The Governor and Business Spectator

Last night's speech by Reserve Bank Governor Glenn Stevens – 'Producing Prosperity' – was a masterfully nuanced description of where the Australian economy stands right now, ending with a bit of a dig at the 'Asian century' paper.
 
Well I thought it was a dig anyway. As usual, of course, the governor is too smart to be obvious about it, and has plausible deniability on that score.
 
You be the judge. He said: "Looking much further ahead, to ‘the Asian century', our opportunities are large. But to grasp them, that same adaptability, combined with a clear focus and steadiness of purpose will be key. We need to produce our sought after prosperity; it won't just come to us.”
 
Quite. The speech undertook the well-trodden progression for any serious policy economist's speech these days of starting with an awed discussion of the terms of trade and the resources boom, going on to some hand-wringing over whether domestic demand would strengthen sufficiently as the boom subsides (not 'ends'), and concluding with a call to lift productivity.
 
He repeated his memorable statement from June about how to improve productivity: "The Productivity Commission has a long list of things to do. My answer to what we can do about productivity is: go get the list and do them.” It was a deliciously succinct recipe.
 
Unhappily, there was no list, so outgoing Productivity Commission chairman, Gary Banks helpfully produced one in his final speech earlier this month. It was a very long list, too long to reproduce here, but the items came under three headings: incentives, capabilities and flexibility.
 
Virtually all of them involve some kind of government policy reform. You might think governments have reformed everything already, but you'd be wrong. There's a long list of things still to do, including industrial relations, infrastructure, tariffs, competition, regulation.
 
But one thing that neither Glenn Stevens nor Gary Banks talked about enough is not susceptible to government decree: innovation, and in particular, creating start-ups and, even more particularly, getting them to scale.
 
A report to be released today by Deloitte and produced with two start-up specialist firms, Pollenizer in Sydney and Startup Genome in the US, compares Australia's performance in generating start-ups with that of America. It's based on Startup Genome's database of 50,000 start-up firms around the world.
 
According to the study, appealingly called "Silicon Beach”, Australia has four start-up "ecosystems” – Sydney, Melbourne, Brisbane and Perth. Sydney is 55 per cent bigger than Melbourne, six times bigger than Brisbane and eight times the size of Perth.
 
But Silicon Valley in California is 6.7 times the size of Sydney and New York is 2.6 times larger.
 
Only 4.8 per cent of start-ups in Sydney and Melbourne are successfully "scaled” (got large enough to be sustainable) which is another way of saying that 95.2 per cent fail. In Silicon Valley the success rate is 8 per cent.
 
The difference is capital: start-ups in California raise 100 times as much money as Sydney ones in the scale stage, and they raise 4.8 times as much in the earlier stages of discovery, validation and efficiency.
 
Yet as everyone knows, Australia punches well above its weight in capital formation, thanks to compulsory superannuation and the $1.4 trillion super pool. Why doesn't any of that money find its way to supporting start-ups? Because it is conservatively managed by people who value liquidity and low business risk above all.
 
Actually, super fund money is unlikely ever to do much work in early stage firms – it's a job for rich individuals. America's success in getting start-ups to scale probably has a lot to do with its abundance of billionaires.
 
As it happens, Business Spectator is celebrating its fifth birthday today. It's not the actual day, that was three weeks ago, but the party is today.
 
Business Spectator was a challenger start-up funded by three rich individuals and one poor indebted one (me). No big super. It was sold to a large American-owned corporation five months ago, having achieved scale.
 
Business Spectator had a few innovations, but the key one was to produce a credible competitor to the incumbent with less than 5 per cent of its costs. This required a whole new way of doing things and was carried out by a combination of traditional media types and young new entrants who all thought differently and created a culture of innovation.
 
This sort of thing requires more than a touch of madness, but it is also the kind of innovation and productivity uplift that Gary Banks and Glenn Stevens are saying is required if Australia is to meet the challenges of the Asian Century with a subsiding resources boom.
 
There's not much a government can do to promote a start-up culture, but one thing identified in the "Silicon beach” report from Deloitte, Startup Genome and Pollenizer is that employer share option plans could be made easier and more attractive.
 
"A well-structured ESOP allows a company to save cash burn, while at the same time rewarding employees materially for their efforts. The tax environment in Australia makes ESOPs expensive to put together for both companies and employees. As a result, only 57 per cent of Australian start-ups in our survey that have a staff incentivisation plan, have some kind of ESOP scheme.”
 
It should be, but wasn't, on Gary Banks' list. But that, on its own, is not enough, either to create a better start-up environment or to improve productivity more generally.
 
Last word on this to Gary Banks, also quoted glowingly by Glenn Stevens last night: "There is no single thing that can do the job. Indeed, a policy approach based on such a presumption would be destined for failure. Rather, what is needed is an approach to ‘productivity policy' that embraces both the drivers and enablers of firm performance, and is consistently applied.”

Follow @AlanKohler on Twitter