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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?

Peter Fray

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Peter Fray
Editor-In-Chief of Crikey

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