Rate of acceleration

Unicorns have been created inside Australia’s innovation hubs, but with these once-thriving spaces abandoned, the ecosystem has been forced to pivot and re-evaluate during the transition out of pandemic.

When the Queensland University of Technology told its Creative Enterprise Australia CEO Mark Gustowski that it had made the tough decision to close the program he’d built from the ground up, it was like a gut punch. “It was easily the worst time of my life,” he says.

After 12 years, the university closed the incubator, accelerator investment fund and co-working space in late 2020 in response to the pandemic. Gustowski was charged with the task of letting 20 staff go. “The hardest part was letting the team go, and our very commercial board, including the likes of Hamish Turner, the [former] CEO of RM Williams.”

In more than 130 innovation hubs and accelerators across the country, lockdowns have forced startup founders to work remotely off and on over the past 15 months, trying to keep the momentum going. But it’s difficult trying to tackle business problems alone and some fear this could result in an innovation blip on the radar in years to come. The university sector has been particularly hard hit, given international students have been turned away, while government-funded and independent innovation hubs have also suffered.

Closed doors

Take Fishburners, the high-profile government and corporate-sponsored startup community. Its Brisbane co-working space closed its doors in June last year, while Fishburners Sydney has been subject to relentless lockdown. CEO Nicole O’Brien notes the revenue blow has been substantial, softened only slightly by government lifelines. Some members were able to receive JobKeeper, while the R&D tax rebate announced in the Federal Budget has been a saviour. “Our revenue completely dried up for many, many months,” says O’Brien. “We’ve had some government support to offset that loss, to get through to the other side of it, but certainly, we’ve taken a fair hit.”

The general manager of Queensland tech incubator River City Labs, Pauline Fetaui, is concerned about the closures and what that might mean for the startup fraternity. “Blood, sweat and tears has gone into building an innovation ecosystem with plenty of government support in this nation — and it’s dying,” she says. “Since the pandemic, countless grant programs and investments have been retracted and redirected throughout the sector. Innovation hasn’t been high on the agenda, so this is going to create a chasm because there’s going to be a lack of support and some companies have and will continue to die.”

In Melbourne, Jackson Yin, CEO and co-founder of startup iBuild Building Solutions has long been a supporter and user of co-working spaces. He notes that lockdowns have been tough on many startups.

“We have had a roller-coaster experience from famine to feast,” he says. “Our learning is that startups need to adapt to the ever-changing environment to survive and thrive.”

Meanwhile, the technology industry is waiting for its new peak body to get its feet on the ground. The recently formed Tech Council has taken on the responsibilities of the now defunct StartupAUS, and is on a mission to “represent the Australian technology industry, advocate for the conditions tech companies need to grow, attract investment and create jobs across a range of critical industries”. According to Tech Council figures, the tech sector contributes 861,000 jobs and $167b annually to the Australian economy. The council declined to comment on the state of the sector, stating it was too soon after the council’s launch.

Crisis breeds innovation

However, some say the pandemic has been the perfect breeding ground for innovation in Australia and that startup founders should be promoting the next big thing. Changing consumer preferences provide new opportunities to meet new markets and many have responded to the challenge.

“The highest amount of innovation comes during and right after an enormous economic downturn,” says Gustowski. “So, if anything, investment in innovation and new business should have increased during the pandemic.”

Gustowski says the dot.com crash in 2000, the 2008 global financial crisis (GFC) and the 2013 collapse of the Australian automotive industry all encouraged innovation. “Companies that aren’t innovating will eventually die — there is nothing more certain than that,” he says. “Because your customer base is always eroding.”

Indeed, those quick to pivot to attract evolving market opportunities amid the global health crisis have done well. Virtual teaching aides, telehealth initiatives and digital communication enterprises are some sectors that have thrived.

StageKINGS pivoted from manufacturing sets and stages to creating office furniture for Australia’s new stay-at-home workforce. The new brand, IsoKing, has flourished.

SignOnSite was launched to help the construction industry track when workers are onsite as someone crosses a geofence boundary. This technology became invaluable during the pandemic, giving the company a lifeline.

For other companies, not having a physical space for ideas to collide has been a death knell. A startup aimed at the travel industry failed almost overnight. There have been many casualties, particularly in the events and hospitality space.

Pivoting to online

Innovation hubs themselves have been forced to innovate, pivoting their presence online, growing their geographical footprint, in turn opening up new global markets.

Melbourne’s EnergyLab was suddenly borderless, and could communicate its climate tech to a global audience for the first time in what chair Piers Grove says was a game changer.

“Energy-tackling climate tech is an attractive market, but trying to get companies to participate in a program that was located in Australia was quite hard,” he says.

EnergyLab now counts a heat pump company in California and a hot water system in Honolulu in its fold. In fact, 50 per cent of the companies participating in its programs are outside Australia.

Other hubs also report strong financial results. ANDHealth is the nation’s only incubator in the acceleration and commercialisation of digital health technologies —and business is booming.

Canberra Innovation Network CEO Petr Adamek MAICD has noticed more sharing going on. But another program founder said the shift to online had resulted in program cannibalisation, while many hubs had struggled to monetise the shift.

O’Brien emphasises that while Fishburners’ subscription-based digital platform created a new revenue stream, this by no means replaced the company’s lost revenue.

“We’re talking $49 a month as opposed to having someone come in a pay $595 for a desk,” she says.

“And obviously, we still have operating costs we need to maintain — rent, electricity and utilities.”

Other advantages from the shift to online include a narrowing of the distance between startups and investors, says Sascha Kerbert, head of accelerator at Startmate, which is funded by successful startup founders. “Pre-COVID, there was an expectation that if you wanted to pitch to an investor, you had to find the time to physically go to their location, and then pitch in their office,” says Kerbert. “Now, if you’ve got an interesting idea, you can just jump on a Zoom with the best investors in the country and have access to capital in a way you previously wouldn’t have. It’s incredible.”

Virtual coffees are not the same

However, attempts to bridge the physical gap by creating online events such as Zoom “crafternoons”, a weekly accountability club or mindfulness sessions have had mixed results, with broad agreement that there’s nothing like being able to rub shoulders in a physical space filled with so much possibility.

“There’s nothing like the vibes you get when you’re sitting together in a room and get up and put things on the whiteboard, and have a coffee together,” says University of New South Wales professor Veena Sahajwalla, director of two of the university’s new science and tech hubs.

Kerbert agrees, likening social interaction to a chemical reaction. “The collision theory relates to how chemical reactions organise their structures to form something new and interesting,” he says. “It’s the same with accelerators. You can increase the likelihood of a chemical reaction occurring by putting more particles in the box, giving them a higher chance to come into contact with each other and create something new.”

Cash splash

Despite rolling lockdowns, the startup sector is still attracting investment dollars, with high valuations being paid for companies, according to Dr Michelle Deaker, managing partner at specialist VC firm OneVentures. In turn, this has opened up opportunities for large amounts of growth capital to filter into Australian companies. Meanwhile, institutional investors are funding climate change initiatives, digital startups and healthcare.

“At the start of COVID-19, we all thought the world was going to implode and started planning for the worst,” says Deaker. “Then what we really saw was the acceleration of digital.”

There are healthy signs of higher than usual valuations — such as the recent sale of BNPL player Afterpay for $39b — which has shone a spotlight on Australia’s ability to create great global businesses, which is encouraging capital injections throughout the sector. Investment in climate tech is going through the roof, says EnergyLab’s Grove. “There’s more money for investment in this sector than the market can actually deploy at the moment. The time is now. The market is fed up with traditional energy technologies and investors are jumping in the water.”

Kerbert agrees. “There’s been more money flowing into the early-stage tech and startup ecosystem, with low interest rates forcing people to see return in new places.”

Time for reflection

What will become of the physical spaces where ideas collide is anyone’s guess. If foot traffic returns to CBDs, these hubs could be forced to expand their parameters in a bid to attract fresh blood. Byron Bay entrepreneur Mike Smith lodged an application to join two accelerator programs in early 2019 — both were knocked back. “It was a shock. The accelerators all seemed to be looking for pure tech plays.”

Smith had previous built Cake Wines into a $5m business, which he has since sold. “It was a kick in the guts because I had proven I could build a business. But it made me more determined.”

Smith launched a Kickstarter campaign in the hopes of raising $250,000 in pre-sales. He managed to raise $743,000 to build eco-friendly startup Zero Co into a company now making $1m a month in sales. He admits there have been limitations.

“It’s really hard to grow a company remotely without the assistance of an accelerator program, without that human connection,” says Smith.

Professor Sahajwalla says the pandemic has given the sector a chance to reflect on whether it should be a case of business as usual post-pandemic, or whether a new norm should be redefined. “The latter is actually far more important and exciting,” she says. “Rather than think in economies of scale, startups should instead think about economies of purpose, and how adaptive and agile you can be in designing solutions that are fit for purpose. To build resilience, you actually need to stop and ask these questions. We should really be taking this point in time in history to learn from the pandemic.”

“It will be interesting to see what the impact will be, because without a doubt, the level of activity has stagnated,” says O’Brien. “This period has certainly stymied innovation. You’re just not getting that opportunity for people to collaborate and connect — and you need to do that face-to-face. There’s only so much you can do online.”

In the meantime, Gustowski and his colleagues have spent lockdowns raising investment and growing Mandalay Venture Partners — a venture- building firm focused on the agrifood space, which he describes as “farm to fork”. Gustowski aims to deploy capital in time for Christmas. If that’s not enough, he’s also built Innovation Architects, an innovation advisory supporting startups, scale-ups and corporates.

However, the closure of Creative Enterprise Australia still rankles. “It really wasn’t necessary because the university’s losses weren’t quite as bad as they predicted,” says Gustowski. “We were very much in revenue and it is very disappointing. It severely affected me and my team.”