CAN AUSTRALIA BE SILICON BEACH?

Many of us have tried. Since at least 1983, there has been considerable energy put into the concept of Australia diversifying its economy through emulating Silicon Valley and other locations around the world where clusters of innovative firms prosper to become the next generation of large global corporations. There have been seemingly endless government interventions at the Australian Federal and State levels.

Many of these interventions address the issue of venture capital. It is not generally well understood in Australia that most venture finance in other countries relies on corporate venturing and wealthy individuals. In Australia, these sectors are not well developed and venture capital more often than not relies on some form of government support. The results from the industry over a long period of time have been less than spectacular and for the most part have not met the promise of high capital return. There have been some notable exceptions. For instance, Cochlear and CSL in the life sciences/derived health care sector. However, for most investors, financing start-ups is a very skilled and substantially risky business. Better strategy is to invest in enterprises where others have previously invested and profit from the sunk costs. Even better where there is/has been a lot of state financial support.

The conundrum for Australia is that the vast majority of investment offers in this sector are very early stage, with limited intellectual property estates, and, as Alan Kohler rightly points out (Business Spectator 22^nd November 2012) achieving scale. Scale means internationalisation from day 1. The problem is that there isn’t a capital market to support such a proposition. The argument normally is “prove it at home first”. Well often you can’t.

Scale problems include the obvious one of market size, but the real one is pervasive and insidious – talent. You need to be in locations where there are clusters of talent. Basel in Switzerland for biopharma, Silicon Valley are obvious examples. Other problems are self-inflicted. Employee stock and stock option plans come to mind.

With Australian dollar purchasing power, it is tempting for investors to buy into foreign transactions which are usually much better developed than Australian ones. Capital is very mobile and especially so in the world today. Entrepreneurial talent is also highly mobile and especially when armed with a valuable Australian dollar. Hence, the drain of talent to Singapore and Silicon Valley. Competitive currency devaluations may well result in an even more highly priced dollar. That will only exacerbate the problem just at the time when the Australian economy will need a big shot of activity.