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Angus Deaton is right about startups too …

By: Jeremy Colless

Nobel prize winning economist Angus Deaton comments “aid’s Catch 22 is that when the institutional conditions for development are present, aid is not needed; capital will flow to the country. When those conditions are not present, aid is ineffective, disruptive and tends to keep bad governments in power.

It is probably timely to reflect on Deaton’s comments given all the current excitement about the Australian government’s (and opposition’s) interest in policies to support startups and innovation.

An industry that depends upon government handouts to be sustainable is at risk of never becoming competitive.

Governments can play an important role in ensuring there are no regulatory speed bumps, that education systems are well funded and well focused, and that tax rules are not a disincentive. But governments should steer clear of mandating superannuation funds to invest in Venture Capital or use tax payers money to pick winners.

Investors should decide what risk/return characteristics they are seeking independent of government intervention.

Australia’s startup ecosystem is way ahead of where it was even 5 years ago. Short term gains from populist government policy will not build a sustainable ecosystem.

However, visionary government policy and investment in education, and infrastructure will help build strong foundations from which entrepreneurs and investors can take the leap of faith that is needed to build an innovation culture and globally scalable businesses.

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