The Art of Success

| October 18, 2017
Australia sits a long way from the rest of the world, and its exporters must work hard to distinguish themselves from their competitors. Mid-sized firms must therefore innovate to secure export success.

However Australia tends to underinvest in research and development, spending 2.1% of GDP on R&D, slightly below the OECD average but much less than some of its more vibrant Asian competitors. South Korea tops the spending table, dedicating 4.3% of GDP to invest in its future, and it is no coincidence that it is a major exporter of smart phones rather than mineral ores.

Only one of the world’s top 6 companies, Microsoft, operated in the technology sector a decade ago, but five of the top six are tech firms today. Three of those companies – Google, Facebook and Amazon – were created less than 20 years ago and have a combined market value of $2 trillion – dwarfing the $1.6 trillion of the entire ASX 200. More value has been created by those three American giants in the last 2 decades than by the whole of Australia’s corporate industry over 2 centuries. Australia cannot afford to be complacent when innovation is viewed with a global perspective.
Unless we ask why Australia has failed to produce its own tech giant, we will never create one. Of course, it is no easy task. Innovation is difficult for everyone and the failure rate is very high. If gamblers knew which number the roulette ball would settle on, they would all be millionaires and, in the same vein, no-one knows what fruits innovation will produce until they try. Israel is renowned for its vibrant start-ups, but analysis of 10,000 new firms funded between 1999 and 2014 found that only 5% had achieved 100 employees or $100 million in sales. 42% had failed altogether while 53% were still operating more modestly. Australians love a winner and find it hard to embrace something they know will fail 95% of the time. The press would hammer the government over such a small success ratio; but just as a toddler may stumble many times before she walks, so failure must be embraced if success is to be accomplished.
Some uniquely Australian factors reduce our tolerance for such missteps. Australia has enjoyed a quarter of a century of uninterrupted growth and businesses have found it easy to make money without risking something new. Australia’s most innovative era followed Paul Keating’s dire warning that we stood on the brink of becoming a ‘banana republic’.  This stark assessment scared the business community into action to meet the threat – and opportunity – of rampant Asian economic growth. The government and nation accepted the challenge, passing major regulatory and corporate reforms and investing in research and development. This rebooting of the Australian economy laid the foundations for the 26 years of economic plenty which has sapped the will of their successors to show the same resolve today.
Australia is a great country but its instinctive ‘she’ll be right, mate’ attitude can be a red flag of inaction from the farmyard to the board room. ‘She won’t be right unless we do something’ should be our motto in facing serious issues. Australia’s admirable belief in fairness means it shies from insisting on excellence but the two approaches need not be opposed. Australia can have a fair society which values the worth and contributions of all its citizens while encouraging individual accomplishments which boost the nation as a whole.
Innovation can involve long development cycles of little appeal to impatient Australians. Stakeholders like to believe that investment in research should reap rewards within two years but a decade is a more realistic time frame, stretching to 15 in the medical field. Redbubble itself only became an overnight success after 11 long years of toil. Even global giants such as Google, Facebook and Amazon endured difficult times in their earliest years.  Google was launched in 1996 and it’s easy to forget it took five years to make its mark.  Innovation incurs immediate costs which must be paid before any possible payoff. These costs are transparent and can be modelled easily, while profits may come many years into the future, if at all. Long term investment is easy criticise, and corporate or public infrastructure spending is castigated in the papers every day, but without it we will have no future.
To overcome these hurdles, companies must select the right targets, pursue a logical strategy to achieve their goals and hire people who embrace a learning methodology. However they need some help from policy makers and changes in the investment landscape could encourage long term growth over short term profit taking.  Franking credits reduce reinvestment in successful publically quoted enterprises as they come under intense pressure to pay dividends to their shareholders.  Unfortunately this increases the risk profile of companies who now pay out more in dividends than they have in cash flow. A firm like Redbubble should be reinvesting its profits to expand for the future, rather than doling them out in dividends today.
Australia’s regulatory environment can also be improved and harmonised. It was easier for Redbubble to offer stock options to its US employees than its Australian ones, for example, and the Tasmanian government once sued the company, which at the time employed 8 people, for offering terms of employment which Queensland had already accepted. Unfortunately the Federal government can appear beholden to an ossified cartel economy of big banks, Telcos and other vested interests which lobby to restrict new entrants to their market. These long established firms naturally use their considerable clout to fortify their own position and the Government bows because elections are won by preserving the jobs of today, rather than seeding the ground for tomorrow. The Government should also invest more in education as Australian standards are below the OECD average and falling further still and without the right skills, young Australians will struggle in the job markets of the 21st century.
Just like their climate, Australians tend to extremes. Occasionally we take ridiculous risks but more often we avoid it entirely, particularly in our choice of investments.  People have flocked to the property market as a one way bet but this asset bubble will become risky in itself as risk is maximised when everyone avoids it. Government support for negative gearing has encouraged this timid behaviour, but a false perception of living in a low risk environment merely increases risk to the country overall.
Australia should learn to celebrate corporate success as much as it loves to denigrate business villains. The founders of BHP and Cochlear should not be less famous than Christopher Skase or Alan Bond. Australian entrepreneurs must also be more ambitious, working to build billion dollar companies once they have achieved initial success, rather than moving to Byron Bay to go surfing as soon as they can. This choice of leisure over ambition again reflects a difference in culture between America and Australia but if we want our own tech giant, it is one we must reconsider with a sense of urgency.
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Martin Hosking

Martin Hosking is a co-founder of Redbubble (RBL.AX) and became the CEO in July 2010. Redbubble, the world’s leading marketplace for independent artists, listed on the ASX in May 2016. Previously, he was the Chair of Aconex, a SaaS provider to construction firms, and Southern Innovation, a digital pulse processing solution. He was instrumental in the development and subsequent listing on NASDAQ of search company, LookSmart. Martin started his career as a diplomat with the Australian Department of Foreign Affairs and Trade before joining McKinsey & Company, serving clients focusing on emerging technologies. He has a BA (Hons) from Melbourne University and an MBA (with Distinction) from Melbourne Business School, where he has also lectured. He is a Graduate of the Australian Institute of Company Directors.