Innovation, Research & Governments: the Entrepreneur’s Riddle

Following on from my Open Letter to the new Australian government, I wanted to spend some time reflecting on what innovation means in the context of fundamental vs applied research and take a look at what government can do to boost the entrepreneurial ecosystem.

I believe the Labor government and the anticipated Department of Innovation, Industry, Science and Research under Senator Kim Carr has an incredible opportunity to get things right. In effect, given the lack of effective activity in this area of late, they have a blank slate to work on and there is much they can do to ensure Australia takes its rightful place in the innovation pecking order.

Irving Wladawsky-Berger, Chairman Emeritus of the IBM Academy of Technology,  argues that the big issues that need solving are increasingly prevalent in the real world, not as many researchers would have us believe, swanning around their ivory tower labs or exotic location academic conferences. He calls on researchers and innovators to personally (don’t send your PhD students or three admin assistants) step out into the real world and personally get to know these tough problems.

His view is that if they do this they will hopefully be able to come up with not only elegant, innovative solutions to the problems, but also with new ideas that might lead to fundamental advances in science and technology.

In some respects one might think that this is trite. Surely by now researchers and university academics get this. Apparently not. Irving points out that in some of his recent discussions he has encountered resistance to this way of thinking, even within the hallowed halls of MIT:

“…a well-respected MIT professor expressed his feelings that a university should focus pretty much exclusively in inventing new technologies, and leave it to industry and government to worry about how to apply them to problems in business and society at large.”

I have certainly experienced that approach as well, but there are folks out there working at the coal face trying to change stagnant perceptions like these. In some instances there have been great successes. I won’t mention names, but I have personally experienced a similarly senior professor go through a metamorphosis from staunch critic to commercial acolyte.

I agree with Irving’s view though, that the big challenges are above distinctions around applied versus fundamental. As he says:

” these problems are so incredibly complicated, and require such top talent and new knowledge that the distinction between fundamental and applied innovation is practically non-existent.

I like Irving’s take that we are talking about a multi-dimensional spectrum of innovations, a spectrum that requires an all hands on deck approach to solving – we don’t have the luxury of lofty distinctions when it comes to the environment or health care.

Irving’s comments were a response to a special report on innovation in last month’s The Economist. It’s interesting to note the argument made in one of the series of articles that the best thing that governments can do to encourage innovation is get out of the way.

In this article the author looks at how little positive effect government intervention has had on innovation in Europe:

Europe’s innovation malaise is the result of a complex mix of factors. Some places, like Ireland, Finland and parts of Scandinavia, do better than others. And Cambrdige, England, can reasonably claim to have created Europe’s best innovation cluster, albeit one that falls far shaort of Silicon Valley. 

The main thing holding back continental Europe is that it is a lousy place to start a new company…last year, venture capitalists invested only about $9 billion in the EU, while their American counterparts splashed out some $45 billion on new ventures. The link between venture capital and innovation is a strong one.

There are many analogies between Europe and Australia when it comes to government’s approach to supporting innovation. Maybe its our colonial upbringing that inspires an innate desire to suffocate innovation through red tape and market barriers, but the new Australian government has a chance to move beyond this.

I have had a chat with a number of colleagues around the world about the unique position we are in – Australia is at an inflection point. Like Europe, we aspire to have a robust innovation system overflowing with new, thriving businesses.

How do we get there?

As John Wolpert, an evangelist for open innovation, puts it: “Make it cheap and easy to start and run companies. Make risk capital attractive to partake in by low capital gains. And then encourage a culture of giving by removing tall poppy attitudes through a systematic cultural program so that conspicuous giving is accepted.”

I totally disagree with the notion that in a country like Australia, the government should take a hands off approach to innovation. However, we do need to fundamentally break from the past.

There are many areas where the Department of Innovation can assist.

As highlighted in my Open Letter, they have already alluded to removing some of the bureaucratic fervor around such programs as Commercial Ready, but there is one area that is urgently in need of fixing.

I highlighted above in bold the quote about the nexus between venture capital and innovation. The former Australian government, recognising that the country’s venture capital industry is broken had started to introduce support for new VC managers under a follow-on IIF round.

However, that stalled when the elections were announced. In addition, it is my opinion that the form and quantum involved in this support was completely out of whack with the importance of a robust venture industry to innovation and the Australian economy as a whole.

My thesis is that the Australian government should allocate $1 billion towards kickstarting the Australian Venture Capital industry.

This funding should be placed in the hands of a number of VC managers with a level of oversight from the Future Fund, who would act like a limited partner does in the Silicon Valley style venture model. Allow these funds to build track record and they will, through their very nature, seek to increase funds under management, which they will be able to secure in droves as a result of their success.

A simple, yet bold step, but a big one that would put Australia onto the exciting journey of solving the Entrepreneur’s Riddle.

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4 thoughts on “Innovation, Research & Governments: the Entrepreneur’s Riddle

  1. I think there is no question that due to the long-term dependence on government backing of virtually all parts of the innovation “system” in Australia, pulling back and taking less of a command-and-control approach would be disasterous…a whole generation of innovation devastation would result before people realized that they need to spend their own money on research and innovation rather than relying on government.

    But I think it is dangerous that there is such a single-source mentality about innovation resources in Australia. (And it will be too soon if I ever again hear an Aussie saying, “that’s a great idea! Let’s see if we can get government to fund it!)

    I agree with Randal that the government (given it is already taking the money in high taxes) should give back at least a billion in venture funding, but it would be a terrible mistake to do what would be the most typical thing for government to do – give most of the billion to a small handful of venture capital managers. If there is one thing I learned spending most of my career in California it is that you need to have MANY people you can pitch for funding…because you are going to get the first nine pitches wrong or run into a VC who is having a bad coffee day.

    Diversity > Picking winners

  2. Randall – love your enthusiasm, but the target is wrong. This government is looking for ways to reduce its overhead. And so they should be. The thing that needs to be fixed is tax laws that relate to early stage companies and investments. We need for founder options to not be taxed to start with – provided that there is an escrow period. That way founders and staff can receive options as part of their remuneration without being penalized. The current tax system provides no incentive for people to take non-cash remuneration. The same philosophy should be applied to investments made in early stage companies – a 10BA style scheme that will give HNW investors a way to get a 150% write off on the money they put into start ups… Sure there will be schemes developed by smart accountants just as happened in the movie industry. But the benefits will be that there will be a lot of engineers, scientists and entrepreneurs that are able to raise funds without having to go the vulture capital route.

    Next: Give a tax break (as in Ireland) to companies/people whose businesses are built around IP. The idea should be to keep IP in the country because of the tax implications rather than motivating IP to be sold to foreign companies so that owners and investors can get a quick return.

    Neither of these requires the government to find the money. These actually help create more.

  3. Chris – I see the measures you mention as complementary rather than mutually exclusive. Reducing administrative costs where possible is commendable, but boosting the economy before it stalls would be visionary.

  4. Metamorphosis the novel by Franz Kafka is to hit the big screen. A movie has been underway and the trailer has now been launched. The film, directed by Chris Swanton and starring Chris New, Robert Pugh, Maureen Lipman and Laura Rees follows the story of Gregor, a travelling salesman who progressively morphs into an insect, with his horrified household observing in disgust.

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