Reform on Employee shares and crowdfunding important priorities - notes from Silicon Valley
If you are sitting stuck in a traffic jam on route 101 between San Francisco and Palo Alto you would have reason to question Silicon Valley’s power of technical innovation. The Internet, sure that’s pretty impressive, smart phones, they’re cool, Twitter, Facebook, Google, Cisco, Apple – yes, no doubt, they have changed our lives. Invented much, if not most, of what we could call the modern world. But some old fashioned transport infrastructure would be good too.
It was interesting last week visiting the technology companies in the Bay Area to see so many of the latest trends. And not just technological ones.
Take the return to the city. For years the tech companies that were spun off from Stanford and its graduates built corporate campuses that looked like the university campuses most of their employees had only recently left. Low rise buildings, manicured gardens in between them, canteens and pool tables. Just like college, except you got paid.
But now the latest tech companies, Twitter, Square and others, are setting up back in San Francisco, in old warehouses on the south end of Market Street. The brilliant young people that make these companies hum don’t want to live in the leafy suburbia of Palo Alto and they don’t want to commute to it so much either. They want to live in the city – San Francisco which for decades has watched the Internet age explode forty kilometres away down the freeway is now back in the swing of it. Urbanism is back.
There were Aussies everywhere here in Silicon Valley, most working for big tech firms, some establishing their own businesses or like Ash Fontana working at AngelList a new crowdfunding site which takes avantage of recent American legislation to allow crowdfunding of start up businesses.
This is an important lesson for us in Australia. According to a recent study there is $7.50 of venture capital invested in Australia per year per capita, compared to $170 in Israel and $75 in the U.S. Venture capital has always been scarce for tech startups in Australia, especially beyond the very early seed capital stage and we are looking very closely at how we can match the American changes that are already providing a new source of venture capital - using the internet to aggregate many small investments, a thousand dollars or less in many cases, to provide the financial backing that new ideas need to prove whether they can fly.
Many of the Australians working in Silicon Valley complained that they had had to move their companies here because of our current laws on employee share and option schemes. Introduced by Labor in 2009 these laws require employees who receive shares and options to pay tax on receipt – even though the shares may never have any value at all and are invariably unsaleable. This made it either impossible or absurdly expensive for start up companies to issue shares and options to their employees and consequently they stopped doing so for the most part. Many moved to the US where the tax laws are more rational – the employee pays tax on the shares when they are sold and he or she has the cash to pay the tax.
The Aussies in the Valley were delighted to hear that our Government is actively consulting with the startup sector right now to see how we can best reform the law to bring it into line with best global practice so that it becomes a driver of innovation instead of a dead weight.
One gloomy note of anxiety that hung over the whole tech sector was that cast by the Edward Snowden leaks from the NSA. Most of the tech companies I visited, be they hardware manufacturers or over the top cloud services like Facebook, Google, Dropbox and many others felt very let down by their own government. How, they asked, could the NSA be so dumb as to allow a systems administrator to download and remove millions of files? And with it create the impression (robustly denied) that every American tech company provides an open back door to the NSA to snoop on its customers (especially foreign ones)
President Obama’s speech they felt was a good first step, but there was a long way to go and America has to move fast. Whether you sell telecom equipment like Cisco or cloud services like Facebook, Google, Apple, Amazon and many others, one thing you know for sure is that most of your future potential customers do not live in the United States or its closest allies like Australia. They live in Asia and especially in China. And in those markets the damage that Snowden has done to American commercial interests is very profound. Last quarter Cisco reported an 18% drop in China sales, IBM a 23% drop.
Snowden aside, there is enormous optimism here for continued innovation. As the team at Apple reminded me, it has never been easier to start a new company. Not only are the tools to build an application cheaper and easier to access, rented by the hour from companies like Amazon, but once built it can go to market instantly and especially via the Apple or Android app stores reach billions of potential customers immediately.
Apple were astounded by the success of the app store. When they launched the app store six months after they had launched the iPhone they thought they might have a thousand apps six months later. They had 100,000 – today there are over one million apps on Apple’s platform and 575 million app store accounts. And Google’s Android platform is already bigger and getting bigger by the day.
Apple’s iPhone may be overtaken by the cheaper Android devices, but the truth is that the biggest revolution in recent times has been the smart phone. The simple fact that over a billion people have smart phones today – handheld devices with the power of what we would have called a super computer twenty years ago that is constantly connected to the Internet. And while America’s smart phone penetration is high at 62% Australia’s is higher at 84%.
As more and more people are carrying, or increasingly wearing, smart wireless devices connected to the Internet a new wave of disruptive innovation has begun. Uber, GoCatch and others are smashing the monopoly taxi radio networks – the only hardware the driver and his potential customers need is a smartphone. Concerned about traffic conditions? No need for cameras on highways or tv stations flying helicopters overhead to report on the traffic. With thousands of commuters using Waze, and similar apps, their speed of travel is automatically reported so now Google Maps can show precisely the speed of traffic at any place and at any time.
Interestingly nobody, Australian or American, called for Government handouts to promote innovation. They wanted dumb laws, like that relating to employee shares, reformed and made consistent with global best practice and in particular US laws. They wanted smart laws, like those allowing crowdfunding, introduced. But beyond that they wanted Government to provide leadership and inspiration in innovation and to ensure that Government embraces the digital economy in the way that most of business has done.
And as I ground my way back through the Valley in another traffic jam I could only reflect that if we remove the obstacles to innovate in Australia, in a war for talent we cannot help but do better and better.
Note an edited version of this blog was originally published in the Australian Financial Review on Saturday 25 January 2014