Where is the Australian Facebook?

“Sell enough of this software so that we get bought by Microsoft.”

That was the task I was given in the startup I joined in my last job before I entered academia. I guess the fact that I’m writing this now tells you how effective I was at meeting that goal…

You can actually date Australian software startups by who they wanted to be bought by – from the late 90s until about 2002, it was Microsoft. Then it was Google. Then Facebook.

Part of this is because there was no Australian Microsoft, or Google, or Facebook. Except now, things might finally be different. That is the story that I was looking at in the paper (.pdf version here – but I’ll warn you that it’s pretty abstract) that I presented at the 14th International Schumpeter Society Conference last week.

I wrote the paper with Jason Potts and Mark Dodgson, and the question that we’re looking at is how do innovation systems change? This is important, because the innovation systems within which a firm operates have a big impact on how effective they are at innovation.

An innovation system is the set of rules that tell you how things are done. People have identified these systems within countries (innovating in the US is different from innovating in Australia), in industrial sectors (innovating in biotech is different from innovating in manufacturing), and even within regions (innovating in Silicon Valley is different from innovating in Route 128 in Boston).

At the national level, issues like infrastructure, education and innovation policy all drive performance in this area. The idea that this is one area where government policy can have a substantial impact on firm performance is a robust research finding that has been replicated many times over the years, in studies all around the world. As an Australian Government report puts it:

In today’s rapidly changing economic environment, governments play a key role in harnessing the creativity of their people, their enterprises and the economy as a whole. Through the national innovation system and links between stakeholders, government can instil, drive and support the development of good management practices and behaviour, especially targeted towards small and medium sized firms. The LSE study not only concluded that “Governments can play their part in encouraging the take-up of good management behaviour” but it also maintained that “Doing so may be the single most cost-effective way of improving the performance of their economies”.

One key element of innovation systems is venture capital – and it explains a lot about the lack of an Australian Facebook. Check out this chart showing investment by VC firms based in Australia:

It shows that in 2011, there were 34 new VC investments in Australia worth about $34 million. About $1 million per investment. There were another 63 follow-up rounds of investment worth $85 million.

One of the reasons that there is no Australian Facebook is that you don’t grow huge when you only have $1 million to play with. This is a big part of the reason that we wanted to sell to Microsoft – there was a lot more money in it.

Building software in Australia was very different from building software in Silicon Valley – which leads to different views of what is possible, different ambitions, and different scales of innovation.

That gap might be closing now though. Check this out:

In 2011, one Silicon Valley VC firm, Accel Partners, invested more ($120 million) in Australian firms than all of the Australian VC firms put together! And that was spread across I think three firms – about $40 million apiece.

This means that all of a sudden, the innovation system in Australia looks very different. The investment that Accel has made in Atlassian is their biggest ever, and they’ve been around for 17 years.

Now, Atlassian doesn’t have to get bought by anyone. They can stay in Sydney and grow big on their own.

There is an important lesson about innovation here. The Australian national innovation system has been changed by the actions of Accel Partners, Atlassian and a few others. Firms (and the people in them) often feel as though the systems that they work in constrain their ability to innovate. And they often do. But systems are made by people, and people can change them.

Remember this the next time you decide not to float a new idea because you’re sure your boss won’t like it.

Remember this the next time you shoot to low because that’s what everyone around you is doing.

Ten years ago we surely could have done better than be bought by Microsoft. We should have aimed higher. So should you.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

4 thoughts on “Where is the Australian Facebook?

  1. I would be curious about your observations of New Zealand – it has much less money yet produced Trade Me. It has also produced some huge brands like 42 Below vodka, Ice Breaker, and Fonterra (revenues in the same scale as RIM). Does AU need money or more and bigger ideas with potential? Just curious……
    If you believe in this quote, “Governments can play their part in encouraging the take-up of good management behaviour”
    — what comes first? Big money or the ‘good’ management behaviour to know what to do with the big money?

    • Interesting question Ed. New Zealand has done very well. Out of those companies, Fonterra in particular is an interesting one – their approach to innovation is well-founded. The number 8 fencing wire ethos in New Zealand serves them well in terms of entrepreneurship, but the tall poppy syndrome (which is stronger there than anywhere I’ve ever lived) doesn’t.

      I think that ideas & funding go hand in hand. There are plenty of big successful Australian companies as well. BHP is a good example – they were highly innovative when they were founded, and they also had access to good levels of capital in the early days. My point here isn’t really one of which comes first – it’s that the whole system works together. If you have funding limitations, it often ends up limiting what people aspire to.

  2. I thought you may find this example of interest. Michael and Co had difficulty with the process mainly because their funding round was too small for many VC firms. I think its important first that a company knows exactly what funding it requires and how that funding is to be utilised, a detail which could be easily overlooked in the chase to be bought by someone big? Ultimately, if you are diluting your equity you want to be certain that the remaining interest will increase in value, there are plenty of examples of businesses which don’t come out the other side in a healthy state.
    I guess this comes back to whether you are funding the growth of a profitable business, or aiming to grow to a scale where future profits are realised.


    • Thanks for the link Rohan. You raise a really good point. One of the issues with VC and other forms of entrepreneurial capital in Australia all along has been that there are gaps in the size of funding that you can get. The $1-10 million range in particular seems to be an ongoing problem.

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