Malcolm Turnbull meets staff at start-up space Stone and Chalk
The uncritical public acceptance of the Turnbull government’s innovation policy is a worry. Apart from putting money back into CSIRO that had already been taken out, the ideas boom is largely about start-ups. Start-ups, for those playing along at home, are what you call small businesses when they are run by young dudes who can code.
“Start-ups” have become talismanic in contemporary Western culture, and it’s no surprise we have a lot of blind spots and cognitive biases when it comes to them. We seem to be expecting a lot more economic upside than is likely.
The key features of a tech start-up are this: it has no customers and a strong chance of going broke. What most of these businesses do is funnel capital (investors’ money) into work nobody asked to be done. They build a product for which there is no market, exhaust their funds, close. They’re a bit like a make-work project.
Turnbull said at the launch: “We learned so much from the failure of new businesses.” The word “we” is a curious choice. This is eye-wateringly expensive private tuition, now publicly subsidised.
The idea, of course, is that among all the dud start-ups, there is a shiny diamond. One that goes huge.
But remember what huge means in this context; the photo-sharing service Instagram had just 13 employees when it was sold to Facebook for $1 billion. The employment upside for Australia of a break-out tech start-up is modest. At least the investors reap the benefit. But the people who pop the champagne as the sale goes through are those whose investment portfolios include venture capital. Malcolm Turnbull might have some of his money in VC, but the average person does not.
In short, the average tech start-up adds little value to the economy, employs few people, and pays out to a handful of already rich people if it succeeds. And we’re now going to give them tax breaks to do so.
The other big winners from a successful start-up “eco-system” are the big companies that gobble up small start-ups.
According to a brilliant feature article on the struggles of a middling start-up called BoomTrain, Silicon Valley is a system for “doing low-overhead, low-risk R&D for five corporate giants. In such a system, the real disillusionment isn’t the discovery that you’re unlikely to become a billionaire; it’s the realization that your feeling of autonomy is a fantasy, and that the vast majority of you have been set up to fail by design.”
The scepticism I’ve outlined above may be hard to match up to what we know about the United States and Silicon Valley. They do have several huge businesses that make good money and employ many. Its true Apple and Google are monstrous. Facebook, too.
But the true value of the second rung of famous enterprises — Airbnb, Uber, etc — is likely overstated. Their valuations run far ahead of revenue, and some, like Twitter, are serial loss-makers.
If a business adds a lot of value to customers, but can’t extract payments from them, you want to be the customer, not the owner. The smart play is to let America subsidise the likes of Twitter and Facebook and exploit the free service.
Even Facebook’s share price is 80 times its earnings. Mature companies in mature markets have a ratio closer to 15. Facebook’s higher ratio represents optimism it can grow its revenue. If it turns out it can’t, the economic importance of Facebook will look more modest.
We are likely closer to the top of the tech bubble than the bottom and, at this stage, joining the comically long list of places that want to be “the next Silicon Valley” could be bad timing.
At this stage in the article I come across as a curmudgeon who hates risk-taking and resents success, I know. But I protest! I believe Australia can innovate and be wildly successful. But to do so, it needs to think beyond the “brogrammers”.
The ABS definition of innovation is so much broader than the concept of innovation as portrayed in this policy announcement.
It talks about innovation in operational and managerial processes and marketing as well as in products.
There are loads of very successful innovative Australian businesses that have grown quickly and would be front-page news if they’d only had two 20-something white dudes as their founders and relied a bit more on code.
Think about Guzman y Gomez — an Australian Mexican fast-food chain that has caught fire. Or Roll’d. Or Boost Juice. Technology is not the only sector where a great business idea can capture the imagination.
But new business should not be our only concern. It is well-known employment growth comes from high-growth businesses, and high-growth businesses tend to be older businesses.
Where we need innovation, and where innovation can really be leveraged, is if it happens in big business.
For an example, look at the Swedish clothing chain H&M. It was founded in 1947 and has recently gone fully global and been wildly successful. Is there any reason Myer or David Jones couldn’t do likewise, if they had the right motivation, and the right policy settings?
The current innovation fad can easily disappear up a blind alley as PR types and marketers get their hands on it and treat it like a new invention in and of itself. It’s not as though we get up in the morning and say, “Hmmmm, I’ll innovate something today that will make ne a squillionaire”. If it was that easy, we’d do it every day, wouldn’t we.
Innovation comes mainly in two forms. The first is detailed in this article where thousands of people have thousands of innovative ideas of which thousands fail and maybe 10 become monster successes. The other comes in the form of problem solving and this is where established businesses focus on their business risks 5 to 10 years out and take measures to manage the risk.
So McDonalds opening up McCafes to bring back people who had graduated from Happy Meals to espresso coffee is innovative.
But that’s probably not sexy enough for the marketing and PR crowd busily destroying yet another word until its meaning is no longer apparent.
People have been innovating ever since mankind mastered fire.
This is a really acute analysis, JM, especially given that the economic jury is still out on even apparently unstoppable monsters, like Facebook. It’s arguable that Turnbull’s own biggest personal ‘success’ story as a Venture Capitalist – Ozemail – was to some degree a slightly-shabby exercise in luck’s-a-fortune wealth transferrence, from a lot of investors (in WorldCom) to a handful of starter-uppers. Turnbull uses the word ‘entrepreneur’ a lot, but it’s come increasingly to mean little more than a twenty-five year IT-brat with a vague idea for an app and his troll lines out for a million-dollar buyout before she has to actually create much more than a vaguely-hip Powerpoint pitch. But building real growth/wealth/jobs is about the long haul, a la Frank Lowy & Co. Building nominal value is mostly to do with hype, timing and enticing the strategic staying power of established concerns to ‘buy your vision’. Again if you look at Ozemail’s trajectory, it’s been Iinet and NZ Telecom that have (eventually) turned its start-up fundamentals/potential into communications companies that can sustain themselves. Kudos to Turnbull et al for kicking things off and building it in the early days, sure, but on balance did those originating VC’s, really, earn the eye-popping personal fortunes they reaped? You want ‘entrepreneur’ to mean a person who creates productivity/jobs/growth out of nothing, not just personal wealth. And if I was a shareholder buying Ozemail out back then, I’d want to be sure that the $57 million pay-off I was turning an original start-up investment of only $500,000 into (inside what, half a decade)…was payment for some serious value-adding along the way, resulting in long-term, substantiated growth and yield projections, with rock-solid DD, etc. I doubt even Malcolm Turnbull himself would look you in the eye and say he earned every cent of what he sold for. Fair play, but in the wider picture, his own IT VC backstory is pretty typical: very few Tech start-ups, even the big boys, could provide browsing shareholders with authentic DD on their potential future earnings. Even the massive players like Apple and Google are relying, in the end, on esoteric and mercurial ‘valuation’ parameters: crowd behaviour, existing monopolisation, tenuous multi-stranded IT-sector bundle-deals, self-generating momentum-by-default (we’re getting bigger because we’re getting bigger because we’re even bigger now because oooh we’re now very, very big)…yet such stuff can evaporate – reverse – very quickly, too.
So I agree with your timely analysis. I think the underlying philosophy of IT since the late 90’s – get in early, run hard with the next big idea, puff it up into a vaguely-going concern of plausibly tradeable value, flog it at high personal yield and walk, leaving the buyers to make it stick over the long run – is not something you can (or should want to) base a national economy on. Because in many ways it’s a massive game of musical chairs, and very, very few end up sitting anywhere but on the bones of their arse.
Good Article.
I am a joint partner in a new “small business enterprise”, that is not high tech at all.
I agree wholeheartedly with the sentiments in this article.
I suspect that eventually all the hard work and design done by my partner and myself will be bought by a larger business that should have had the sense to just employ us to do what we did.
No one did, so we were forced to go it alone with almost no finance.
Policies should try to encourage larger businesses to share their capital and risk around, rather than SBE’s like ours that usually die quickly, starved by a lack of capital.
Old hands like me have seen 3 or 4 waves of enthusiasm for “innovation and technology” roll over the land girt by sea.
There was the “Sputnik era” that got me into doing a Ph.D. In physics. Then there was solar energy after the OPEC oil cris in 1972, then the High tech boom of the early 80s, led by Barry Jones, then the IT boom of the late 90s, the new solar energy boom (not really seen in Oz) and now the App boom.
All of these booms went bust in Australia as we got in late and tried to be a fast follower. We were trying to emulate Silicon Valley in the 80s and it seems that we’re trying to do it again.
Part of the problem has been “the taboo against knowing who we are”. If we are to diversify from mining and agriculture, we must use the innovation in those industries as the springboard.
How do we use “Innovation” to diversify from our present industry base? This video illustrates the “Supplier-User model”, based on B-A Lundvall’s “Danish Dairy Industry strategy”. https://www.youtube.com/watch?v=NXY-5M5_wEg&feature=youtu.be.My full paper on the strategy is at http://www.thepicketline.net/industry…. Also look at my youtube on “Definition of Innovation” at https://www.youtube.com/watch?v=vGCIw….
It might be more beneficial to identify and cease giving subsidies to companies that stifle innovation…