“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.