Can We Please Get Some Facts Into The Innovation Debate

21/04/2016 9:57 AM AEST | Updated 15/07/2016 12:52 PM AEST
YOSHIKAZU TSUNO via Getty Images
Australian Prime Minister Malcolm Turnbull (R) takes a selfie with Japanese auto giant Honda Motor's humanoid robot Asimo (L) at the National Museum of Emerging Science and Innovation in Tokyo on December 18, 2015. Turnbull is on a one-day visit to Tokyo and will have talks with Japanese counterpart Shinzo Abe. AFP PHOTO / POOL / Yoshikazu TSUNO / AFP / POOL / YOSHIKAZU TSUNO (Photo credit should read YOSHIKAZU TSUNO/AFP/Getty Images)

As someone who has been involved in the technology industry for more years than I want to note, I have watched Moore's Law run rampant over the expectations as to what computers of any form can do. In more recent times, we have seen the leveraged impact of mobile devices, high bandwidth net connections, big data, machine learning and cloud computing (let alone advanced robotics) rain on the prognostications of "experts" as to what limits will exist for technology.

However, other things also change... fast. Specifically, the state of the environment in Australia supporting innovation has undergone a dramatic change in the past two to three years. A change of Moore's Law proportions.

I was at a conference recently listening to someone whining about how bad the landscape is for innovation in Australia, how there is not enough money for startups, no people to hire, no appetite for risk etc. It followed another conference (I have to stop going to these things) where another whiner complained that Australia was at crisis point with regard to global innovation, that nobody wants to come to Australia, that you can't hire quality people...

Let's look at some of the more common complaints with regard to the innovation ecosystem. Generally speaking, most of these complainers are either not paying attention, are generally uninformed or they just like to whine. So let's unpack the specific focus of most of the whining.

Back in 2012-2013 there was very little money available for venture capital in Australia. It was due to the general failure of Australian venture funds during the 1990s and 2000s. Hundreds of millions of dollars had been blown up by fund managers who, for the most part, didn't really know what they were doing. We then entered a dark time when only a few corporate and a few high net worth (HNW) individuals were prepared to allocate risk capital.

Since 2010, a number of high-profile funds have launched, who now manage over $1 billion specifically targeted at venture. The backers of these funds have mostly been HNW individuals and families with, in very recent times, super funds re-entering the space. This does not include the hundreds of millions of dollars allocated by a diverse set of angel investors who participate in everything from personal investing and club investing through groups such as Innovation Bay and club rounds via dinner parties with people keen to invest.

The government's recent announcement with regard to tax offsets for investment into early stage companies and venture funds will further help the flow of funds. A couple of asides with reference to Government funding here:

1. I am not much of a fan of the Significant Investor Visa (SIV) programme -- good intentions but the incentives are not aligned so we will probably get poor outcomes.

2. Governments (of all persuasions) should generally never directly invest in companies, nor should we see a general return to the failed models where government participated in areas where it was not needed nor had any experience or skill.

3. Governments, or more specifically government funding, is critical in areas such as research but also in terms of investing where others fear to tread or where we need to establish research infrastructure (such as the Quantum Computing investment, Synchrotron or the Square Kilometre Array).

4. In other investment areas (such as biomed and biotech), where the risk profile is much higher and the returns profile much longer, the government's role is crucial in helping to bring commercial money to these areas. The co-investment Biomedical Translation Fund is a wonderful example of where government money is well placed.

5. The Early Stage Venture Capital Limited Partnerships (ESVCLP) programme was probably the single biggest driver of the creation of a venture capital industry in Australia. Providing investors with tax relief has helped dramatically increase the level of investment being made. This was and is a great idea (and yes, AirTree Ventures is an ESVCLP Fund... one of many that have been established over the last five or so years).

In terms of the general funding space, while we lag behind the United States in terms of relative allocation of venture capital available, I think it is fair to say that the large influx of capital means sufficient funding is available for Australian companies raising between $100,000 and $10 million. Sure, we don't have large funds allocated to later series funding (raising greater than $25 million), but this is also beginning to change and change fast. That type of funding is also inherently more global in any event.

So to be clear: we have enough money for now. What is imperative now is that at least some of the people investing in Australian startups and funds make a return. If they do, then these successful funds will attract more investors and the funds will invest more and we will have a growing industry. However, if we (as a venture industry) just piss the money up against the wall in a range of cool sounding but fundamentally flawed businesses, then our investors will not come back and the Australian venture industry will enter another ice age.

It is important to understand why this focus on investor returns is actually good for everyone. In private equity, the fund generally buys out the significant majority of the business (if not all) and so (generally speaking) the majority of the returns made flow to the PE funds and their investors. This is not the case in venture, where we tend to take minority positions in companies (normally between 5 percent and 25 percent) and are part of a broader ecosystem of participants in a company's success.

This means that if we (the fund with, say, 15 percent) make a good return for our investors, then the guys that own the 85 percent also do well. So the founders, employees and angel investors all make strong returns too. Our model as venture investors is to support great founders and back them to make the right decisions: we can't, and don't want, to force founders to sell early. Of course, there are edge cases where this doesn't quite work out, but in the significant majority of cases this is what happens.

What is even better is that in most cases, founders and employees will use these returns to make their own angel investments and/or start more new, cool companies. And so the wheel turns and an ecosystem develops. This is the secret to Silicon Valley's success.

As to the level of innovation or activity going on in Australia, let me step back a few years.

At my previous fund, Netus (2006 - 2012), we saw just over 550 companies in the course of six years. In the first 18 months of AirTree Ventures, we have seen over 1150 companies. So to suggest that there hasn't been a material shift in either the demand for funding or the access to funding is simply untrue.

Let me be super clear. If you have a great idea or opportunity in Australia, you can get funding. If you can't get funding, it might be because you need a lot of money for an unproven idea (we do not have an ecosystem that can easily allocate $40 million to an idea with no metrics), your idea will not show any traction for a long time (again, our ecosystem is at the point that it needs to show reasonably quick returns to justify more money coming in) or it is not that great an idea. Of the 1150 opportunities we have seen over the last 18 months, maybe less than 5 percent fall into the above (difficult to fund as opposed to terrible ideas) categories, leaving the vast majority within the funding ability of the Australian market.

The oft-repeated claim that Australian venture funds are risk averse is also an outdated observation. Every year there are thousands of young people leaving university who don't jump into a consulting firm or investment bank but rather take the risky path and create or work in a startup. They are getting angel funding from friends and family and then getting follow-on funds from people (like us) who are prepared to invest risky capital. It would be fair to say that many corporates have lacked a long-term approach to product development (and therefore risk), but this is changing as disruptive models are forcing even the most entrenched monopolies to start to react.

The other common whine is about research funding. It is true that Australia does not invest enough in research and development. The main culprit is our corporate sector who has generally (ex mining) never had to really think about investing in-over-the-horizon products or services (such is the cosy life of an oligopoly market). However, this does rescue governments from making seriously stupid decisions. The cuts brought in by the Abbott Government were reprehensible and short sighted. Put simply, more government money should be directed to research and a return to pro-rata investments must be made.

Yet it is not appropriate to draw stumps at this point of the research debate. The research sector needs to prove that the bulk of government-funded research turns into patents, royalties, commercial investment and jobs, as opposed to just hitting metrics in terms of impact. If we can show a relationship between these harder metrics and government funding, then one would hope there is a stronger case for more funding to be allocated.

We do have a skills shortage. When you have an exploding area in an economy -- guess what? You have a lack of skills. This is surely not a surprise. The US, UK, Canada and Australia (to name a few) have a STEM skills shortage. So we do need to address this and a range of ideas regarding both upskilling students and visa changes will help.

The quickest way to address the shortfall is immigration. Note that while only 12 percent of the US population is foreign born, greater than 35 percent of the people in Silicon Valley are foreign born. We need to make it easier for smart, trained foreigners to come to Australia to help us build a new innovative economy.

To the whiners, a small point of order: we are not trying to get people from Silicon Valley to come here. We need to do what Silicon Valley does and get people to come from all over the world. We need to recruit in Europe, the Middle East, Asia and even Africa. Spending $1 recruiting in Silicon Valley would be a complete waste of money compared to what that same $1 will achieve in Poland, Argentina or Malaysia.

We undoubtedly need to encourage more STEM skills in schools. But we must be careful -- already a whole bunch of science and engineering graduates can't get jobs post graduation, so just making more STEM grads is not the answer. We need to understand why these STEM grads can't find jobs and perhaps look to offer short courses to upskill them to allow them to be employable in the roles that need filling.

While I applaud the UK government's recent decision to make coding mandatory in schools, this is not enough by itself. Technology changes rapidly (as do coding languages) and so we need to expose STEM students both to generally applicable ways of thinking (e.g. logic) as well as specifically applicable skillsets (e.g. programming).

In summary, the Australian venture/innovation landscape is vastly different from what it was even two years ago, and on every front things are getting better. We can think of our innovation-focused economy as a small garden. We want to make this a big garden so we need to carefully fertilise and water the garden at the right cadence. Too little and it will die. Too much and it will also die.

Let's push the whiners aside and neither talk up nor talk down where we are on this trajectory. We need to focus on what we need to do and how we measure the impact of what we are doing to make sure we are on the right track.

More On This Topic