Why Invest in Regional Innovation?

Byron Bay: The Case for Regional Australia. 

Irrespective of the election outcome, the #ideasboom policy initiatives of the Turnbull Government are fuelling debates in the startup community debate and taking hold ahead of July 1st. As part of the government consultation process, I witnessed dialogue turn to how the innovation agenda support for startups should focus exclusively on city based clusters. This centres around the usual squabbles of land-grabs between the major cities and secondly the intangible strength in numbers argument. This article provides an opposing view based on successful regional innovation and latest research.

The argument comes at the same time as many high profile companies and individuals head towards Silicon Valley so easy to understand their concerns. I've been enormously fortunate to have done my US "stint" so understand the allure. The first time I visited New York City was when my startup firm, following a trail of acquisitions, went public and IPO'd on the NASDAQ in 1999. I was still in my 20's so it was intense, crazy and surreal all at the same time. For me, the journey had begun in 1996 creating a startup whilst finishing university and (kind of) ended in 2005 being sold to Oracle for US$630M. I'd had enough of the US before then and exited in 2011 with a move to Sydney, a place on my travel radar for many many years. One of the reasons for the move to Australia with my new found fame and fortune was because the company that bought us, the one that went global and then became part of (then) the second largest tech-firm in the world, was Australian. Retek Inc was born in Melbourne.

Whilst this fun was happening, Australia itself had become a tech-desert so unless you worked with a tier-one retailer with interests in Enterprise Resource Planning systems, or investor, any Aussie tech in the noughties was generally a no-go-zone. It's not little surprising though that Retek (and spin off retail.com) hasn't been at least acknowledged by the Australian tech scene. It's been endemic that vertically specialised industries are limited by the size of our consumer market. The little Melbourne-bred tech start up was at it's peak during dotcom boom times, though it was much more resilient than the average late 90's IPO flash-in-the-pan. Retek dominated it's vertical market globally for over a decade, most notably head-to-head with SAP. It weathered the dotcom crash, then went on to being purchased by the equivalent of an Apple or Google today. It has been forgotten by the Australian startup industry, because, like many rapidly growing Aussie businesses, they moved and setup shop in the US to form strategic partnerships. 

The Lack Of Value Ecosystem.

The same is still true today as it was then, the lack of a high value ecosystem in Australia. Successive governments have over-invested in failed policies since the 1980's over-investing in the low value end of the supply chain, like car assembly, rather than the high end of innovation. The startup industry talks about ecosystems a lot, repeat a lot, and I see a few vertical hubs springing up, for instance health or Fintech. Part of the strategy unfortunately is to attract talent through "sugar-hit funding" (back) to Sydney (or Melbourne depending on who you're talking to) without much of a value ecosystem around these verticals. It's the same old argument, nothing innovative or disruptive, just look at Silicon Valley and it's tech cluster, let's do what they do. Ack. It is passive thinking formed on weak relationships and ties. This view relies on "access to information and ideas already out there waiting to be found". According to Professor David Stark from Columbia University research tells us however that innovation policy initiatives like the #ideasboom about "generating new knowledge and ideas" not consolidating them. 

The complex problem for Australia is that it fundamentally lacks middle-tier companies. ARC (Australian Research Council) research tells us that Australian companies either tend to be really small or really big, with very little at the meso level i.e. between micro and macro. This means, our ecosystem thrives mostly on small companies quickly being gobbled through acquisition by large companies. A criticism of the startup industry, that is us as Accelerators and Incubators, is the demand for these "rock-star" acquisition poster kids. Those that don't, despite maybe having great products, find it difficult to scale (even in tech) if they max-out their growth in the Aussie domestic market. The path of least resistance is to find a consumer facing winner, sell to a large company, move on after the golden-handcuffs come off OR we don't sell, we hold-out and go global. If that fails then... well, if your startup is lucky, you become cash-flow positive but remain a small business. Most however don't because that's not why the founders started. The ASX is relatively young and doesn't yet fully appreciate which tech business models are predictable and stable. This leaves Venture Capital and the general argument from them is that there is a lack of Australian quality startups coming through their deal-flow. I see this all the time manifesting in startups, and worse, their coaching mentors, nurturing ideas that solely focus on direct to consumer models (b2c). Sure, we have some big consumer brands, but this skews our perception. What's generally false is the strategy of "conquer the Aussie market, then the world". That may have been true 10 or 20 years ago, but isn't true anymore, we need more dynamic, cross sectoral strategies. 

Current rockstars like Atlassian, Canva, Spreets, 99Designs and Campaign Monitor are business-to-business products that actually service the industry. Atlassian's Partner page reads more like a business directory (and impressively so). It is this middle-tier business-to-business (b2b) supply and demand part of the ecosystem that is self-sustaining and the missing value end of the ecosystem. Especially in tech, the 'middleware' level is extremely important and is really the dynamic that powers the successes of consumer facing rockstars like Uber and AirBnB technology stacks. These business-to-business (b2b) startups thrive on being nimble, agile, data-driven and being able to pivot (repeatedly) towards the specialist, focused 'killer app' part of their technology IP as the leading edge over the competition. This b2b middle or meso tier has gone largely unacknowledged in the Australian economy. For some reason within the tech startup community, top incubators, accelerators, advisors and investors, still tend to favour and put up in lights sexy b2c, "consumer" startups. This is even though we have a tiny consumer market and most of our true rockstars are boringly b2b. Retek became a vertically specialised US corporation largely for this reason, by forming deep strategic partnerships, ultimately with big players Anderson Consulting (now Accenture) and Oracle, the eventual suitor.

Regions Are Part Of The Solution Not The Problem

Lacking this insight, the logic from the industry is simply we are a small market, not a dynamic one. Australia mustn't put its energy into regions because of the need for cities to be more dominant. The reality is however that regional areas are changing and more dynamic than is perceived. Why? Because regions need to be resourceful, resilient and entrepreneurial to survive. Since jobs and careers are scarce, regional professionals who increasingly know how to use tech, quickly learn how to "invent jobs not apply for them". They adapt, leverage resources they can access, and more importantly embed themselves in the verticals they need to operate in. I recently visited the home of QANTAS in Outback Australia. The Queensland And Northern Territory Aerial Service began in one of the remote parts of Australia to service an obvious demand: mobility in distant regional areas. Early QANTAS planes (see photo) were however built by a Sydney based engineering firm. Based in Mascot NSW, now the site of Australia's largest airport, Australian Aircraft & Engineering Co Ltd, was by all accounts a startup that lasted just 4 years, oddly liquidating in a double-dissolution election year even after securing government contracts. The point here is the Sydney-based firm starting more or less at the time, collapsed, whereas the regional innovators thrived to become a global business and today is one of the world's oldest airlines. Fast forward 100 years and you can bet it would still be the Sydney firm claiming the agenda. 

One of the first QANTAS fleet planes at the  Qantas Founders Museum , Longreach. (CC)BY-SA

One of the first QANTAS fleet planes at the Qantas Founders Museum, Longreach. (CC)BY-SA

Today in Byron Bay the story is not dissimilar: we have the highest density of creative professionals outside of Sydney and Melbourne so a significant pool of amazing talent. Many rockstar companies have started in the Byron region, not least Spell Designs, one of the most successful women's clothing brands in Australia. They started out at the Byron markets and remained there until a few years ago, growing their business and combining some savvy social media (check out their Instagram followers). TripADeal is a travel company on target for an $80M revenue year; the founders started running local travel tours then created a travel company that leverages the Internet but favours phone instead of web bookings. Creative Media Institute SAE started it's first campus in Byron Bay. It's now owned by Navitas, one of the largest educational companies listed on the ASX and SAE is a national brand. Content destination website TotalTravel began in Byron's CBD and in 2009 sold to Yahoo! for $20M. More recently Enova became Australia's first community owned energy retailer. FlowHive who have reinvented beehives became the largest crowdfunding campaign outside of the USA. At the time FlowHive was the fifth largest in the world raising over US$12M, bigger than the trailblazing Pebble Watch. Digital business is booming in the Bay, but rather than replicate Silicon Valley style tech hubs, regions also use technology for digital transformation then collaborate with other talent pools. Local inventor Ric Richardson for instance states he's simply able to "get more stuff done" here. Instead of constant distractions, hair pulling and being dragged into back to back meetings, being away from the city allows him to "free think". As we talk about here at StartInno, we have a startup culture, yes, with lifestyle benefits which means, as we like to say "more life in our work". 

For regions the problem also remains, the lack of a true ecosystem, but with different challenges. The question is where is the value ecosystem to help them go global? It's not in our cities, their customers are already there. They already found collaborative ecosystem that revolves around vertical and cross sectors: Byron Bay's consists of clothing, travel, education, sustainability and food/agri, all flourishing creatively in the region. In Byron's case the evidence is that creative professionals combined with diverse sectors do enable a localised value ecosystem enabled by technology distribution and scale. This is an important point since at the micro-level, capital is less abundant so regions have to leverage all their resources more urgently mobilise supply and demand for organic growth. Also, due to the aviation pioneers of 100 years ago, most regions remain closely connected to clusters - whether Byron Bay, or our good friends at Working Spaces HQ and 365 Cups in Wagga Wagga - the city is mostly just a 40 mins flight away, the same as the average daily commute. These relationships are important, add the connectivity of the Internet (NBN), network reach superpowers coupled with entrepreneurial ambition, amazing things can and do happen in regions. Regions need the cities to raise their game as much as they want to. 

Regions Need Cities And Cities Need Regions. 

This is but a small snapshot, there are many other Aussie companies that are incredibly successful both overseas and in our regions. To simply focus on "clustering" back into the major cities solves nothing and most likely deepens divisions forcing businesses offshore. This "perception" - that's exactly all it is - widens the gap rather that connecting pathways between ecosystems. It fuels self interest of the big players and in fact contradicts the notion of what Lean Startup Methods pertain: democratisation of commerce, accessibility of technology, disrupt where there is dissatisfaction. I get the argument, it's simple, startups need to scale and scale quickly, and cities are an obvious starting point. Cities want the Silicon Valley model were tech firms cluster, ideas exchange happens rapidly and easily, the big players are there to quickly validate and swoop around smart operators. To me this just means we are more likely to become followers, not leaders, innovators or pioneers of the day: we are more likely to subscribe, champion or copy the models of Google, Apple and Facebook, etc rather than challenge them. So the question is not "if" but "how"? We have some ideas on how to do that. Ground up we created a movement, or what Seth Godin calls Tribes, that began our regional ecosystem. So much so that other fledgling ecosystems spotted what we were doing and wanted to be part of it, the problem is we want to keep building ours. But there's nothing like a challenge and scratching your own itch, so we created a platform StartupAcademy.org. Startup Academy Byron Bay began as a series of innovation forums, demo day pitching events in collaboration with the wider community. We wanted to connect the hubs already here in our region, now we want to network these hubs with other hubs, nationally and globally. We wanted a new model for hubs, incubators and accelerators to scale and grow without limits. Cities need to invest in Regional Australia because Regional Australia is investing into the ecosystem. 

If you want to team up with startups and join us, go on to StartupAcademy.org to learn more. 

Dr Dan Swan, Founder StartInno and Cofounder StartupAcademy.org, will be presenting some of his research on startups, collaboration and innovation at ISPIM Porto conference in June

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