By Andre Tan
Steve Jobs, Bill Gates and Mark Zuckerberg are household names: geeks who parlayed their good ideas and technical brilliance into global empires. The stories behind most entrepreneurs are usually more prosaic. The majority of start-up companies founder after a few years; a proportion are modestly successful, providing local jobs and growth, and a handful go on to achieve significant international success.
Earlier this year, ASIF ran our ‘Big Innovation Survey’ to provide information and data to support our submission to the Senate Enquiry into Australia’s Innovation System. The submission focused mainly on the quantitative aspects of our survey. In a series of upcoming articles in our newsletter, we will address the wealth of qualitative responses that we received from the researchers, entrepreneurs and other science and technology industry professionals who responded.
In this article, we look at some of the factors that can tip the scales between success and failure for new, high-technology businesses. More than 150 individuals completed our survey, with 42 individuals having had a founding role in a start-up.
Entrepreneurs whose most recent start-ups are still in operation identified five key factors critical to a successful launch:
- Ability to raise capital
- Strength and perceived value of intellectual property
- The leadership and vision of the founders, and the culture they instilled within their start-up
- The experience of the start-up’s leadership team
- The nature of the market
Seven broad reasons for failure emerged:
- Inability to raise capital
- Lack of rigour and foresight in business planning
- Government policy
- Poor estimation of the time required to innovate
- Poor staff retention incentives
- Poorly-executed marketing and sales strategy
When it came to successfully scaling up a business, respondents identified
- Timely access to capital
- Willingness of stakeholders to share risk
- Intellectual property
- The energy and drive of the founders
- Government policy
- Access to experienced individuals
- Marketing and scaling strategy
Access – or lack of access – to capital emerged as a critical theme. Comments from successful company founders pointed to:
“Funding provided by CRC equiv[alent] to
Series A funding was vital to getting it to
viable product, with marketing/business
plan and support.”
“Appropriate level of finance when required.”
However, there were other responses that indicated that lack of timely access to
capital was limiting the ability to incubate, grow and scale technology opportunities:
“The basic idea needed to be worked out before VCs stepped in to fund commercialisation (the CSIRO was sort of involved, but declined to support the vital initial development).”
“Access to risk capital is an ongoing issue.”
“A lack of capital to expand [led] to failure.”
Does keeping start-ups “lean” and “hungry” lead to cost-efficient development of technology opportunities? Or does pushing high-risk, new-technology start-ups too far increase the risks of failure? Interestingly, one respondent highlighted
“Separate sources of income to support founders during set-up stages” as a way of minimising the financial risk the founders were absorbing, and giving them confidence to move forward with their venture.
Even after the initial start-up phase, funding continues to loom large. One positive respondent noted the value of:
“Access to state funding and a willingness of [the risk-sharing partner] to risk shar[ing] costs.”
On the negative side, the cut-off of a government incubator grant was felt keenly:
“Governmental grant helped to launch the product….Funding shortage is preventing necessary growth.”
A second area that attracted many responses linked start-up failure to the inability to attract and retain talented individuals:
“Unable to easily allocate equity to employees.”
“[Staff were] offered better opportunities elsewhere.”
One respondent painted a picture of how Australian talent was being lured away:
“Potential clients (i.e. overseas companies) could see that the upper management / board failed to appreciate the staff and their potential, ironically most staff members were recruited with better offers by Chinese companies to build on what had been achieved at the start-up. This is somewhat sad as these Chinese companies are kicking on from the hard yards done in Australia, but due to a lack of skills in upper management [and funding], the innovation developed in Australia has not been successfully commercialised.”
This leads to another area that many respondents provided feedback on – the capability of the founders, and their leadership experience or lack thereof. Leaders and CEOs require a broad range of skills and capabilities, as well as strong networks and
“The drive, ability to listen [and] learn, [and the] resilience of the CEO”
“Strength of pre-existing personal relationships”
“Decades of relevant engineering knowledge applied to a market for experts.”
“The connections of the CEO”
Finally, the issue of Government policy attracted a mixed set of responses:
“Taxation – especially with tight payment deadlines has a huge impact on limited
“Operating in a highly regulated environment in which the service I offer is mandated by the Commonwealth in my sector. Confers a form of protective competitive advantage on the handful of IT providers who have attained registration”
“…Start-ups are typically high risk with limited funding in the early days. This is particularly true for Life Sciences opportunities (with long lead times to market).
Most countries recognise this “innovation funding gap” and so governments normally facilitate translation of innovations and IP in grants and incentives. An important example has been Commercialisation Australia.”
Timely and affordable access to capital is essential for successful progress from basic and applied research, through development and protection of intellectual properties and early stage commercialisation, and finally on to growth and profitability. This funding will inevitably draw on a mixture of sources: public spending; private investors; philanthropists and crowd-funding, and even from the pockets of the entrepreneurs themselves. However, chokepoints anywhere along this pipeline will only throttle successful innovation.
ASIF is disappointed that the Innovation Investment Fund (IIF) and Commercialisation Australia have been discontinued, as these mechanisms respectively helped start-ups in finding venture capital and raising non-dilutive capital. Biotechnology and life-science businesses were particularly well-served by the IIF and ASIF believes that replacement mechanisms are urgently needed, such as the Entrepreneur’s Infrastructure Program (EIP) or the Medical Research Futures Fund (MRFF). The recent acquisition of an Australian life science start-up, Fibrotech, by Shire Plc
(Ireland) for USD $75mil (plus milestone payments) indicates that start-ups launched from IIF-supported venture capital funds have the ability to scale globally. Additionally, improving the cash flow for technology start-ups by paying R&D Tax credits quarterly would improve the liquidity of start-ups and enable them to pursue opportunities for growth more quickly.
Better tertiary and post-graduate training is also essential. Too many scientists and engineers emerge from university with little or no knowledge of business, economics or industry. Similarly, a majority of business and legal graduates lack basic scientific literacy, and are ill-trained in managing and extracting value from intangible assets such as intellectual property.
ASIF supports innovation and business training initiatives for technology entrepreneurs, as well as training professionals in the financial, corporate and intellectual property services to better understand the intricacies of science-derived assets, and how to build successful companies around them. We believe that these
“interface training” initiatives will help foster the development of executives who have sufficient breadth and depth of experience to launch and grow the technology companies of the future.
More details on these recommendations can be found in our Senate submission. In particular, the following recommendations particularly target the themes addressed in this article:
- Allocating funding from the Entrepreneur’s Infrastructure Program (EIP) to support early-stage investment, in place of the now-closed Innovation Investment Fund and Commercialisation Australia
- Compulsory teaching of innovation and business skills to all scientific and engineering students at both undergraduate and postgraduate levels
- Expanding training for business and law graduates to cover management of nontangible assets derived from scientific and technical research
- Supporting quarterly payments of the R&D Tax incentive to improve cash flow to start-ups engaged in R&D activities.
- Defining an allocation from the Medical Research Futures Fund (MRFF) to
- support biotechnology and health technology opportunities
In spite of the negativity present in the feedback from our Survey respondents, the Federal Government appears to be taking some steps toward reducing innovation barriers and improving incentives for technology start-ups:
- Returning the Employee Share Scheme to its pre-2009 state. However, this is yet to be implemented
- Examining opportunities for greater acceptance of international standards in Australia. The first area of impact will be for Australian medical device manufacturers, who will now have the option to use European Union certification (“CE Mark”) in place of TGA certification
- Releasing a Discussion Paper for consultation on strategies for improving the translation of research into commercial outcomes, as part of the greater Industry Innovation and Competitiveness Agenda
ASIF plans to submit a response to the Discussion Paper to further advocate for improvements in Australian Innovation system for science and technology-derived start-ups and opportunities. If you have any feedback, please let us know by e-mail, on LinkedIn and Twitter, and keep an eye on this space!