Australian incubation stands on the cusp of revival - but if that revival is realised, it won't be because of government support. Around the world, we have seen government interest in incubation remain strong, and even accelerate during the financial crisis, as they look to use incubators to shore up economic activity. There has been a resurgence of interest in the importance of small business to OECD nations - particularly since they account for 60 to 70 percent of jobs in many countries - and using incubation as a tool to help achieve that goal.

In Australia, though, the door to government support has shut. Instead, we are witnessing the rise of private sector seed investment and accelerator incubators, with investors wanting access to start-ups and economic opportunities. And this means a shift in thinking. Rather than supporting small businesses as a sector per se, as governments might, the new financial backers are there to pick winners and find the success stories, with individual excellence rather than cross-sector growth as key. It means that incubators in Australia today are almost all financially self-sufficient, while also facing an uncertain future in which the role of incubation may change.
Understanding just how Australia got to this point requires looking back a little way.

Australia was an early adopter of incubation, with the first incubators developed in the country in the 1980s. For 20 years, the number of government-backed incubators grew, although the level of government support varied. “Free” buildings or rent was one common form of support. But there was also money to be found for incubators in grants and money for ongoing operations. Initial support for business incubation was found from the national government's Department of Employment, Education and Workplace Relations (the department responsible for job creation and training in Australia) which funded the creation of business incubator buildings and facilities. By the mid-2000s, though, the national government and the many state governments around Australia had begun to tire of incubation as a concept. The last Government-backed business incubator was created in Australia in 2006 in rural New South Wales.

In 2008, the Federal Government cancelled what was known as BITS funding (Building on Information Technology Strengths) - $158 million that had been sourced from the sale of Australia's major telecommunication service to provide seed capital for ICT incubatees.
This eight-year programme was developed by the Department of Communication, Information Technology and the Arts to address Australia's innovation in information and communications technology. This programme funded the management of incubators and provided seed capital for incubated tenants. However, it ultimately failed to deliver on the promise of generating and enhancing a successful ICT sector in Australia. At the time, this made sense. Much of Australia's economy in 2006 and 2007 was being driven, too fast, by the booming resources sector. Rising interest rates, falling productivity, a nationwide skills shortage and the threat of inflation were all bigger problems than a need to encourage people to start businesses. The Federal Government had shifted its attention to working with more established businesses, particularly in manufacturing, to try to help them address some of these issues.

At the moment of the global financial crisis, then, support for incubation in Australia had hit an all-time low. And while the crisis prompted governments around the OECD to implement policies targeting small business, pump dollars into programmes that assist with developing capacity and push to turn innovation into commercial reality, that didn't happen in Australia. Why? Well part of the reason was that the economic crisis didn't bite as hard in Australia as it did elsewhere. In October 2008, just before the Lehman Brothers crash, unemployment in Australia stood at just 4.3 per cent. It peaked at 5.8 in mid-2009 and today is back to 5.4 per cent.

When the Federal Government decided economic stimulus was needed in 2009, then, rescuing people from unemployment by encouraging them to start businesses was just not a priority. Instead, governments focused on boosting the economy by spending on infrastructure and encouraging households to buy.

What happened in the wake of the financial crisis was more surprising.

As Australia weathered the storm better than most other economies, some of the intellectual capital we had sent overseas for decades in the form of smart Australians who wanted to work in Europe, Asia and America, came home. Their jobs elsewhere had evaporated, and they came back to look for new opportunities. Some of the world's money also wanted a new home. Australia's dollar was and remains strong, our banks are secure and the economy continues to tick along - so it is little wonder that venture capital has suddenly found a new place to invest. While other markets are still emerging from the economic doldrums, there has been an injection into Australia both of smart, savvy operators and investment funds looking for something to do - and incubation offered some answers.

Since 2010, we have seen venture capital finance create seed investment business accelerators, take equity stakes in start-up tech businesses and incubate them with their own management teams and mentors. There are examples of incubators like Angelcube, Fish Burners, Pollenizer, Starmate and BlueChilli - smart, modern and canny operators - with a very different set of skills to those seen in the traditional incubators Australia had prior to 2008. These incubators have more sophisticated models to allow investment in start-ups but also work in partnership with industry. Telecoms firms, mining companies, and media groups want to connect with, if not the next-big-thing, at least one of the companies that might be in the running.

What you see in Australia today has been a rapid evolution from an environment which the Federal Government lamented in 2004 as “a market failure of the venture capital market to adequately assess the prospects of early stage ICT companies and to provide them with seed capital.” The money is there now, and the incubator operators that can tap into those pools of funds, are finding entrepreneurs lining up out the door.

The biggest split between old and new incubators is more philosophical than financial, however. Most existing general incubators don't rely on government funding either, these days; 80 percent of incubators report being financially sustainable, and the operation of pre- and post-incubation programmes and income generated from tenants remains a model that continues to deliver benefits. For the new crop, the thinking is different, though, and the risk going into the future will be all about balancing the support for firms along with the growing demands of private backers. Not an easy task!

Everyone wants to commercialise technology, everyone wants to find the next Facebook, and everyone wants to turn a firm started on a shoestring into magic multi-millions. But with the founder and financial investors wanting high returns for the risk, it is going to be important that the fundamental goal - supporting the entrepreneur - does not get lost along the way.

Phil recently attended the NBIA Conference in Boston, USA. At the event he recorded three videos with Impulsa about his experiences of running an incubator in Australia.


Video 1: Common mistakes of business incubation managers


Video 2: Where we find our incubator clients


Video 3: How incubators clients can become successful networkers

In conversation with Hamish Hawthorn, Chief Executive of ATP Innovations

ATP Innovations, one of Australia's leading incubators, started as many do - as an alliance with universities. Four of the country's biggest tertiary institutions are shareholders - the Australian National University, University of New South Wales, University of Sydney, and the University of Technology, Sydney - and the links mean the organisation has access to all the benefits of working closely with the university community.

But Hamish Hawthorn, ATP Innovations chief executive, says the success of ATP Innovations has come through the decision by the incubator to break out of the narrow role of dealing only with university technology. In recent years, the executive has worked with more than 80 businesses from outside the university pipeline as well as within, helping them raise more than $96 million from investors, sell products internationally and file more than 200 patents and trademarks applications.

What makes your incubator a successful one?

I think that part of our secret sauce is the fact that we are not just limited to university technologies. What we have created here as an environment is an ecosystem of both university spin-outs, technology that is licensed from the universities by private sector companies, and companies that are totally unrelated to the university intellectual property. Those companies absorb the outputs of the universities, so they hire staff, they give places to interns and they provide collaboration opportunities for the universities. Having that mixture within our portfolio of companies is really essential and it helps create the right culture here of entrepreneurship and commercialisation excellence.

Who are your tenants and clients?

ATP Innovations' current portfolio of companies features about 55 businesses, drawn from technology sectors. We have three big buckets of clients: life science businesses, engineering and widget-type companies, and software businesses. And sitting between those businesses are the convergence of all those technologies, like clean-tech, the creative industries sector, food technology and others, for instance.

If we look at those companies, the things that make them world class and successful is a clearly articulated value proposition, solving problems using a defensible IP or rich technology that gives the company some sustainable competitive advantage. They are the companies in our sweet spot and it means we have developed a range of activities that are part of our product offering relevant to those types of companies.

How does Australia fare for technology start-ups compared to offshore locations?

There is sometimes an urge for Australian firms to skip offshore and try their luck in the bigger markets of America and Asia, particularly for technology companies. But there are benefits in using the Australian incubator networks and support as an anchor point for offshore expansion. I think the view that you have to go to Silicon Valley to be successful is flawed. It makes some flawed assumptions about the opportunities here in Australia. A colleague of mine said it very well: it isn't Silicon Valley or Australia, it is how to take advantage of the best of both of those options.

So, what in your opinion is the best way forward?

I think really where we have to get to, is to show how university technology commercialised through an incubator that addresses a global market is a well-trodden path to success. We have been able to help companies take advantage of the great opportunity here in Australia but in a way that facilitates entry into those overseas markets. I think you should go to Silicon Valley if that is where your customers are or where your investors are or where your acquirers are. But if you are still developing a product and proving that it works and understanding the commercial opportunity, then Australia is a really great place to do that.

It is very easy to be drawn to the bright lights of Silicon Valley. But I have seen it often leads to you becoming road kill. And the reason is that people think they can just go over there and walk up and down Sandhill Road spruiking (sic) their pitch deck. Pretty quickly you realise that you don't stand up to scrutiny.

Can you give us a recent example?

Recently we have had a company here at ATP Innovations called ScriptRock who have an office in Palo Alto and an office here in our incubator. The investors in that company are very happy with the situation. They can get great people in Australia to do technology development and the management team are close to customers and work on the strategy to take over the world!

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Phillip Kemp has qualifications in small business facilitation, company management and agricultural science and has published widely on SME and micro-enterprise development issues with particular reference to international best practice in business incubation operation. He has conducted international research and published comparative international studies on the provision of SME and micro-enterprise business advisory and support services. He is Chairperson of Business Innovation and Incubation Australia and Director of the Asian Association of Business Incubation. He has previously sat on a number of Federal and State Ministerial boards and committees, investigating the provision of services and training to Australian SMEs.