A wake-up call for Australian start-ups

Why is the federal government pouring $20bn into medical research but has slashed start-up and innovation programs in half? Perhaps the answers can be found within the sector itself.

Despite all the one-liners about innovation and self-reliance, about lifting and learning, and about businesses producing goods and services that people actually want, Joe Hockey’s budget speech missed the bigger picture: that of an innovation-driven, more entrepreneurial, and globally competitive Australia.

While policymakers the world over are recognising and investing in the high-growth potential of the IP-driven, technology-based start-up sector, the Australian federal budget did the opposite, abolishing a range of industry assistance programmes such as Commercialisation Australia and the government’s venture capital assistance program, the Innovation Investment Fund (IIF).

Rather than huff and puff about what’s been lost however, perhaps there are some valuable lessons to be learnt here. Why has the federal government opted to pour $20 billion into medical research but has slashed start-up and innovation programs in half?

What do the changes mean?

The end of CA, IIF and other business advisory services will save $845 million over five years and in Hockey’s words will “refocus our effort on innovation and self-reliance”. Also under the axe is the communications and information research organisation, NICTA, which will not receive government funding from 2016. The R&D tax offset has been reduced by 1.5 per cent to 43.5 per cent a year. 

To be fair, the IIF matching funds program had probably long past its due date and was in need of review. It’s Government and private sector matching funds programme tended to award strong claimants rather than strong claims. But the grants delivered to a vast range of  tech-based start-ups by Commercialisation Australia will be missed, despite criticisms of unwieldy application processes.

In their place will be a new -- but not yet defined -- entity called the Entrepreneurs’ Infrastructure Programme (EIP) which falls under the auspice of Industry Minister Ian MacFarlane.

With funding of $484m over five years, the EIP will support the “commercialisation of good ideas, the provision of market and industry information” and facilitate access to good management and mentor advice. No one, including MacFarlane, knows just how yet.

One probable candidate to be the public face of the EIP is long-time CA chief Doron Ben-Meir. If so, Ben-Meir will bring to the EIP definition and intelligence from the CA database of 500 grant receivers in multiple sectors and more than 100 business mentors. He will also be armed with the many lessons learned from the pros and shortfalls of the CA grants programme. There’s enough of both to be interesting.

But on the whole, the changes outlined in the budget seem counter to what’s happening elsewhere in Asia and globally. Adding insult to injury, the budget delayed any decision on tech sector policy must-haves such as employee share option scheme reform, and clarity on rules for future crowdsourcing platforms.

Why pull the rug out from under high-growth tech?

Some of this is about savings, but much of it is cultural. Most government and industry leaders in Australia have not seen a clear  upside coming from the tech sector in the same way they see value in mining, agriculture and the trade of physical goods and services; and, apparently, medical research.

Insiders say Tony Abbott hated the word ‘innovation’ long before it became the buzz-word of the so-called new economy evangelists (myself included) and economists all over the world. It’s too fuzzy, they say; the 21st century version of the 1990s’ ‘synergy’. Ouch!

In other government quarters, there has been little understanding of the difference between the potential for a globally scalable tech start-up sector versus traditional small business.

Education policy has also failed to introduce programmes that encourage more science, technology, engineering and maths (STEM) students, who are critical to the future of industry old and new. And despite numerous white papers, roundtables and value-added manufacturing forums, it's much harder to see how innovation easily translates to real stuff like taxes and jobs, especially when innovation has a highly disruptive effect on traditional business and industry with losses of jobs in the process.

This is why the announcement of the Medical Research Future Fund (MRFF) is so revealing. Apparently the Coalition government has been listening after all -- at least to the medical research sector. 

Seeded with $1 billion from uncommitted funds in the Health and Hospitals Fund and expected to grow to $20bn by 2020, the MRFF is hailed to be the largest of its type in the world. It is a bold and interesting initiative from a government which many view as pro-physical infrastructure but anti-science.

There are few areas of research more difficult to commercialise than medical and biotech technologies. There is intense global competition, there are zillions of regulatory hurdles and, if you’re lucky, years and years of painstaking clinical trials before anything like a win. Last year’s McKeon Review identified that Australia has a strong medical research capability but a poor track record of translating much of this research into health and commercial benefits.

So it’s a very big taxpayer funded bet for this government and a huge win for the medical and biotech sector. Depending on how it’s implemented, the MRFF could be a truly transformative initiative and a model for future investment in other research and IP-driven sectors. 

A problem of visibility

Through the likes of the Walter and Eliza Hall Institute of Melbourne and many other influencers, the medical research sector has received benefits from its effective organisation and its ability to communicate the promise of big payoffs. The sector mobilised to demonstrate against proposed funding cuts back in 2011, fuelled by a snappy social media campaign in which hundreds of medical researchers piped up.

In contrast, the broad-based tech sector lacks visibility, influence and resonance, in part because all our ecosystem partners (start-ups, VCs, institutional investors, large businesses and industry) don’t come together very well. The sector suffers as much from a lack of popular appeal as it does from old-fashioned government ideology.

Sure, it’s easier to sell the benefits of curing cancer, Alzheimer’s or diabetes than it is to argue the benefits of software and social media. But the very essence of most truly scalable start-ups is that they can positively impact almost every business in every sector. Their expertise in new tools and business models can be quite profound. And they need the wisdom (as well as the frustration) of dealing with bigger customers and partners, and they definitely need to be hooked into the regional and global distribution networks of their older, bigger, legacy industry brethren.

Towards cohesion

I, and many others, see the start-up and innovation sector’s fragmentation of purpose and politics in almost every meeting, every forum, almost daily. Numerous entities have marked out their memberships and territories at the expense of the broader ecosystem.

There’s the Australian Information Industry Association and its traditional membership of tech multinationals; there’s the Australian Venture Capital Association, which quite justifiably sees its membership as M&A and equity investors as opposed to new-breed start-up companies. There’s also the Australian Computer Society, which few industry insiders have anything positive to say about.

More recently we have StartupAUS, the Google vehicle led by Alan Noble which represents a loose collection of volunteers from the mostly net-based start-up sector.  But StartupAUS is criticised in part because it's an Alan Noble show and because so far it hasn’t broadened its appeal beyond its own fan club.

The tech start-up sector can only begin to fix its ‘no one understands us’ block if it sells itself better to the myriad industry associations, government departments and bigger businesses. That means better linkages and demo days, not just with all government departments but also with Chambers of Commerce, the Business Council of Australia, the Australian Industry Group, the Grattan Institute and other industry think tanks -- all and anyone we can get an audience with.

It's all about the data

Most of all, Australia’s nascent entrepreneurship sector suffers from a lack of hardcore sectoral data -- often called industry sector/ecosystem mapping. It’s a big topic and challenge and one that deserves a column or several in its own right, so I won’t go into here.

But suffice to say, when we are dealing with international investors, big business customers and partners from the US, Israel, Asia and elsewhere, our lack of specific sectoral and industry data dilutes our power to negotiate effectively. Communications Minister Malcolm Turnbull has often advocated his department’s role in better harnessing government data. But there is a huge industry side to this too and they have to meet. These databases, to be useful, must be shareable with industry and vice versa -- keeping privacy in mind, of course.

It won’t be easy, but if the innovative tech sector wants to focus on one thing to prove its current and future value, it should focus on coming together to start collecting, sorting and analysing this data. And the really great thing about starting to do it is that it gets better over time.

Sandy Plunkett is a former associate editor of Business Review Weekly, venture capitalist and has written extensively on digital and tech entrepreneurship issues.

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