NSW startup sector sounds the alarm as the state government turns off funding taps in pre-budget review

The NSW startup sector has responded with dismay after the NSW government suddenly shut down a range of funding programs for early-stage companies in the wake of an expenditure review by the new Labor government.

Popular programs such as the Minimum Viable Product (MVP) grant have been put on hold “as part of the sector-wide Comprehensive Expenditure Review being coordinated by NSW Treasury”, Investment NSW announced this week.

That includes current applications for the matched grant for startups to develop their technology solution to get them to the first sale. The former government had increased the matched funding from $25,000 to $200,000 a startup late last year.

“Investment NSW is unable to progress existing applications while this review continues. The fund is one of several that will remain on hold until the government makes decisions for the 2023-24 Budget,” Investment NSW says on the home page for its grant programs.

Hundreds of NSW startups have used the program to achieve their initial product development goals and the sudden shuttering of the program has dismayed the sector, fearing it could lead to the demise of multiple early-stage startups at a time when the sector is already seeing multiple collapses as venture funding dries up.

UNSW director of entrepreneurship David Burt said the change under the new government comes just six months after a revamp of MVP was announced with the promise of increased maximum funding and streamlined application processes, which generated significant optimism among the NSW startup ecosystem.

“This indefinite pause by the NSW Government is a terrible outcome for NSW-based startups, especially those that had recently submitted applications that are now sitting in limbo,” he said.

Programs delivered through the Office of the NSW Chief Scientist & Engineer have also hit the pause button. Other former Coalition government initiatives through Investment NSW also halted are the NSW Future Industries Investment Program, the Infrastructure Build Out Program, National Collaborative Research Infrastructure Strategy (NCRIS) Support Program, and the $40 million Biosciences Fund.

“The Department of Enterprise, Investment and Trade is working with NSW Treasury as it coordinates a Comprehensive Expenditure Review to assist the NSW Government in delivering its priorities and managing budget pressures,” a departmental spokesperson said.

“As part of this sector-wide review, a number of Investment NSW programs have been placed on hold and will be reviewed as part of the 2023-24 Budget process”.

They said updates on other grant programs will be provided throughout the review process.

The combined value of the programs exceeds $225 million. Much of that funding is matched by the private sector, providing additional value for taxpayers. The MVP grant was worth around $10 million over four years.

David Burt, who also oversees UNSW Founders, said the government needs to move swiftly to reinstate the MVP grant program, describing it as “one of the most effective and important startup support programs available” to NSW-based startups.

“The last data I saw on impact was from 2020 which showed that from 181 grant recipients,  830 jobs had been created (307 FTE & 523 Contractors), an average of 8.9 FTE/startup), 54 had raised a total of $231m in equity, 22 reported export revenue ($7.7m) and the cohort had an 89% survival rate,” he said.

“Pausing this program for months until the September release of the next budget will maim NSW’s promising early-stage startups, or cause them to relocate to states with more startup-friendly policies like Victoria). Research shows that all net new jobs are created by companies that are less than five years old so this decision will harm the NSW economy.”

A critical role

Burt said the MVP grant played a critical role in nurturing hundreds of NSW early-stage startups by providing the first external financial resources.

Tash Jamieson, founder of Lockpick Games, which helps prepare children for standardised tests is one of them, having received $25,000 last year.

“NSW government support is instrumental for so many of us local startups – even beyond the financial support, having the backing of a government program like the MVP grant is a great signal for an early-stage business,” she said.

“Thankfully, I still have a good runway so will be ok, but I hope that for other upcoming startups, the program will return.”

Burt said the indefinite pause “is another example of how Australian innovation policy has long suffered from a revolving door of ministers who under-appreciate the importance of providing stability in government economic development programs” and leaves both the state and nation “at a significant disadvantage” compared to other countries where similar grants exist – for example the US Small Business Innovation Research (SBIR) program has remained largely unchanged since its introduction in 1982.

Jack Qi from startup advisory firm William Buck also believes the MVP grant program is vital for the sector.

“The need for the NSW Government to tighten its belt is unsurprising and somewhat welcome in light of the cash-grab happening as we speak in Victoria, but we call upon the Government to leave the MVP Ventures grant intact at the conclusion of its review because it was only introduced in its revamped state in late 2022 and has generated a lot of interest amongst startups,” he said.

“Ultimately, a long term view must be taken to recognise that helping startups get new products and services off the ground will generate economic activity, jobs and crucially, revenue for the Government.”

Lagging behind

Cathy Lyall from early-stage VC Seed Space agrees that government support is critical.

“Australia lags our peers internationally from the perspective of levels of government support across a range of financial metrics including investment, tax credits, and grants. The sudden halt of all existing NSW programmes has a direct impact on the ecosystem,” she said.

“NSW already lags our peers in other states as far as support for start-ups and at a time when companies are more mobile we will start to see companies re-locating to more founder friendly states such as Victoria where initiatives such as StartupVic have had an incredible impact.

“I urge the government to consult quickly and provide certainty to those founders choosing to establish their businesses in NSW. I also urge the new state government to connect directly with those of us in the ecosystem who have lived experience both domestically and overseas on how to create a meaningful suite of programmes that have succeeded in the UK and elsewhere.”

A pincer movement of cuts

Jessy Wu from Afterwork Ventures said it’s been a pincer movement between the state and federal governments as they pull funding that support innovation and entrepreneurship, pointing out the federal treasurer Jim Chalmers mentioning ‘technology’ just seven times in his budget speech earlier this month.

She singled out federal programs such as Boosting Female Founders, which provided $250,000 to $500,000 to female-founded startups, which has frozen applications.

Other programs shut down, although the federal Labor government appears to have rebadged Accelerating Commercialisation and Entrepreneurs program as the Industry Growth program, with around $390 million in funding over four years, but that’s not rollinf out until later this year amid an ongoing federal review of existing programs.
“Startups don’t have the luxury of time to wait around for governments to get their sh*t in order. Many were in the middle of (incredibly onerous) application processes, only to be unceremoniously notified the whole program was shutting down,” Wu said.

“In a sector where uncertainty is a constant, governments are most helpful when they can provide stability – in policies, sources of funding, and tax incentives to invest in entrepreneurship.

“A new program, new executive, new independent review committee, and new set of eligibility criteria is all very well for new governments’ desire to make their mark and cut ribbons, but it ultimately leaves startups and SMEs in the lurch.”