Startup summary

Startups receive cash, then spend it on wages, contractors, rent, cloud services, lawyers, accountants, marketing, software development, equipment, promotion, failed product development, partial products and the occasional real company.

With regards to supporting this sector the relevant public policy question is whether the spending produces a recurring Australian tax base.

Jobs funded by investor cash, grants or R&D tax incentives create PAYG withholding, GST, and some local spending, but that is mostly taxation during the burn phase. It does not prove that the sector creates durable fiscal value after the cash is consumed.

The better test is recurring tax receipts from export income. Export income matters because it brings money into Australia from outside the domestic economy. A local service business mostly recycles Australian income. A technology company that sells globally can increase the national income base, but only if the resulting profit remains taxable in Australia.

Australia has produced only a handful of successful technology companies in recent years. Atlassian, Canva, WiseTech, TechnologyOne, REA, SEEK, Carsales and others show that local technology businesses can scale. Some of them even have foreign revenue or international operations.

But how much recurring Australian tax was paid on the residual profit after those companies became successful? A company can sell globally while booking revenue through foreign subsidiaries, holding IP offshore, allocating profit under transfer-pricing arrangements, relocating the parent company, selling to a foreign acquirer or otherwise causing much of the residual profit to appear outside Australia. It may be commercially rational. But it weakens the argument that the Australian startup sector reliably converts public support and private cash into recurring Australian tax receipts.

Most startup cash appears to have passed through the sector into salaries, suppliers, tax losses, failed companies and early exits. Some tax was collected along the way. A few large winners created real value for someone. But the sector as a whole has not obviously become a broad, self-sustaining machine for generating recurring Australian tax receipts from export profit, or even more effficient local productivity.

The blunt version:

The Australian startup technology sector has probably been better at converting cash into salaries than converting cash into recurring Australian tax receipts from export profit.

The harsher version:

The cash went in. The cash was spent. Some people were paid. Some tax leaked out on the way through. A few winners emerged. But 40 years of startup-sector spending has not produced a recurring Australian tax base large enough to justify the subsidies, concessions, grants and policy worship surrounding the sector.

So my advice to the govt – kill the subsidies, tax concessions, grants and innovation theatre. All of it. And spend it on theme parks, pineapple farms, or retirement homes for ex-politicians.

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Broadly speaking, there are two ways for the standard of living to improve in a country.

First, the country becomes better at converting resources into things that people value.

Second, the country gets more revenue from outside the country.

The first is related to productivity.

Not productivity as an economist’s spreadsheet pet. Real productivity means using less labour, energy, land, capital, time and material per useful output.

Better farming. Better mining. Better factories. Better software. Better logistics. Better energy conversion. Better tools. Better institutions. Better coordination. And fewer people employed to obstruct useful work.

The second is external purchasing power.

Exports. Royalties. Foreign income. Tourism. Returns on foreign assets. Globally sold software. Technical services sold offshore. Possibly even foreign debt. Anything that lets the country obtain goods, services or money from outside its own circular economy.

Everything else mostly moves money around. Tax, subsidies, grants, asset inflation, government borrowing and domestic service activity can change who gets what. But it does not structurally improve national living standards unless it helps the country convert resources into valuable things more efficiently or brings in value from outside.

This is where the startup argument should be tested. Does the Australian startup sector make Australia better at converting resources into valuable things? Does it create recurring export income?

If not, what exactly is being subsidised?

But once you pull that string, the startup sector is no longer the only problem. Most industry policy starts to look the same. It is described as export or productivity policy, but often functions as distribution policy. It moves income across firms, workers, consultants, landlords, grant writers, advisers and politicians’ preferred sectors. That may be politically useful. It may even be defensible in specific cases. But it should not be confused with making the country richer.