In the recent debate on innovation in Australia the question has been asked "Is Australia risk averse?". It would be simple to answer "Australia, risk averse - you'd have to be joking! We gambled $113 Billion dollars in the last year, and lost some $13 Billion in doing so!"i Of course we are not risk averse in this sense.
Whether we are averse to risk when it comes to the commercialisation of innovation is a different question altogether. I believe that the answer is that yes, we are averse to risk, but that is not a bad thing.
Let us considering what are the differences between gambling and the commercialisation of innovation. Gambling results, if one ignores it's tragic social consequences, in the mere transference of money from one pocket to another. The nation as a whole is no richer, but no poorer. By contrast the successful commercialisation of innovation is the wellspring of economic growth. It generates employment and contributes to national wealth. It enables us to export more, to add value to raw materials, to work more efficiently and productively, to unburden and enrich the lives of all.
The American economic historian Joel Mokyr, in his insightful book "Lever of Riches" said
"Technological progress has been one of the most potent forces in history in that it has provided society with what economists call a 'free lunch,' that is, an increase in output that is not commensurate with the increase in effort and cost necessary to bring it about."ii
Even if one is concerned about the prospect of "globalisation", and the presumption of continuous economic growth that it entails, innovation remains important. Herman Daly's "steady-state economy" still requires technical improvements in resource productivity to lift the poor out of povertyiii.
If we are to satisfy the aspirations of our society to grow and prosper then we must engage in a relentless pursuit of successful technical innovation. Here lies the rub. Which technical innovations are "successful"? What new ideas will lead to successful technical innovation. If our innovative activity, our research, is unsuccessful, or if it is successful at a research level but is not commercialised, then there is no "free lunch"... just a bunch of researchers starving to death in a laboratory. By definition then successful innovation is that innovation which produces more than it costs.
So we want innovation to be happening in Australia, but we don't want to be undertaking research which will be unsuccessful. This seems like quite a paradox when you consider that innovation involves "doing something new". New things often don't work. Research is therefore inherently risky. One has to accept that a proportion of research projects will be unsuccessful. In these circumstances is it not appropriate that those charged with allocating our scarce national resources on innovation should be looking quite hard at whether any given innovation will pass the "free lunch" test? This is the display of an "aversion to risk".
"Snake oil" has a long and illustrious history. A new idea without value can suck in capital which achieves no more than if it had been frittered away on gambling. Scarce resources, such as venture capital, are wasted if they are invested in a "snake oil" scheme. It is appropriate that Australia be "risk averse" in the sense that it seeks to avoid investing in "snake oil" and attempts to direct the available, but limited, resources, such as venture capital, into projects that will produce a "free lunch".
Let me at this point make very clear that I am not proposing that the government seek to "pick winners". It is abundantly clear that politicians and bureaucrats are singularly ill equipped to do any such thing. The "market" must decide where to invest.
Having put the view that we should be risk averse it may be useful to consider two things. Firstly, where should the aversion to risk occur and to what extent. Secondly, if it is not aversion to risk which is holding the commercialisation of innovation back what is?
In considering these questions it may be helpful to think of the innovation process as a linear process. It isn't, of course, but it may assist our thinking to consider it so. A creative idea is generated, typically by an individual inventor or a small group of collaborators. This is the "Idea" stage. It is the cheapest stage and the most free wheeling. That idea is then communicated to others and a plan evolves for investigating the idea, seeing whether it really works. Lets call this the "Seed" stage. The seed stage is the cheapest stage of the research. It will largely involve scientists and engineers. The next development will be the building of a prototype. It will involve more resources and a wider cast of players. Money must be raised, marketing research must be done, investigations made into competitive products, materials must be sourced, a business plan developed, patents written and a management structure created. This is the "Prototype" stage. Then comes the commercial application of the innovation. The "Commercial" stage is vastly more expensive. It involves even more people, disciplines and complexities.
Taking these stages in turn we start with the "Idea" stage. Barry Jones pointed out in "Sleepers, Awake!"iv that Australia had a good track record in publishing papers but a poor record of commercialising those ideas. I think he is right but I am not sure that we cannot do more to encourage the generation of ideas. This is the cheapest stage of the innovation process. We want a society churning out new ideas in an unfettered stream. The risks from idea generation are small. If we have a good process for sifting the good ideas from the poor then the benefits will strongly outweigh the costs.
The "Seed' stage of innovation is where the risk assessment process starts. Money and other resources start to be drawn in. The assessment involves considerations of patentability, involving as it does novelty and inventiveness. It involves an early consideration of market size and the barriers that exist to entry into that market. Technical risk needs to be considered and balanced against the potential advantages of the innovation. This is not blind risk aversion for it's own sake. It is careful, logical analysis undertaken by trained people with experience and wisdom. The same types of consideration applies at each of the subsequent stages, but each time as the stakes go up so should the level of scrutiny. In this way we can understand and manage the risks inherent in the innovation process.
I would now like to examine briefly a rather random collection of thoughts on the limitations which exist in Australia to the progress of ideas through this series of stages leading to commercialisation. I preface these comments by noting the great changes that have occurred in Australia in the last couple of years. The Innovation Summit Implementation Group's report "Innovation - Unlocking the Future"v, the Chief Scientist's report "The Chance to Change"vi and the Prime Minister's Innovation Statement "Backing Australia's Ability"vii all point to a sea change in the way innovation is viewed in Australia. These initiatives are welcome and have been widely applauded. I have seen, in my role as a mentor of innovators, the results of this changing attitude. There is more money available, big companies are more receptive and the inventors are more inclined to "give it a go".
The number and quality of innovators will depend significantly on the knowledge base of the population. We have in recent years seen a quite shameful decay in our universities, technical colleges and research institutes due to lack of adequate funding. Education is not a revenue item, it is a balance sheet item. It is not a cost but an investment. By the education of our population we are investing in our future. That investment will be repaid in many ways, one of them being the stimulation of innovative activity.
The increase in university spending, the establishment of the Federation Fellowships and the doubling over 5 years of funding for Australian Research Council grants announced in the recent Innovation Statement by the Prime Minister are all extremely welcome increases in the quantum of educational spending. Unfortunately they barely reverse the catastrophic under-funding of the past decade.
The quality of our education is also important. We are more likely to produce innovation through an education system which emphasises creativity rather than rote learning. Perhaps we should be considering more closely the educational ideas of Edward De Bono. De Bono believes that creativity can be taught and his "Six Thinking Hats"viii methodology has been successfully adapted even for primary education. I have, regrettably, seen no sign that there is an attempt to change the quality of the education process to better adapt our population to think innovatively. In fact suggestions of the Implementation Group of the Innovation Summit relating to programs to increase innovation in education and teaching were rejected by the government in its response to the Innovation Summit.
If we educate our population to be creative then we have to generate an appropriate milieu in which that creativity may blossom. Innovative people will be found in universities and research organisations, but in my 30 years as a patent attorney I found them at work in large and small companies; they will be individuals in garrets and garages throughout the nation. Any given initiative to stimulate innovation is likely to only benefit a few of these disparate groups of innovators. We therefore need to cast our nets widely to try to maximise the social benefit of the inventive in our society wherever they may exist.
The recent increase in the availability of venture capital in Australia is a welcome change. I suspect that this has been driven by a number of factors. The IIF and PDF schemes of the Federal government have clearly been influential. The entry of high profile investors such as the Packer family has done the industry no harm. Successes such as Cochlear, ERG and Resmed have helped. As the average P/E at which the listed stocks trade has risen the attraction of private equity, with it's generally lower multiples, has increased. My perception is that in Australia at the moment the availability of capital is not a major stumbling block to well managed innovation. The VC fund on whose advisory board I sit has been able to find suitable projects into which to invest its money, but it has taken a lot of due diligence to find enough good projects in which to invest all of the money placed with the fund.
We could certainly look again at the tax structure to see the way in which it acts as a disincentive for innovators. Despite recent changes, the treatment of capital gains treats innovators poorly relative to the tax regimes of other countries. Our tax treatment of employee stock options is outdated and inappropriate. Sunshine Heart Company Pty Ltd and Vaporex Pty Ltd are two start-ups in which I am involved, in each case our ability to attract good people using Employee Share Option Plans has been very constrained by the tax law as it is presently written.
Unfortunately I do not see the "tall poppy syndrome" as having changed in the way capital availability has. This is regrettable as we need success stories to inspire others. In the US it seems that people getting rich is OK. Here such success is treated with ambivalence, if not outright hostility. A medico on whose behalf I negotiated a licence, and who should be an Australian innovation hero, says "Please don't tell anyone of this great outcome because I don't want to cop a heap of flack!" A university professor, who was advised by my former patent firm, achieved a substantial payment under his university's long established policy of paying one third of the net benefit of an invention to the inventor. He was verbally savaged by his jealous professorial colleagues.
The flip side of this syndrome is our intolerance of failure. An innovator who has not succeeded on one project finds it very difficult to get support for the next innovation. Rather that examine the new innovation on it's merits there is a tendency to tar the innovator with the brush of failure for all time.
An element in the support structure for innovation is governmental consistency. The frequent changes in governmental policy is very disturbing for the innovator, particularly when the policy changes are clouded in uncertainty for long periods. Let me give you an example with which I was at the time closely associated, one of Australia's potentially most significant inventions has been in the area of liquid transport fuels. The Keating government put in place a fuel alcohol bounty scheme. Just as the policy was bearing fruits and there appeared to be the prospect of a significant technology developing in the field in Australia the Howard government terminated the scheme. The Howard government didn't even bother to formally close it down, they just neglected to provide any money for it in the budget! A more recent example is the change to the eligibility criteria for the R&D tax concession which was introduced at the time of the Innovation Statement.
I would like to see universities and research organisations, such as CSIRO, being much more liberal in allowing staff to take periods of leave to try their hands at establishing a spin-off company based on the research that they have been doing in the institution. The institution may require equity in the company in recompense for their intellectual property and the disruption that the leave may cause. Allowing the innovator to return to his or her job within the institution, if he or she so desires, in say 3 years limits the risk to the innovator. In advising universities and CSIRO I have too often seen inventors being encouraged to participate in a spin-off with no safety net if the venture fails. Surely, as society is a big winner from innovative activity, risk sharing between the institution and the innovator should be encouraged.
May I conclude by raising a further issue of significance in the commercialisation of innovation. One which goes to the very heart of the management of risk in innovation. That is the education and training of people in the management of innovation. It requires a different mind set to mentor inventors while they build a business. In my case this came through years of advising inventors as a patent attorney. Gradually I came to realise the desperate need those inventors had for commercial advice to assist them in the conversion of their idea into a business, or at least a licensable product.
As an example of the gulf between traditional management and the skills needed to run young companies may I remind you that it was not so long ago that Pacific Dunlop was a respected "blue chip" company. They acquired Telectronics and with it the bionic ear technology. As Telectronics collapsed the bionic ear technology was spun-off as Cochlear some ten years ago. How do those two entities, Pacific Dunlop and Cochlear, compare today. Cochlear was recently Australia's 56th largest company valued at 2 Billion Dollars and exporting the bulk of its production. At the same time Pacific Dunlop was company No. 86, importing cheap sandshoes from China.
There are a few educational institutions now beginning to embrace the teaching of innovation management. Swinburn University of Technology lead the way, a number of other universities have recently come on board. The COMET scheme administered by Ausindustry is seeking to assist in this regard. There still seem to be an awful lot of MBAs based on the Harvard model which may be fine for big corporates but doesn't seem to work so well in running small innovative companies. There needs to be more training of scientists and engineers on the job to better equip them to extend beyond their specialty to at least understand the issues surrounding the commercialisation of innovation.
I have seen from my own involvement in a number of start-up companies the very positive effect that can be wrought by a suitably skilled manager in moving innovation forward. The assistance may be through such relatively simple steps as establishing the right corporate structure; getting appropriate shareholder agreements in place; attending to IP ownership and registration; ensuring appropriate employment agreements are established; setting up employee share option schemes; and writing clear business plans. It is only then that applications can be made for START grants or venture funding. Part of the mentoring is having a network of contacts allowing suitable ancillary skills to be brought in quickly and cost effectively.
In summary then I reiterate my view that Australia is risk averse but that such aversion is not a bad thing. An informed, experienced and intelligent team of innovators and managers backed by venture capital and working in a supportive milieu will manage the innovation process in ways that will allow the risks to be assessed realistically and addressed. If the risk is too high then the project should not go ahead. In this way will society maximise the economic "free lunch" available from technological innovation.
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