Australia's hidden ideas bank

Risk-aversion is a poor excuse for anaemic investment in Australian start-ups. With the potential to contribute $109 billion and 540,000 jobs to the economy over the next 20 years, it's time to start cashing in.

With the upcoming election framed as a battle of economic credentials, the challenge of our transition away from resource-led economic growth is now well and truly at the centre of national debate.

Many argue that innovation, supported through investment in research and education, will pave the way forward. Australia’s young but active start-up ecosystem could prove to be a crucial piece of the puzzle. A Pricewaterhouse Coopers report released earlier this year estimated our tech start-up sector has the potential to contribute $109 billion (4 per cent of GDP) and 540,000 jobs to the Australian economy over the next 20 years, provided we create the right conditions.

So are we moving fast enough and, perhaps more importantly, are we thinking boldly enough?

You jump, I’ll jump

Much has been said about Australia’s anaemic venture capital industry, with minimal returns often cited as a turn-off for investors. But Alan Jones, co-founder of start-up agency The New Agency and editor-in-chief of start-up blog From Little Things, says that using risk-aversion as an excuse for slow investment in Australian tech doesn’t quite hold up, given that we have historically been happy to embrace a culture of risk in unstable sectors.

“We’ve taken enormous risks in mining, in agriculture, which is just an ongoing cycle of crazy booms and busts,” says the industry veteran, investor and mentor. “Compared to tech start-ups, there are thousands more dollars worth of capital tied up in risky industries.”

Throwing money at legacy sectors such as automotive manufacturing may appease the nostalgics, but it makes little sense in terms of return on investment – at least, without including innovation in the equation. A global, digital manufacturing boom is erupting, and what’s required is a bold cultural shift to redirect funding towards these innovative sectors. Their fruits have perhaps yet to bear, but they are likely to prove a far more lucrative return on investment in the end.

Cashing in on our ‘ideas banks’

Redirecting capital is one thing, but employing the right collaborative mindset to drive productivity and innovation – and give us the most bang for our buck – is another. Fostering better synergies between Australian universities and business is a key step.

After being awarded a scholarship to UC Berkeley’s Venture Capital Executive Program, Melbourne tech entrepreneur Chris Gillard experienced first-hand the deep connections between business and universities in the US. He sees enormous potential to accelerate the commercialisation of ideas through improving such relationships in Australia.

“There are connections that are there which are kind of lacking here,” he says. “Not to talk them [Australian universities] down, but it’s just not the same kind of business mentality.”

Opening up the ivory towers more readily to industry is a win-win situation: better access to ideas which have a stamp of approval from our world-class universities may satisfy the more risk-averse investors, while our cash-strapped tertiary sector can also potentially funnel commercial revenues back into research and foster yet more brilliant ideas.

As co-chief executive of brand building and app development agency Project/Project, Gillard hopes to kill two birds with one stone by creating a framework that leverages the collaborative opportunities between business and universities and also addresses the problem of access to early-stage support.

Working in combination with a small group of private investors and accounting and legal firms, his “seed services” model would see the best ideas from our universities (and beyond) developed and nurtured through a kind of “ideas factory”, from germination right through to becoming fully-developed Series A investible companies. The agency’s end-goal is to build up its existing “intellectual property suite of diversified digital assets”, with Project/Project seeking to take an equity stake in the new companies it develops.

Gillard’s mindset is refreshingly fearless in the context of the wider risk-averse culture among Australian investors, but he’s adamant that the returns are absolutely there. 

“It comes down to the ideas,” he says.

Let’s do business together

Applying the same collaborative mindset between start-ups and more traditional businesses can bring similar mutual benefits. Big companies including Telstra and Optus are beginning to recognise that tapping the sector not only allows them to stay ahead of the game through better access to the latest innovative ideas and technologies, but can provide them with new avenues for growth.

Telstra is forging into the sector through its venture capital arm as well as its global applications and platforms unit. Kate McKenzie, managing director of innovation, products and marketing, which oversees the unit, says that as more innovation happens at the software layer there is more opportunity for start-ups to make a significant mark on wider industry.

“Some of these things would be very difficult to achieve in the same time frame in-house,” she says, citing the recent acquisition of US-based app developer Kony, whose capabilities were simply added to the telco’s arsenal rather than having to be developed from scratch. Australian companies Mandoe Media and Whispir, meanwhile, are some recent local additions to the portfolio.

On the start-up side of the equation, the benefits of collaboration include an opportunity to scale more quickly through access to all the things big business has to offer – in Telstra’s case, a massive network of existing customer networks and distribution channels.

For large companies with potentially conservative shareholder bases like Telstra, however, the mandate is to tread carefully in what is otherwise seen as a risky sector. McKenzie says not only is Telstra looking for start-ups that “fit with our overall product roadmap ambitions and the overall strategy” but for ventures that are generally already developed to series B or C level of maturity.

“When it’s a business plan on the back of a napkin I guess that’s a bit too early for us – at that point in time the benefits we can bring aren’t really realisable,” she says.

With reports earlier this year of $50 million going into Telstra’s venture arm, McKenzie says the outlay is not huge relative to the company’s size, and is constrained by the capacity to integrate new additions into the company’s overall strategy.

“There’s a natural limit to how much of this we’re going to integrate,” she says. "There’s not really a dollar limit [but] we don’t want to over-invest in this because by nature it’s experimental.”

For the more nascent start-ups seeking to collaborate, Optus’ foray into the sector offers early-stage funding and support for Australian ventures through its Innov8 Seed Program. Its cash injection is significantly smaller however, offering up to $250,000 per successful applicant. Since the program was launched over a year ago, that’s only two.

Room to move

If the example of big telcos tapping the start-up sector sounds like an obvious fit, that’s because it is. The PricewaterhouseCoopers report quoted earlier found that the vast majority of Australian tech start-ups – more than three-quarters – are targeting the information media and telecommunications industries.

But there are outstanding opportunities for start-ups in other industries, including the healthcare and social assistance industry. Expected to be the highest contributor to Australia’s GDP in 2050, according to the report, only about one per cent of local start-ups were targeting this sector last year. The finance, construction and manufacturing industries were also significantly under represented by start-ups when the current and projected contributions to GDP of these industries was factored in.

A global challenge

While McKenzie says Telstra is keen to develop Australia’s potential as a tech innovation hub, the telco has been criticised for taking a more global approach to the sector instead of focusing on supporting local initiatives. But this strategy merely underlines the competitive global playing field of the digital economy.

If Australian firms are looking overseas, the flipside is also true. Overseas investors are showing increasing interest in Australian start-ups, with US-based Accel Partners’ multi-million dollar backing of Atlassian, 99Designs and OzForex a well-known example. But while local start-ups winning significant funds from anywhere at all is usually cause for celebration (and rightly should be), the presence of foreign capital behind our brightest ventures also represents, in some ways, a missed opportunity for Australia.

“People don’t really back ideas here for some reason,” says Project/Project’s Chris Gillard. “They wait till the other guys do it really well and then go, ‘Oh, there’s an idea that works,’ and potentially lose the national economy a lot of money. It’s crucial that we hold onto our intellectual property in Australia so that we can create a new digital manufacturing base.”

Tech, tech, boom

For Australia’s burgeoning start-up entrepreneurs, the global, digital economy is a double-edged sword. The opportunity to scale products across global markets with minimal reproduction costs is seemingly boundless, but we are also competing with markets from all over the world. And with many of our young tech entrepreneurs lured by the promise of success in Silicon Valley, it’s not just products that are being shipped offshore.

Gillard believes we must build the right infrastructure to not only keep our talent on shore but secure our competitiveness in this global, digital marketplace of the future. And he is urging us to move faster.

“It’s a frontier, and this moment in time when there’s all this new opportunity before things are quite set is fleeting historically,” he says.

But Jones is optimistic we can rise to the challenge, and that a cultural shift that sees more support channelled into the sector is already underway. He says it’s getting easier for local entrepreneurs to access funding, and that universities are starting to be tapped. Meanwhile, crowdfunding tools such as Kickstarter have opened up new avenues for entrepreneurs to gauge markets and gain endorsement for products, making them more attractive to larger investors before they embark on the hunt for that elusive cash injection that could make or break their future.

Follow @HL_Francis on Twitter.