Funding Innovation in the Knowledge Nation
1999 Information Outlook Conference
Enhancing Business Opportunities with the Internet
Australian National University, Canberra
6 November 1999
Contents and Powerpoint presentation summary
Introduction
SLIDE 1
There was a momentous event last week. Four venerable giants of the US industrial base, Union Carbide, Chevron, Sears Roebuck & Co and Goodyear were removed from the Dow Jones Industrial Average. They were replaced by four companies: Microsoft, Intel, SBC Communications and Home Depot. At least two of these companies, Microsoft and Intel were founded within the lifetimes of most of the people in this room.
They are companies that are in industries that didn’t exist 40 years ago. Most remarkable of all, one of the companies, Microsoft, is still headed by the entrepreneur who founded it just over 30 years ago.
They are companies that deal in the creation, storage and transportation of a commodity that has the rare property of increasing in value as it increases in volume – that commodity is information.
This is the information age. It is also the age of the entrepreneur. Their combination has transformed commerce around the world. The changes in the composition of the Dow this month are, as if we needed it, a final confirmation that we now live in a knowledge economy.
The knowledge economy will transform every national economy. Conditions that once encouraged the development of successful corporate cultures in the past might be found wanting in the new economy. The challenge for Australia is to work out where it stands today and what it must do differently to fully participate in the world that is emerging.
Funding innovation
SLIDE 2
In my presentation today I want to address some of the ways we can build identity and presence in the global knowledge economy, including the role of education and innovation and how they relate to industry growth.
Entrepreneurs are the human resource needed to derive economic benefit from ideas. They are the link between innovation and commercialisation. The ability for entrepreneurs to secure investment for this process is a critical, tangible requirement of building a knowledge nation. Specifically, Australia must create a corporate culture that is encouraging to entrepreneurs. To inform my views I have looked at entrepreneurial landscapes in other places and considered Australia’s current corporate and investment environment.
The knowledge nation. It is time to put some substance behind the concept. Australia is well and truly engaged in the information economy and our capability to build identity and presence in the ubiquitous digital environment of the internet will largely determine how we fare in the knowledge economy.
The knowledge nation heralds a shift in values, where the management and commercial exchange of intellectual property derived from people who think up new ideas ultimately becomes the source of wealth, rather than the commercial exchange for the products of an industrial process.
Whilst this over-simplifies the landscape, there is no doubt that the changing proportion of our economy from manufactures to services is by far the most obvious and powerful indicator of such a shift, with services sector now over 80% of the Australian economy. The use and refinement of information technologies has at the same time facilitated this shift by changing the nature of the workforce and allowed the investment / return ratios that existed by definition in a manufacturing/ resources based economy to be completely blown away.
As a result wealth is being created in ways and orders of magnitude that are reshaping economic hierarchies both within nation state economies and the global economy. The internet has enabled the emergence of another market, a market that thrives in active contempt of the traditional corporate culture. Australia’s capacity to think outside this risk-averse corporate culture has been preceded by recognition that it exists here in droves. It’s true: an agricultural and resources based economy carries the risk in the weather and exploration. Therefore the concept of increasing risk in the value-added aspects of the business did not make good business practice. What was a cultural strength in a commodity and resources economy has become a cultural weakness in a service and information economy.
The challenge is therefore to change our corporate culture so we are best able to place Australia in a position of strength in the global information economy, with the aim of deriving the benefits from growth for Australians. But first, I want to focus on why the internet is so central to success.
Focus on the Internet
SLIDE 3
The Internet has enabled unprecedented rates of change in the social, economic and cultural spheres. It has redefined the empowered citizen and the nation state. Globalisation is most often the term used to describe the symptoms of the depth of change enabled by the internet.
Thomas Friedman, in his book ‘The Lexus and the Olive Tree’ says ”
Today’s era of globalisation is built around falling telecommunications costs – thanks to microchips, satellites, fire optics and the Internet. These new technologies are able to weave the world together even tighter.”
The enabling technology industries have established themselves as the drivers of growth, with the sector being characterised by high value added and high wages. Here in Australia, the information industry is growing at a rate three times that of the economy.
US Federal Reserve chairman, Alan Greenspan, has stated that the IT&T sector, which provides the infrastructure fort the information economy accounts for one third of all recent US growth, and is growing at two times the rate of the overall economy.
Forrester Research has estimated the total value of goods and services traded between companies over the Internet will reach $2 trillion in 2003. To put this in perspective, a 5% commission on this represents a $100 billion opportunity. (AU$) Business to consumer e-commerce is also growing at phenomenal rates.
From another perspective, internet stocks continue to lead the market, with capitalisation figures outstripping revenues way beyond the normal relativities of other stocks. Despite a series of adjustments, internet stocks have held up despite prophets of doom predicting a devastating bursting of the ‘bubble’.
Globalisation introduces many challenges to Government, Industry and the community. What is the best path to follow in policy terms and what strategies can offer the best chance for success and survival of our national economy, and indeed our sense of Australian identity? Jerry Everard confronts these issues in Virtual States which I had the pleasure of launching just last week. He has this to say:
‘Globalisation is above all a social process, and it operates unevenly across society and between societies. This differential quality provides dynamism behind globalisation. I t also promotes social inequalities.’
Issues of profound importance such as this are worthy of far more attention than they are currently receiving, however for today I have chosen to look at some of the specific strategies that may assist in affording success in important areas of the economy.
Entrepreneurial landscapes
SLIDE 4
From a public policy perspective, we need to establish, as far as is possible, what constitutes success. Is it an identifiable economic return to a nation that can be quantified within trade balance of payments terms? We know that we have a chronic IT&T trade deficit problem, with recent figures showing a phenomenal worsening of Australia’s position. So would success be turning this trend around? Or maybe, given the emphasis on intellectual property, it the number of patents held by a particular citizenry.
Defining success in policy terms will always be difficult. The complex relationships between a vast array of portfolios including education, industry, communications and the arts I have found mitigates against defining a clear vision. As a result, assessing the degree of its realisation becomes very difficult.
However, we do know that sustained economic growth offers greater opportunities for employment, and that education offers greater opportunities for those seeking employment. Given that employment in a high wage society offers the best chance to maintain improve one’s standard of living, then investment in these areas by Government makes political sense.
We also know that there is a quantifiable relationship between research, development and commercialisation and economic growth. The higher the R&D expenditure as a proportion of GDP, the stronger the growth. And nothing could be more obvious than through the example of internet and technology services based sector.
All these issues justify a focussed, determine effort by all stakeholders to build a knowledge nation.
And it’s not like we are starting from a low base.
Unique Australia
SLIDE 5
It is generally accepted that Australia is well placed to be successful in the Information economy.
We have high penetration of PCs per head in both business and home and one of the highest internet connectivity rates in the world. We have a well-educated population and a history of adopting new technologies quickly.
Our geography, while presenting a challenge with our coastal cities and sparsely populated interior, means that we have developed, or more accurately are still trying to develop meaningful connectivity solutions. These efforts position Australian capability at the forefront to tackle the connectivity challenges of many developing nations.
The trade challenges of our geographic isolation as an island continent down-under are removed as far as any digital product or service is concerned, automatically positioning the digital sector of creative content, software and e-commerce into one of enormous opportunity.
Fortunately for us, the talent and reputation we have has already made Australians leaders in this field. While in the US I met the president of a production company that makes commercials for Fortune 500 companies. He had just returned from filming in Australia. He told me his company was able to wear the costs of travel to access the talent because the internet was facilitating the production process to a degree that it almost offset the difference.
And I can’t forget our unfair advantage – our beautiful natural environment
With all of our strengths we also have areas where we can do so much better. It is useful to look at other environments that have led the way in adapting to the knowledge economy.
Entrepreneurial landscapes
SLIDE 6
Australians have made a habit of visiting famous locations of IT success stories almost as much as our talent has made a habit of living and working there. Having ‘been there – done that’ myself recently (at least Silicon Valley), there are some obvious elements that can guide Australia in adapting our corporate culture and public policy to offer the best chance for growth.
Contrary to the perception that Silicon Valley grew out of nowhere very quickly, it has had the longest history of a geographically clustered entrepreneurial powerhouse. There is one feature central to ist development – and that is Stanford University, which was established back in the 1800’s. Stanford’s business focus is attributed to Professor Frederick Terman, who was central to shifting commercial studies into entrepreneurial business activity. He was the one who gave Hewlett and Packard $500 to get the started. The West Coast distinguished itself from the conservative culture of the east coast corporate establishment and has since made an art of risk taking.
What is less well known is the role that the public sector has played in the Valley’s growth. A feature all but ignored in recent forays to the region by Australians. For example, a partnership between the City of San Jose and an association of software firms provides test equipment, lab space and business services for the region’s software developers. The procurement methodology of the US Government also ensures that local businesses will benefit directly. If there is no local capability, then it is developed, perhaps through a joint venture and the university.
The decision to change the driving force of growth in Israel to high technology-related industries was a political one. Vast sums of public money were spent on incentives to attract IT corporations. A scheme to introduce venture capital was also put in place. The scheme, Yosma licensed US VC funds to participate, and provided for public money to top up the funds. However it is widely acknowledged that public expenditure in the defense technology industries that enabled Israel to move so quickly to establish their presence in the global IT&T sector.
What we have…
SLIDE 7
In all the case studies available it is plain that the policy settings of federal state and regional government are key determinants of growth and opportunity. I would now like to have a look at some of the policy settings that are currently in place in Australia relevant to this issue.
In 1996, public spending on Australian education, research and training increased to almost 3 per cent of GDP from 2.35 per cent. This has since fallen dramatically to 2.53 per cent in 1999-2000. If the 1996 spending levels had been maintained, $2.87 billion more would have been spent on education in the last budget. The impact of public re-investment of this magnitude in Australia’s skills development, research, innovation and, ultimately, industry growth and jobs.
Tackling Australia’s dire IT skills shortage is essential. The policy dilemma seems to be: why invest in education if the best and brightest are lured overseas by high wages, stock options and start-ups? An emphasis on real industry growth must accompany investment in education if we hope to entice our own to stay, or at least return.
There are over 20 government programs pitched at the IT&T sector. These programs range from PR style information distribution through to tax breaks on R&D investment. Unfortunately there has been a reduced commitment to supporting R&D investment and other activities, such as the attempt to wind up the highly regarded Export Markets Development Grant scheme. These have exposed a fundamental weakness in the policy platform of the current government.
While the Building IT Strengths (BITS) program has sought to capture the strengths of business incubators, the success of the program will lie in the networking relationships that form amongst the entrepreneurial, professional services and investing communities. Hardly something Government can artificially create. The healthy presence of a range of incubator models and technology park initiatives will best serve a growing sector. International insights gathered recently by Canberra Business Centre have led CEO Julian Webb to identify fifteen specific ‘critical factors’ that contribute to an effective incubator.
Webb examined twenty incubators in Great Britain, the Netherlands, the United States and Israel. I will quote from his findings:
“A successful incubator will be both a tool for the entrepreneur and the investor – also governments and universities. The due diligence, selection processes and value added services must give an investor or venture capitalist adequate assurance. This is crucial for the businesses, to help them obtain the necessary finance. Seed [angel] and venture capital backing is essential to fast track commercialisation of IT.”
If the BITS program is have a meaningful impact, the Government would be well advised to look at Webb’s findings.
Venture capital has attracted a significant amount of attention recently as well, with the Labor opening the policy door at the last election. Again, recent business tax proposals contain recommendations to widen the capability beyond funder funds to US pension funds to invest in venture capital funds. There is growing pressure for the same capability to be extended to our own retirement funds.
As far as venture capital initiatives are concerned, the Israeli inspired Innovation Investment Fund has seen public investment along side private investment, with eight venture capital companies licensed to manage the funds.
In all that we have as a nation, particularly our inherent strength as an early adopter of technology, the policy foundations for education and industry are weak. For a government that claims it is devoted to the macro policy settings this is a complete contradiction. I will now turn to specific elements lacking in our entrepreneurial landscape.
What we need…
SLIDE 8
Having the brainpower to drive ideas and the skills to add firepower to innovation. The adaptability of our education system to the demand of the knowledge economy is critical. It must however, be matched by an equal commitment to the creation of employment opportunities too, otherwise Australians will continue to fund the best of the best in the IT talent that is scattered around the world.
While I hasten to add that part of our strength as an IT nation is our roving brainpower – because some do come home, we cannot sustain the current losses – estimated by Morgan and Banks to be about 1000 people per month in the IT&T sector alone.
Part of our problem may be the study-work transition. The relative lack of collaborative relationships between industry and education institutions whilst improving all the time, continues to distinguish our education environment from other, more entrepreneurial cultures. It is an irony that a tradition of distance between education and industry could also be partly responsible for our capacity to come up with very clever innovations. It is almost like our thinkers are sheltered from the inevitable homogenisation occurs when one’s research is sharply focussed on development and commercialisation for the market.
A consistent theme that emerges in any geographically clustered entrepreneurial environment, is the all-pervasive power of the informal networks that exist. It is the culture of sharing ideas that so distinguishes Silicon Valley in particular from other corporate cultures. The concept of corporate loyalty has diminished to the point where personal commitment is extended to the technology and the profession.
This attribute allowed individual investors like business angels to make the most of their range of experiences, as many have been entrepreneurs or worked in start-ups. This is experience that has served them well in analysing future investment opportunities, not to mention knowing who’s who in the zoo for the purposes of pulling together a strong team to manage the start-up.
Even a rudimentary analysis of the investment flows in Silicon Valley demonstrates the significance of Business Angels. Indeed it is an indictment that the lack of general recognition of the role they play demonstrates that Governments are happy to set policy as mere arbiters of those interests that present their views most often and most effectively. It is, however, not an area where a supportive policy setting is a necessary pre-requisite to encouraging angel involvement. Rather, it is about being mindful that in the midst of encouraging an entrepreneurial culture, the Angels role in the capital food chain is acknowledged at a policy and leadership level.
There are some good economic reasons for creating a competitive environment for investment, but it is also important to ensure that sources of capital are as diverse as possible. Attention has been paid to VC to date, but the lack of recognition of the role Business Angels play continues to be a real threat to establishing a robust capital food chain in Australia. Securing sources of capital in stages creates momentum as each stage of investment establishes important credentials for the next. It is rare that the VC will enter at this really early stage. This initial investment in start-ups is invariably in the hands of Business Angels.
Unfortunately, many in the Australian IT&T sector know the term ‘business angels’ as a government program. According to a recent Government survey of 233 small to medium enterprises in the IT&T sector this program was “not well known or regarded by IT&T SME’s”. Whilst established SME’s don’t always attract the interest of the real angels either, this response confirms my perception that there is little knowledge in the sector that networks of investors operate outside of the VC structure.
Angels are only now establishing a public presence in Australia and this could explain in part the lack of policy attention being paid to their role, although it is no excuse. High profile local angel efforts like TinShed can hardly go unnoticed, but it was back in the early nineties that San Francisco-based business angels gathered together for regular meetings. Business angel investment is as critical an element in a healthy and robust capital food chain as the more structured venture capital. The presence of angels, including US based investors may well determine whether or not momentum gathers behind recent tax proposals designed to encourage capital investment. I met with one group, called the BayAngels, whilst in San Francisco who indicated their strong interest in establishing an Australian presence.
Priorities for a Knowledge Nation
SLIDE 9
One of the more enlightening moments whilst spending time in San Francisco was the apparent recognition by these business angels of Australia’s desire to retain intellectual property. It seems that in a departure from the established practices of US investors, Business angels are not devoted to shifting the whole enterprise to the west coast as part of their strategy to realise their returns. This only emphasises the state of flux that we are in and that Australian leaders should not merely plead for investor interest, but assert what is in our national interest, which is keeping what we can on-shore.
Universities and industries form alliances, allowing an entrepreneurial structure to emerge as a natural by-product of their relationship. Investment in higher education becomes a direct investment in industry development. Recognising spending on education as an investment in industry growth is just the start.
Entrepreneurs are the human resource needed to derive economic benefit from ideas. They are link between innovation and commercialisation. The ability for entrepreneurs to secure investment for this process is a critical, tangible aspect of building a knowledge nation. That is why access to very early, or start-up investment capital is worthy of a particular emphasis.
Understanding the capital food chain is essential if the policy framework is to serve the purpose the rhetoric claims. Whilst the role of business incubators and VC’s has attracted a lot of attention, the role of business accelerators and business angels has been all but ignored.
Business angels are more than the desirable experienced management team that is so essential to securing start-up funding, they are the providers of the start-up funds. They facilitate the gathering of a team and constitute within the loose definition of ‘angel’ a veritable pre-requisite to an entrepreneurial culture.
Access, Education, Innovation, Industry: the internet is the key
SLIDE 10
Over the next twelve months, Australia will be opening it’s doors even wider to new sources of capital – new ways to fund innovation. I hope I have addressed some of the ways we can build identity and presence in the global information economy, on our way to becoming a knowledge nation. An entrepreneurial environment is one element of this process. It also serves to remind us that our future does depend on people and their capability to participate in innovative ways to build a society that will serve the community well into the future.
We must address the social challenge of the information haves and have-nots. To be able to use the internet as a mechanism to close the gap, rather than widen it, we must be in a position of strength in the information economy. The aspiration of universal connectivity is therefore an essential foundation to a knowledge nation, as is giving education and industry policy the attention is deserves. Australia has a proud past of being a global leader in progressing the social agenda of equity and human rights. Whilst this role has shamefully diminished over the last few years, now more than ever, in an information economy, there is a need for global leadership. I would like to conclude with another quote from Virtual States:
SLIDE 11
“National government will still set connection standards, and still operate with a duty of care to their citizens, so there will remain a strong role for states to play, no matter how globalised the economy becomes.”
Jerry Everard, Virtual States 1999
