There can only be one Silicon Valley, so let's try something else

The world only needs one Silicon Valley. The evidence? Firstly, Silicon Valley doesn’t just serve the US, it is a magnet for entrepreneurs and risk capital from all over the world.

Secondly, as American entrepreneur and academic Vivek Wadwha has said:

“Hundreds of regions all over the world collectively spent tens of billions of dollars trying to build their versions of Silicon Valley. I don’t know of a single success.”

We have never had a sparkling startup tech sector in Australia. At times the sector has shown a little self-promoted promise with the odd eccentric and moderate success, but that is all. Most people with the required expertise recognise this fact. One trip to Silicon Valley convinces them that over there they have something that we do not.

And yet our local media mostly runs tech sector stories that are blazingly upbeat. I think this is because the tech sector stories are run as “feel good” stories.

Software firm Atlassian: the poster child for Australian tech startup success.Daniel Munoz/Reuters

For example, a two-man startup might be promoted as the next Uber and then it will quietly disappear never to be heard of again. Your local medical researcher doing some exploratory effort into determining the cause of Alzheimer’s will win a Eureka prize and the public may think there is a cure and a large Australian medical corporation on the way. It just about never happens.

The experts that can see past the positive media coverage seem to all have a pet hypothesis as to the root cause of the “problem” that haunts the Australian tech sector. Variably they will say, not enough skilled entrepreneurs, or not enough quality innovation, or not enough investment capital, or not enough qualified venture capitalists, and the list goes on.

Some of them then start promoting to the government their hypothesised solutions; for example (working through the example list above) creating university courses to up-skill entrepreneurs, or by government investing more into university R&D to create more innovation, or by removing barriers to crowdfunded venture funds, or by giving venture capital at friendly terms to Australian venture capitalists returning from Silicon Valley (and the list goes on).

There is a pattern here.

Firstly the experts announce there is a problem, the lack of a vibrant tech sector in Australia, without ever defining exactly what a vibrant tech sector would look like. It doesn’t make much sense to start looking for a solution to a problem until the problem has been properly defined.

Secondly, the experts hypothesise a solution without ever realising that their idea is just a hypothesis. That is, it could be wrong and it needs to be stress-tested before being implemented. Since different people have different hypotheses you’d think they’d catch on. But no, everyone just thinks that everyone else is wrong.

Thirdly, most of the experts look at the problem in “kinetic” terms. That is, they believe the lack of vibrancy in the Australian tech sector is caused by certain missing or under-performing elements of a tech food-chain (which comprises of innovation, entrepreneurs, skilled tech employees, risk capital, venture capital managers, investment bankers, corporate acquirers and a tech friendly public stock markets). Fix the underperforming element they say, and then magically all would be OK, despite the evidence to the contrary from past efforts.

The problem is actually “thermodynamic” in nature. By this I mean that there is no actual need in our economy for a tech sector to exist.

The commodities sectors do not need one; they have their own R&D channels. The oligarchies in the services sector don’t need one; they buy their technology from overseas vendors. The educational exporters don’t need one; they only innovate to reduce costs and improve their marketing. And the list goes on.

Identifying a need

Basically there is no major corporate sector in Australia that requires a steady stream of new platform technologies served up by startups. They are doing just fine as they are. Without this high level driving force no amount of fiddling with the tech startup food chain will do any good.

Until one of the Australian corporate sectors buys into the idea of buying startups and attacking global markets with the so-acquired platform technologies we will never have a thriving tech startup environment.

To make matters worse, any startups that do succeed pretty quickly disappear overseas to serve larger markets with cheaper capital, leaving the local environment devoid of their potentially positive influence. This fact underlies the need for local corporate adoption of successful startup technologies.

Silicon Valley was built on defence, semiconductor and computer technology companies in the post-war era. After decades of slow developments the VC sector really took off in the 90s (in terms of capital deployed) when three things occurred.

Firstly, the corporate sector in the USA saw Silicon Valley as a reliable and viable source of new platform technologies. The opportunity they saw was to cut much of their under-performing corporate R&D expenses and use those funds to acquire start-ups or listed tech companies; this turned out to be a more cost-efficient way to innovate.

Secondly, Silicon Valley caught the first internet boom and saw an opportunity to seize a once-in-a-millennium IPO market for new global technology companies.

Finally, the 1978 ERISA amendments allowed US pension funds to “prudently” invest in early stage unlisted companies. Before then the VC industry was much smaller and limited by capital supply; these amendments had fixed this issue by the 90s.

As you might imagine, not much of this story aligns to anything we might conjure up in Australia. If we want to have a vibrant high tech startup sector then we need to come up with our own need to have one rather than attempt to copy and compete with Silicon Valley.

Identifying a solution

If we accept this premise then we have two choices:

1. Create a new export-orientated corporate sector from scratch that needs the technology platforms served up by local startups, or

2. Encourage one of our existing corporate sectors to start buying the new technology platforms and start exporting.

Which of these has the highest chance of success?

For the former to succeed we would have to miraculously create both a new export-orientated corporate sector and a thriving startup community. In the 90s many in the Australian startup community used to look to Nokia as the template for success. “Create enough startups” they said “and you will eventually get a Nokia”. They argued that Nokia had created a new technology-export sector for Finland and it also supported a local technology startup community. Well after 35 years of trying we haven’t got a Nokia, and neither does Finland for that matter.

My money is on using government incentives to encourage our plumpish corporates in the services sector to morph from being domestic oligarchies that use third-party off-the-shelf technology platforms to global vendors of disintermediating technology platforms in their own sector. They have the capital to execute this plan, if not the management or culture. It won’t be easy but it has a higher chance of success than many of the other options commonly proposed.

Ian Maxwell is an investor in high-tech start-ups. Many of these companies have received government financial incentives.