While there are good signs of life for the Australian startup scene, there’s also cause for concern. The good news? Sydney is now ranked 12th in the world when it comes to startups, outpacing cities like Berlin and Waterloo. Melbourne is not far behind, at 18th. But as FLT’s recent report, Silicon Beach: a study of the Australian ecosystem, has highlighted, Australian technology companies are struggling to scale — fewer than 5% are managing to do so. Those that do scale raise 100 times less capital than their Silicon Valley equivalents.

Yet, earlier this year the Global Entrepreneurship Monitor found that Australians are inherently entrepreneurial. More than 10.5% of Australian adults are currently involved in starting a business, showing the desire to start companies is there. The only country which has a higher proportion is the U.S.

And so the bad news. While entrepreneurship is strong, Australia’s startup landscape is restricted by a lack of government and industry support.

How is it that Israel, a country of just eight million people, ranks as one of the world’s top startup hubs? The capital, Tel Aviv, took out second place in the global Startup Genome project study, closely following Silicon Valley, the benchmark for technology startups. Israel is a third of the size of Australia yet has a startup ecosystem that blows Australia’s tech industry out of the water. Tel Aviv’s dominance comes back to two key things: a strong early-stage deal pipeline, and a healthy VC market. Israel’s government has played a key role to kick start both.

R&D and the early-stage market

Israel currently has the highest research & development (R&D) intensity globally — it invests 4.3% of its GDP in R&D. In comparison, Australia invests just 2.3% of its GDP in R&D, slightly more than the global average of 2.1%.

Geographically isolated, and lacking any significant natural resources, Israel has managed to build the world’s second most effective startup ecosystem. How, you ask? The country realised in the late 80s it needed to encourage a strong science and research sector, with growing public debt, a lack of natural resources, and an influx of Jewish immigrants from the Soviet Union. Israel has consciously built a research driven, high-tech economy.

In 1991, the Israeli government established run the Technological Incubators Program. By 2009, the program had helped establish 26 private tech, biotech and life-science incubators, to provide work space, services, mentoring and financing to early-stage companies. At last count, more than 1,400 companies had been established through the incubators. The Israeli government invests $USD45 million every year into the program. For every dollar invested by the government, five dollars is attracted from the private sector. Reportedly, more than 60% of the companies which went through one of these incubators raised additional funding. More than 40% are still operating.

Sydney is now ranked 12th out of startup hubs worldwide (Image: courtesy of semuthutan)

In February, Reuters reported that VC funds in Israel, a country of 8 million people, raised close to $USD800 million in 2011, and was on track to raise a similar amount this year. In comparison, Australia, a country home to 23 million people, saw deal flow worth $AUD115 million ($USD110 million).

The wrap-up of the Australian Government’s IIF program should be cause for concern. Over the past decade or so, the scheme has co-invested more than $300 million alongside Australian investors, helping commercialise Australian R&D. Although AVCAL, the peak body for VC and private equity in Australia, released data showing VC investments in technology and communications had increased by 54% in 2012, it’s not apparent that investor confidence has yet returned. VC investment is still below what it was between 2007-2010 — even with the IIF program, VC funds have been struggling to raise money.

As OneVenture’s Anne-Marie Birkill explained to FLT, confidence from foreign investors, self-managed super funds and high net-worths is still not what it was a few years ago. And why should we care? Birkill explains: “If we break the pipeline of funding our economy is the loser. We will never realise the full potential commercial outcomes from our huge investment in R&D and we jeopardize the opportunity we have to commercialise the outcomes of that R&D effort to reinvent our economy, as one based on our intellectual and technical resources rather than ‘rocks, crops and crocs’.”

And as well-known business commentator Alan Kohler has highlighted, encouraging startups is one of the best ways to improve innovation, and sustain economic growth. He argues that a strong startup culture, supported by government, will help provide the productivity improvements Australia requires.

Mind you, things are not all rosy for the Israeli economy — as the Taub Center for Social Policy has said: “while some sectors of Israel’s economy are cutting edge, the overall human capital and physical infrastructures have not kept pace.” The country suffers from high unemployment and a relatively low GDP per capita. While Israel’s difficulty will be getting more people into work and spreading the productivity gains from its impressive R&D output, Australian politicians should heed its lessons in creating a high-tech research driven economy.

Evidently, it takes twenty years to build a startup ecosystem, and it doesn’t happen without the right policy environment. Recently, we’ve seen the green shoots begin to emerge, but we need to make sure they’re given a good dose of fertiliser, so that Australian startups get a better chance at survival.