blog Every so often you come across something in Australia’s technology sector which infuriates you because of its counter-intuitiveness. Today’s item is the news broken by Mahesh Sharma at ZDNet.com.au (I recommend you click through and read the whole story, it’s a good one) that local technology incubator Startmate has successfully advised its entire latest batch of companies to become incorporated in the state of Delaware in the US instead of in Australia. Sharma reports:
“Startmate co-founder Niki Scevak explained that the primary reason for this was because of the payments infrastructure in Australia, which is managed by the big banks. It is extremely difficult for start-ups to navigate the red tape and bureaucracy involved.”
Now, I’m not just a journalist — I’m also an entrepreneur, having founded Delimiter in January 2010 — and I can understand the rationale behind this move. When you’re a startup trying to get off the ground, Australia’s taxation and regulation system seems pretty onerous. There’s leagues of red tape and condition after condition which you have to satisfy. I personally recall an hour and a half meeting with the Australian Taxation Office which was pretty pointless in terms of what it accomplished. And I’m pathetically grateful to my accountant for taking much of this off my hands.
In addition, there is a strong argument to be made that just because a company is incorporated in the US, that’s just something happening on paper. It doesn’t mean that the startups concerned won’t seek financing in Australia, find their first customers in Australia, employ staff in Australia and, of course, pay taxes in Australia and support the Australian ecosystem. After all, how often do you really think about where your company is incorporated? The global nature of capital and of capitalism these days — especially associated with Internet startups — would appear to mean that it shouldn’t matter where your company is incorporated.
However, I must say that this move gives me a deep feeling of unease. My gut tells me that Startmate’s approach to this matter has the effect in practice of re-orienting the startups under its wing to focus on the US.
Like Sharma, I suspect that when these companies look for funding, they will do so in the US. I suspect that when there is a chance for them to be acquired, it will be US companies that will be doing so. And I suspect that many of these companies will increasingly not only be incorporated in the US, but base their operations there as well. If this occurs the way I suspect, it will partially transform Startmate into a bridge for Australian technical and entrepreneurial talent to transition to the US.
There’s also something which just seems duplicitous about the practice. Why would you set up your Australian company, right from the start, to avoid interacting with the Australian regulatory authorities — the ATO, the Australian Securities and Investments Commission, and more?
Now this is an issue about which I’ve personally had ferocious arguments with Scevak and others. He and many other senior entrepreneurs in the Australian startup landscape see it as beneficial for our talent to head overseas to centre of gravity locations such as Silicon Valley, believing that they will bring that experience (and funding) home and help to fuel the entire Australian startup ecosystem. But I haven’t seen much evidence of that so far. It has always been my philosophy, and the philosophy of many businesspeople in many industries, that continuing to invest in the Australian landscape where possible will pay everyone locally dividends in the long term.
One company to consistently buck my expectations in this regard is local software house Atlassian, which despite taking a huge round of US venture capital funding in July 2010 and establishing substantial international bases has retained its commitment to development work in Australia. In fact the company last week revealed it was poaching European developers for relocation to its headquarters in Australia. Atlassian’s founders are investors and mentors in Startmate, which may bode well for the incubator when it comes to maintaining its Australian feel and focus.
On this matter I’d love to hear responses from people — especially those involved in startups — about what they think.