Kickstarting Aussie Startups - Crowdfunding

This post is the third in a series on kickstarting Aussie startups.  The first post is here.

“Crowd funding” is a new way for startups to raise funding from smaller investors who do not qualify as so-called “sophisticated investors” and would otherwise be ineligible to invest.  President Obama's “Startup Act” proposes a crowd funding model that allows businesses to raise up to $1 million a year using regulated online investment platforms that permit smaller investors to participate in capital markets offerings. The US SEC would be tasked with providing protections to investors who would be limited to investments of no more than $10,000 or 10% of annual income.

Opportunity #3:  Leverage Australia’s broad investor base

Australians are avid investors in the stock market, and have among the highest per-capita ownership of shares in the world. We also have small business trading platforms, such as ASSOB, but such platforms do not favour unsophisticated investors.  That is because companies seeking investment are still constrained by the so-called “20/12 rule", which allows only $2m to be raised over any 12 month period from a maximum of 20 retail investors (specified under Section 708 of the Australian Corporations Act).

Proposal # 3: Crowd fund Qualified Small Businesses

Relax the 20/12 rule to enable crowd funding of Australian Qualified Small Businesses (QSBs). This would enable ordinary Australians to make investments in startup companies, within reasonable limits.  For example, along the lines of the proposed US guidelines, investments could be limited $10,000 per investor or 10% of annual income.

Imagine what we could do with a whole nation investing in startups?

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Kickstarting Aussie Startups - Tap into Super Funds

This post is the second in a series on kickstarting Aussie startups.  The first post is here.

Opportunity #2: Superannuation

Australia has over a trillion dollars in superannuation funds, the 4th largest retirement funds industry in the world, and way more per capita than any other developed country

Yet almost none of that capital is invested in startup companies.

Proposal #2: Put Super into Qualified Small Businesses

Mandate that Australian super funds invest at least 0.5% of their assets into Australian qualified small businesses (QSBs), either directly, or indirectly via venture capitalists.

Details, details

Although 0.5% is a tiny percentage, it represents $5 billion, dwarfing the amount of venture capital currently available in Australia. It would obviously take a few years to ramp from $0 to $5 billion. Investing $500 million per year for 10 years seems achievable though.  Imagine funding $1 million to 500 new startups every year.? Even so, that's only one new startup per year for every 44,000 Australians.  How hard can that be?

Next time, “Crowd funding”.

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Kickstarting Aussie Startups - Qualified Small Businesses

Succeeding as an entrepreneur can be difficult at the best of times, and doing so Down Under can be doubly so. Firstly, there are the tyrannies of distance and a smallish population that we all learned in school, i.e., limited domestic market, limited access to capital, and remoteness from global markets, etc. Secondly, there are those vestigial "cultural inhibitors", such as Aussie poppy-lopping tendencies and the abuse paid out to failed entrepreneurs. Last, but not least, there are few tangible incentives for investors to back Aussie startup companies over conventional investments. 

Helping startup companies to succeed should be one of our top national priorities though. In that spirit, I’d like to offer a few suggestions that could make a real difference to kickstarting startup activity in Australia, heavily influenced by my years spent in Silicon Valley.

Opportunity #1 
In Australia there are no general tax incentives for investors to invest in small businesses .

Over the years there have been some specific incentives limited to particular industries, such as the film industry. More recently, the Clean Energy Finance Corporation (CEFC) was set up by the Australian Government to encourage investment in clean technology. Specialized programs can be useful, but they limit the pool of investors and they require governments to pick winners - neither great!  As a consequence, many investors in Australia have traditionally tended to  go with safe conventional investments, such as property or mining.

In contrast, US tax law defines a class of business, known as qualified small business (QSB), for which there are tax breaks to encourage investment. Section 1045 of the US tax code allows taxpayers (other than corporations) that have held stock in a QSB for more than 6 months to defer the gain on the sale of such stock if they reinvest the proceeds of the sale in another QSB (within 60 days of the sale). This is a very good incentive to encourage investment in startup companies (although the 60-day provision is usually way too short to identify and invest in another company.) 

The UK took a different approach recently with the introduction of their Seed Enterprise Investment Scheme (SEIS), which encourages investments into startups by offering a straight 50% tax break to those investing up to £100,000, regardless of their normal tax rate.  It is more generous than the US QSB scheme in that it enables tax relief in the tax year that the investment is made, but it has been criticized for having unwieldy rules that discourage regular retail investors though.

Proposal #1

Implement an Australian QSB model, implementing the best of the US and UK models.  For example, extending the re-investment rollover grace period to at least 1 year makes sense. Also, allowing some upfront tax breaks is desirable, although it is not clear that they need to be as generous as the UK SEIS model. The key thing is to provide general incentives to encourage investment in startups that are not limited to specific industries.

Next time, “Tapping into Super Funds”.

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