At a glance
- Startup funding in Australia dropped over 50% from 2022 to 2023.
- This fall may be stifling innovation as entrepreneurs struggle to secure capital.
- Heavy regulation and limited risk capital discourage small investors and early-stage business growth.
- Accountants can help startups survive by improving financial management and preparing for investment rounds.
Despite what appears to be a growing appetite for innovation, for challenging the traditional way of doing things and welcoming digital enterprise and entrepreneurship, early-stage businesses in Australia face challenge securing the capital needed to survive and thrive.
Interest in starting new business ventures is strong, but entrepreneurs often realise they’ll need to move elsewhere if they’re to find funding. That challenge is actively eroding Australia’s innovation capacity.
“We’re a country with a lot of intellectual property, a lot of physical resources, and still in relatively good financial shape. Yet, we don’t seem to be innovating much,” says Jason Parker FIPA, principal both of Parker Accounting and of Jason Parker Legal.
Parker, also an ex-president of the IPA and a participant/investor in several startups over the years, has seen this issue first-hand. He believes poor access to funding is a barrier to Australian economic dynamism.
“We are struggling to innovate,” he says. “The lack of funding opportunities in this country is a key issue. On top of that, there’s red tape everywhere. We’ve regulated the system to protect investors from themselves, but we’ve also made it so hard that many people don’t even try.”
Capital is drying up
It’s not just Parker’s opinion. Data reveals a sharp downturn in startup investment in Australia. As Forbes Australia recently reported, “startup funding tanked in 2023”. From 2022 to 2023, startup funding dropped more than 50 per cent, from $7.4 billion to $3.5 billion.
“Once early investors are tapped out, it’s hard to go back to them again with your hand out, even if things are going well.”
Jason Parker FIPA, principal of Parker Accounting and Jason Parker Legal
At the same time, major lenders such as the big banks have also been pulling away from small business lending, preferring to deal with those borrowers that can offer property as collateral.
It’s a particular challenge for small businesses operating at a loss in their early years. As they don’t meet lending criteria and as venture capital pools dry up, there’s little option except closing up shop or leaving the country.
“Startups with no revenue have almost nowhere to go,” Parker says. “We don’t have a robust enough culture of risk capital to support them. And our regulatory settings, while well-meaning, are making it harder, not easier.”
“We’ve regulated for dummies. Rather than educate Australians to be financially literate and able to assess risk, we’ve created a highly regulated system to protect people. Outside of high-net-worth individuals or family offices who could invest in start-ups, smaller investors are often discouraged from doing so.”
This structural failing leaves Australia vulnerable to being left behind in a global economic environment that moves faster and innovates more.
“We’re getting overtaken,” Parker says. He points out that countries like Israel, Singapore and India are developing “the new Silicon Valleys”.
“They are backing innovation at scale. And meanwhile, we’re sitting on loads of intellectual property and capital, but not enough of it is flowing into our entrepreneurial economy.”
A small-business problem is a big business problem
Why is it an issue if the small end of town is feeling the funding squeeze? As Reserve Bank of Australia assistant governor Brad Jones said recently: “Small and medium-sized firms (SMEs) are in many ways the backbone of the Australian economy.”
Of the 2.6 million businesses in Australia, the RBA’s Jones noted, 97% are defined as small, with less than 20 employees. Another 2% are medium-sized, leaving just 1% as large businesses. SMEs account for two-thirds of private sector employment and just under 60 per cent of company profits.
“Another way in which to view the contribution of SMEs to our collective wellbeing is narrower but no less important,” Jones said. “They are potential engines of innovation and dynamism in the Australian economy. SMEs can introduce competitive tension to established markets that are typically dominated by larger incumbents, driving them to be more efficient in the process.”
How can accountants help?
Parker says that while capital reform is very much a policy issue, accountants can play an important role in helping their small business clients navigate the choppy waters of funding.
“Start-ups often have big ideas but messy books,” he says. “The first step is helping them get their financial house in order. If they’re behind on BAS or don’t have accurate cashflow forecasts, they’re not going to get anywhere.”
Beyond compliance, accountants must also help small businesses and startups to understand their cash burn rate, to properly structure their business for investment and, critically, to make sure any intellectual property is in the right entity.
“I’ve seen companies collapse or lose investors because the IP was still in someone’s personal name,” Parker says.
Also, accountants can use their own experience with their numerous other clients to offer startups and SMEs the wisdom they need to survive.
“For example, many accountants will be very aware of the fact that capital raising fatigue is real,” he says. “Once early investors are tapped out, it’s hard to go back to them again with your hand out, even if things are going well.”
“So an accountant would do well to recommend that they raise more than they think they’ll need, up front. If they need $500,000, raise $2 million up front instead, so they don’t have to go back again.”
For accountants in the startup and SME arena, the challenge is clear, Parker says. In a capital environment filled with obstacles, the accountant’s role is potentially more valuable than ever. They’re a mentor, advocate and trusted guide.
