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Technology’s powerful promise in 2016

Prime Minister Malcolm Turnbull announced his Innovation Statement last month under an ‘ideas boom’ mantra that aims to create a more entrepreneurial Australia able to support growth and investment in new technology businesses built for the digital future into 2016 and beyond.

The two essential ingredients in creating fast-growing digital businesses are skilled workers and investor capital, with many of the policy initiatives aimed at promoting education and encouraging investment via tax incentives. A total of $51 million will be invested to help school children learn software coding and other digital technologies, while pathways to permanent residency for science, technology and engineering graduates from overseas will be made easier.

The tax incentives are largely aimed at start-up investors with capital gains exemptions for early stage investors and a 20 per cent tax offset for investments capped at up to $200,000 per year, per investor. This may sound attractive to private investors dreaming of snaring their share of the next Uber, but backing start-ups is not for the faint-hearted, with the majority failing and the risk-reward profile poor compared to other asset classes.

Opportunities abound 

Australia though has plenty of start-up successes and the ideas boom means more support for the junior tech sector via a bigger pool of human talent with the education and specialist skills required to help start-ups succeed on the global stage.

For investors, such businesses worth knowing about can be commonly found in the financial technology, biotech or medical technology spaces. Indeed, many of the ideas boom policies directly promote investment and research in these sectors via the creation of a $250 million Biomedical Translation Fund and $200 million CSIRO Innovation Fund.

Although given the overall emphasis on digital excellence and development, another sector looks the standout winner from the government’s largesse.

Enter, Software as a service (SaaS). This is a technology trend every investor should be familiar with given the transformational effect software will have on almost every aspect of business and industry over the next decade and beyond.

The SaaS sector involves start-ups designing and selling software products that can be delivered to customers online in order to help them save time and money via the beneficial effects the software brings to an unlimited number of business processes across private or public industry. In fact the ASX itself already has multiple junior tech companies profiting from this phenomenon:

Sitting in the sweet spot Ltd (ASX: UBN) sells software to building or facilities management companies that helps them improve operating processes as they manage properties. It’s growing internationally with underlying earnings of $3.5 million in the last financial year and a strong outlook based on a huge addressable market. The current market valuation is $145 million and after recent price falls shares now trade not far above a level they were offered at during the IPO stage in August 2014.

Touchcorp Ltd  (ASX: TCH) creates software that helps convenience stores sell top up vouchers, gift cards and phone credit to consumers on the move. The software helps electronically facilitate the transactions with the convenience store as the middleman and the company’s market value is around $240 million. Total revenues climbed 69% in the most recent half year to $18.4 million and the business retains an exciting outlook.

Prophecy International Holdings Limited (ASX: PRO) is in cyber-security which is an area being directly supported by $30 million of new industry funding under the ideas boom. The global cyber security market is now estimated to be worth $70 billion and Prophecy’s software sales have been going through the roof. It has a blue-chip list of global clients keen to bolster their online security, with a market value of $125 million and fast-rising share price.

Foolish takeaway 

Anyone who doubts the potential of SaaS start-ups need only look at the blockbuster IPO of Atlassian, the Sydney-based SaaS start-up founded by two University of NSW graduates in 2002.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Prophecy International Holdings Ltd. and TOUCHCORP FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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