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Time to Back the Builders: Rethinking Government’s Role in Innovation

We are about to jump into another federal government election and it got me thinking, what is the role that we want the government to play.   At Innovation Bay we get to spend a lot of time with our members understanding what is going on in their world.  We want to be a better voice to the government for founders, angel investors and venture capitalists.   Below are our thoughts, from our community and a bit of a plan on how we can move forward to a better space. 

The core of what I have learned over the 30 years in multiple geographies is pretty simple. 

Government should empower existing industry leaders and ecosystem builders, rather than directly managing initiatives. Their role is to create a supportive economic framework: tax incentives that acknowledge the risks of early-stage ventures and legislation that facilitates scaling with access to talent. 

It’s not as easy as saying, get the f#$k out of the way and support the people who know what they are doing.  If only.  Because the government does play a huge part in shaping the environment in which we operate. 

So lets have a quick look at what has been put in place and how it’s working, 

  1. ESVCLP:  Tax incentives to investors to invest in venture capital.  This has been a great initiative to drive capital, which has been shown in terms of the number of venture firms that came to market over the last decade.  
  2. VCLP
  3. R&D Tax Incentives:  By far this single biggest impact from the government for most startups.   Where eligible companies can receive a tax offset of up to 43% on their R&D expenditure. 
  4. Australian Small Business Advisory Services Program.  Providing low cost advisory services to small businesses. 
  5. Accelerating Commercialisation:
  6. Innovation Investment Funds IIF Program 
  7. Startup Year Program: higher education students with access to income support to come up with their ideas. 

From my experience, points 1-3 are amazing.  The rest is crap.  The core problems I am seeing in our industry, that is stopping us from being a global super power in innovation, 

  1. Access to the right mentors and advisories.  There are way too many advisors in this country who have no experience in building companies.   Sorry, but get the f*^k out the way, because the insights you’re giving are crap and its killing companies.   We need people with scar tissue and as we have learned, founders learn the most from other founders. 
  2. Accelerating Commercialisation just like the NRF has to date been a complete waste of money and time.  Another example of the government trying to be the lead in the industry.  You should not be allocating capital directly into companies, you should be allocating that capital into venture or experienced investors that know what to do with it. 
  3. IIF – awesome, incentivising private sector to invest in startups, which has an initial goal of $200M but looks more like over $1B in venture for startups.  

Lets just be clear, the government plays a key role in helping build this industry of ours.  But it should not be allocating capital directly into companies, no matter how early or how R&D they are.  That is because (please take no offense) bureaucrats have no ideas about how to be an investor or VC.  Just like a venture partner would make a terrible beaucraft, (just look at the US right now the damage being done) . 

What can the government do to make a real impact and accelerate our industry. 

  1. Provide all founders with tax incentives to spend on education, advisories, mentors and professional development.   In my mind this should be around $25K a year. 
  2. Mandating that 1% of super funds have to flow into ventures. Just imagine….
  3. GST and payroll tax exception for all startups in the first 3 years of their journey, as long as they are scaling at 20% YOY. 

Lastly WE have the change the culture around failure in this country.  Second time founders, especially the ones who have not been successful, either shutting down their companies or selling for little upside, should be incentivized to go again.  They should receive some sort of tax break or incentive, because let’s be honest, they are awesome.  An HBR article titled “Why Some Failures Pay Off” found that entrepreneurs who had failed in their first venture were more likely to succeed in their second. National Bureau of Economic Research (NBER): NBER research has shown that entrepreneurs who have experienced failure are more likely to start successful companies in the future.

We don’t need to reinvent the wheel here we just need to look at what ahs worked globally, 

1. Israel: Yozma Program

2. Singapore: Startup SG

3. Finland: Tekes (now Business Finland)

4. United Kingdom: Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

5. Canada: Scientific Research and Experimental Development (SR&ED) Tax Incentive Program

6. United States: Small Business Innovation Research (SBIR) Program

These programs share several common characteristics:

Imagine, if the $15B in NRF funding was allocated into the venture industry????

So this is what I am suggesting….

Tthe most impactful initiatives often focus on empowering the key players within the ecosystem rather than directly investing in startups themselves. Here’s why this approach tends to be more effective:

  1. Leveraging Expertise: $5,000 – $20,000 tax rebate on personal development – making better CEO’s. 
    • Advisors, 
    • Conferences and Events
    • Coaches
    • Organisations such as IB, YPO or EO. 

Simply, you can never over invest in yourself.  The best founders are constantly learning and constantly developing their skills.   The only way we can make better startups, is with better founders. 

  1. Building a Sustainable Ecosystem: Help the grass roots organisations make more impact.
    • Investing in ecosystem enablers creates a self-sustaining network of support for startups.
    • This approach fosters a culture of innovation, collaboration, and knowledge sharing, which is essential for long-term success.
  2. Attracting Private Capital:
    • Government support for venture capital funds and other ecosystem players can attract additional private capital, amplifying the impact of public investment.
    • Private investors are more likely to invest in startups that are part of a well-supported ecosystem.
  3. Reducing Risk:
    • By investing in a portfolio of venture capital funds, governments can diversify their risk and increase the likelihood of achieving positive returns.
    • Venture capital funds, in turn, diversify their investments across multiple startups, further reducing risk.
  4. Creating a Pipeline of Talent:
    • Supporting organizations that provide training, mentorship, and networking opportunities for founders helps to create a pipeline of talented entrepreneurs.
    • This ensures that there is a steady stream of innovative startups emerging from the ecosystem.
  5. Fostering Competition:
    • Investing in multiple venture capital funds and service providers encourages competition, which can lead to better outcomes for startups.
    • This approach also ensures that there is a diversity of perspectives and approaches within the ecosystem.

While direct investment in startups can be beneficial in certain cases, the most successful government programs tend to prioritize building a strong and sustainable ecosystem by empowering the key players who support founders and drive innovation. This approach creates a virtuous cycle that attracts private capital, fosters innovation, and generates long-term economic growth.

Cheers,
Phaedon

– Phaedon Stough is the CEO and co-founder of Innovation Bay.

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