Aussie seed fund tells firms to incorporate in US, but denies its contributing to brain drain

Australian seed fund Startmate has denied that it is contributing to a brain drain of local start-up talent, after advising its latest batch of start-ups to become incorporated in the United States.

Startmate co-founder Niki Scevak has confirmed the latest batch of Startmate companies was incorporated in the US state of Delaware rather than in Australia.

Scevak says the primary reason for this was because of the payments infrastructure in Australia, which is managed by the banks.

“For these companies to get paid, it’s a real pain in the ass to do it in Australia,” Scevak told StartupSmart.

Scevak says a quick and easy solution is to incorporate companies in the US, which is home to a different payments structure and a range of start-up-friendly Silicon Valley banks.

He says all eight of the latest Startmate companies have opted to be registered in America. It’s been suggested the move will draw revenue and innovation away from the Australian economy, a charge that Scevak dismissed.

“I completely disagree with comments characterising it as a brain-drain,” he says.

“No one’s moving to the US. Incorporating there will simply allow the companies to accept payments from all around the world. They might move to America but they might not.”

Scevak says Delaware is a “tiny little state that no one lives in, with very company-friendly legislation”, hence the decision to incorporate the companies there.

Scevak believes Australia will be better off in the long-term because start-ups that succeed in the US will eventually return home with knowledge, capital and networks that they wouldn’t earn in the local ecosystem.

“Australia will never be as good as Silicon Valley, but Australia can still get better as a start-up community,” he told ZDNet.

“I think that if people make money through a company, and they take that money and bring it back to Australia, then everyone wins.”

“I think that the money that people make while in their time in Silicon Valley ultimately ends up in Australia, and generates new jobs and investments in start-ups.”

Renai LeMay, of tech blog and community Delimiter, says he can understand the rationale behind the move.

“When you’re a start-up 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,” LeMay says.

“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.”

“However, I must say that this move gives me a deep feeling of unease…Startmate’s approach to this matter has the effect, in practice, of re-orienting the start-ups under its wing to focus on the US.”

“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.”

This article was first published in StartupSmart.