founders who participated in the survey, 20.5 percent, fell into the 35-40 age bracket. This was followed by founders in the 30-35 age bracket, at 18.4 percent, and founders in the 25-30 age bracket, at 16.5 percent.
Wulff, a former analyst at the Australian Bureau of Statistics who co-founded Startup Muster with Fishburners CEO Murray Hurps, said many of the respondents in the older age brackets were motivated to solve problems they had experienced throughout their professional careers.
A majority of the respondents, 33.4 percent, selected "dissatisfaction with previous job" as a key reason for founding their startup, though 24.9 of founders still had a job outside of their startup. Coming in second, at 31.9 percent, is "experience from founding a startup previously", followed by "having a supporting partner or spouse" at 27.9 percent. Added to that, 23.7 percent of founders indicated that what started out as a fun project turned out to be a viable business.
A stark gender gap remains in the Australian startup ecosystem, though female participation has increased, with 23.5 percent of the startup founders being female, according to Startup Muster. This is up from 17.4 percent in 2015 and 16.1 percent in 2014.
While there were on average four employees per startup, a significant percentage, 47.5 percent, was found to have hired zero female employees. However, 15.8 percent of startups had all-female employees and 11.8 percent had a 50:50 or 60:40 female to male employee ratio.
At the Reimagination Thought Leaders Summit 2016, former Minister for Innovation and Better Regulation and current Minister for Finance Victor Dominello attributed this gender disparity to young girls being drawn to humanitarian subjects, but argued they can make a much bigger impact on the world by engineering technology.
Dominello said women tend to study for careers in medicine, nursing, law, and teaching because they "genuinely care" and "want to make a difference".
"But if you want to really make a profound difference in the 21st century, I can't think of a greater enabler than technology," he said. "Sure, do nursing. Sure, do teaching. Sure, do medicine, Sure, do law. But also think about being an engineer because through technology, through big data, you will solve some wicked problems on a global scale that can't be done from lawyer to lawyer, from lawyer to client, from teacher to student."
According to the government, 55 percent of STEM graduates are female, but only one in four IT graduates and one in 10 engineering graduates are women. Women also occupy fewer than one in five senior researcher positions in Australian universities and research institutes, and are less than half the overall STEM workforce.
At the Reimagination Thought Leaders Summit 2016, Shadow Minister for Industrial Relations, Commerce, ICT, Small Business and Electoral Affairs, Catherine Esther Doust MLC, said the government needs to think about how STEM education is delivered to girls.
"How do we change the classroom environment so that they feel comfortable and get excited about these subjects and want to pursue maths and science as a career option? How do we demonstrate really great role models?" Doust said.
In Western Australia, Doust said there are women in the tech community who go out to schools, particularly in regional areas, and teach classes and talk to female students.
A little progress has been made to encourage girls and young women to pursue STEM subjects in school and university. For example, the federal government has handed out the first round of its AU$8 million Women in STEM initiative in a bid to encourage more female involvement in STEM-based careers.
The AU$3.9 million in funding will be spread across 24 organisations to roll out projects aimed at building interest in STEM for primary school age students, supporting post-graduates and women already pursuing STEM careers, and encouraging entrepreneurship among women.
According to the Startup Muster survey, the most common skillsets among founding teams are software development, general business operations, and project management, which represented 63.9 percent, 61.2 percent, and 52.5 percent of the founding teams. This was followed by marketing, sales, UX design, graphic design, financial management, customer service, and accounting. HR/recruitment, grant writing, legal, public relations, hardware engineering, scientific research, and big data storage/analysis skills were the least common.
When asked about what Startup Muster hopes to achieve with its annual reports, Wulff explained that it's about bringing previously-hidden insights to the surface so that stakeholders can make informed decisions.
"Our aim is to have this data consumed as much as possible by as many people as possible. That's how we can give back to all the people that took the time to fill in the survey," Wulff said.
"It's not our role to envisage or direct where this data will be used. That said, we hope that it will go towards both private and public sector initiatives ... It would be great if this data is taken into account as one of the many factors [that contributes] to large-scale decisions."
A lot has changed since the 2015 Startup Muster report was released and the "jobs and growth"-touting Malcolm Turnbull became prime minister.
In 2016, two new tax incentives for early-stage investors were introduced, including a 20 percent non-refundable tax offset for qualifying investments -- capped at AU$200,000 per year for sophisticated investors and AU$50,000 per year for retail investors.
The Australian government also invested AU$23 million into a new Incubator Support initiative aimed at increasing innovation capacity in Australia's urban, regional, and rural areas, as well as in university precincts.
In addition, the government announced the first five locations -- San Francisco, Shanghai, Singapore, Tel Aviv, and Berlin -- for its AU$11 million startup landing pad initiative aimed at improving the nation's access to international business networks, entrepreneurial talent, investors, and infrastructure.
Most state governments in Australia have also launched state-wide initiatives to support startups. For example, the NSW government unveiled its innovation strategy, which included the launch of the NSW Innovation Concierge aimed at simplifying the process of submitting and tracking proposals to government; a Ministerial Innovation Committee to overlook the implementation of innovation projects within and across state government agencies; and "regulatory sandboxes" to provide government agencies the ability to test out new technologies within sandboxes that are isolated from their regulatory obligations.
It was also revealed that the NSW government would be pushing forth open data initiatives, with substantial support from the startup community. At the moment, 6.9 percent of startups are using government data sources, with the Australian Bureau of Statistics, Australian Business Register, Australian Securities and Investments Commission, and Australian Taxation Office being the most commonly used sources.
Mentorship, co-working, investment, connection to startups, accounting assistance, and legal assistance were considered the top most beneficial services provided to startups since their founding, though investment, media exposure, grants and scholarships, and corporate customers were identified as the founders' top needs in the next six months.
In the next 12 months, most Australian startups are looking to grow their sales and raise capital in Australia -- 64.9 percent and 59.1 percent, respectively -- while 43.1 percent and 24.7 percent will expand sales and raise capital overseas.