Sydney’s Silicon Beach: A New Wave of Start-ups

Posted: 2nd April 2016

By: Terence Zhou

Alright, imagine this.

You’re listlessly wandering down Circular Quay, listening to the cars roaring across the Harbour Bridge’s asphalt breast. It’s the evening, so the water, wharf and sky all meld together into an empty darkness. Chinese tourists pass by, a kaleidoscopic flurry of bum bags, gift-shop boomerangs, and of course, selfie sticks. Sighing dispassionately, you gaze left. There is comfort in the the fin-tech conglomerates that cluster your vision, sprawled across the Quay like a nest of charcoal caterpillars…wait, come again?

The above is the (somewhat dystopian) vision that venture capitalists around the world are currently prophesying. Whilst embryonic in comparison to the giants of Silicon Valley and Tel Aviv, Sydney actually possesses a decent start-up scene, being the former home of both Google Maps and Freelancer. In fact, Virgin recently cited it as the premier breeding zone for Australian entrepreneurs: Sydney-siders currently enjoy a dynamic range of accelerators, incubators, and legal services. Yet even so, the majority of startups seem to be crushed under waves of consumer apathy, raising questions as to the long-term viability of our very own ‘Silicon Beach’. (Note that I did not choose this name – real, legitimate investors with millions of dollars coined this buzzword in what was likely a blind moment of hubris)

Seriously? Silicon Beach? Circular Quay doesn’t even have sand.

It is impossible to draw statistics in regards to the profitability of Sydney’s start-ups. This is largely because the majority of them aren’t even close to the point where we should consider profitability as a measure of success. However, we do know that merely 4.8% of Australian start-ups ultimately blossom into profitable, global businesses, dwarfed by USA’s 8% success rate. In all fairness though, the very definition of a start-up itself, of an innovative and scalable business that is focused on exploiting market gaps, does imply a certain level of volatility. And Australian entrepreneurs are inherently gamblers. As the below graph demonstrates, our start-up scene is practically a mirror of our true blue ‘give-it-a-go’ mentality: 54% of start-ups have made the (almost certainly reckless) choice of constructing new or niche products.

Figure 1: Products of Australian Start-Ups (Source: Startup Muster)

Entrepreneurs certainly seem to have been enchanted by the mythos of home-grown innovative successes like Atlassian, who began off a $10k local credit card, and have now grown into what is likely Australia’s next $1 billion IPO. Consequently, Sydney is now often cited as one of the world’s fastest growing start-up hubs, with our beach-freckled city having moved ranks from 21st to 12th in Startup Genome’s report on ‘Most Favourable Startup Locations’ between 2012 and 2015. There are numerous reasons for our success. Sydney possesses first-class business infrastructure, with a nexus of logistical and financial systems providing much-needed support for start-up businesses. Similarly, our much-envied ties with Asian countries facilitate easier market penetration, a notion that is particularly celebrative in the face of the ASEAN economies’ explosive growth. And of course, Sydney’s idyllic views don’t exactly hurt either.

Now, what’s interesting is that the majority of Sydney’s start-ups are focused upon ‘fin-tech’, a cyberpunk-esque term that simply refers to financial services software. As the final vestiges of the dotcom bubble, fin-tech is inherently disruptive – it seeks to steal market share from older, more traditional forms of finance, with the long-term goal of catapulting Australia into a better, more software-driven tomorrow. For example, Sydneysiders Mario Hasanakos and Alex Badran have designed ‘Piggy’, a digital piggybank for younger children that is easily monitored through a dedicated mobile app. Other innovative products are more complex: former Bitcoin Miner digitalCC has now metamorphosed into a provider of remittance services, targeting Australia’s large migrant demographic.

These fin-tech companies are driven by a large venture capital community, who are happy to send out torrential waves of money, only to see few products actually making splashes in the financial ocean. In fact, KPMG predicts that globally, fin-tech investment will rise from the current levels of $3 billion to $8 billion by 2018. Furthermore, these angel investors have created many business incubators and seed accelerators (notice the motif of ‘growth’ – this is the primary goal of any start-up), designed to raise their success rate. Even in the legal sphere, start-ups find themselves nearly saturated with support: Allens, one of Australia’s ‘Big Six’ law firms, has only recently launched their Accelerate Program, providing free legal documentation for smaller businesses. And finally, start-ups are promoted by the government as well: Hockey’s new and small business support was literally the centrepiece of his 2015 budget.

All of this, of course, has the added benefit of injecting finance into Australia’s economy. PwC estimates that the tech-start up scene will contribute to 4% of our total GDP by 2033. However, this figure does not take into account the positive externalities that may occur, as greater financial and technological efficiencies will ostensibly contribute to higher productivity.

Figure 2: Potential Economic Contribution of the Tech Startup Sector in Australia (Source: PwC)

But of course, Sydney is not the land of endless summer. There are many, many disadvantages to our current fin-tech milieu that discourage innovative commitment. Notably, property is very expensive these days. The majority of start-ups do not have office space, and so must borrow them from seed accelerators. Even the more successful innovators, those who have raised investment capital and delivered viable products, often share property with others in a chaotic, open-office environment. Another salient issue is that Sydney’s population of 4.3 million people is comparatively tiny, forcing start-ups to adapt to international markets if they want to stay afloat. Finally, Australia has a somewhat conservative, spoilt business culture, having weathered a decade of financial crises with barely a missed pulse on our economic heartbeat. Whilst these conditions are favourable for budding entrepreneurs, many lenders have grown inefficient and reluctant, recognising the instability of our current growth (the property bubble being one example). These days, ten start-ups could spring out of the earth and breathe their last before a simple bank overdraft is approved in Sydney.

Entrepreneurs often refer to the start-up scene as an ‘ecosystem’, a relentless, organic environment where businesses must grow fast, or die slow. Indeed, every start-up business is created with the understanding that one day, it too will be uprooted by some defiant new sapling. Therefore, we should not view Sydney’s fin-tech dreams as an unsustainable fad, but part of an ongoing, worldwide cycle of growth and death and growth once again. We must remind ourselves that some of Australia’s most innovative successes, like Atlassian, were created without any support whatsoever. Regardless of our perspective of Australia’s start-ups, they will continue to silently thrive, waiting for that first smoulder of the sun (if not today then tomorrow or even years away) to spread their seeds once more.