Entrepreneurs are innovation’s essential agreement

In my 25 years as venture capitalist, the question often arose as to why Australia, being a country that produces 3 per cent of the world’s scientific research, has not been able to build an equivalent to Silicon Valley?

My reply generally comprised two points. First, do not confuse the US with Silicon Valley: it is only four counties yet it originates over 50 per cent of American venture capital investment. Second, Australia does have the equivalent to Silicon Valley: it is based in Perth and centred on the mining industry.

What Silicon Valley and Perth have been able to create is an entrepreneurial ecosystem. This term is being increasingly used to define a community where, instead of corporate hierarchies, there is promotion of entrepreneurship, availability of venture capital, collective learning through trial and error, horizontal sharing of information, and a passion for experimentation. Typically careers are specialised, flexible, and likely to span across many different companies. Besides Silicon Valley and Boston, Bangalore, Cambridge, Taipei and Tel Aviv are being quoted as successful entrepreneurial ecosystems.

The federal government has stated that one of its key policy platforms is to ensure that Australia builds a 21st century economy. Indeed on May 12, 2009 it released its blueprint for the next 10 years Powering Ideas, Powering Ideas: an innovation agenda for the 21st century. The government promised to increase the Commonwealth science and innovation budget by 25 per cent to $8.58 billion for the 2009-10 fiscal year.

Perhaps the most famous quote in venture capital is that of Professor Ian MacMillan of Wharton Business School: “There is no question that irrespective of the horse (the business), the race (the market) or the odds (the valuation), it is the jockey (the entrepreneur) who fundamentally determines whether the venture capitalist will place a bet at all.”

In my 25 years as a venture capitalist, I would have looked at some 5,000 business plans, invested in 50 and wished it were 25. In all cases the difference between success and failure was the entrepreneur.

When I read the 76 pages of Powering Ideas I struck by the fact that although the word “innovation” is mentioned 525 times, the word “entrepreneur” is mentioned only once.

This is surprising to me because I always understood that if you accept innovation is defined as the commercialisation of research, then what is critical to successful innovation is the promotion of entrepreneurship. If you don’t have an entrepreneurial ecosystem in place the $8.58 billion being invested in innovation will largely be money wasted. It is the entrepreneur who drives successful innovation not the infrastructure.

Hence what Labor needs to do is not just spend $8.58 billion on innovation but build an ecosystem for entrepreneurs - particularly in the tertiary and quaternary sector industries of the 21st century.

What needs to be done to build an entrepreneurial ecosystem? I can honestly say I don’t know. I have some ideas but there has been no necessary rigorous analysis.

There have been numerous reports but none have been developed by an entity that, besides providing properly researched answers will keep providing pressure in the public policy domain. How can the rigorous analysis be done? As a focal point may I suggest the creation of an Institute for Entrepreneurship?

To give an example of the work an Institute on Entrepreneurship could achieve, it is generally well accepted that a key determinant of entrepreneurial activity is the level of capital gains tax applied to a successful exit, both for the entrepreneur and the venture capital investors. However this factor appears to be overlooked in Australia.

Chapter 8 of the Cutler Review of Australia’s Innovation System, Venturous Australia, which considered the relation between taxation and innovation, made no mention of CGT. At least the Australian Taxation Office has now woken up and realised that the level and application of CGT in venture capital and private equity is a critical factor.

The 800-plus pages of 1999 Ralph Report also did not discuss this significant topic.

The Rudd Government is now having another review of the Australian Taxation System under leadership of Treasury Secretary Ken Henry. Who is putting forward the paper and analysis proposing the best taxation structures for entrepreneurs? Not the entrepreneurs, they are too busy being innovators and building their own businesses.

There have been many reviews of Australia’s innovation system: they are read and then forgotten. What we need is an institute that provides the analysis and focus to promote the concept of entrepreneurship and provide useful critiques of government policy.

Australia needs the entrepreneurship equivalent of the Lowy Institute for International Policy or the St James Ethics Centre.