Executive summary
America’s innovation success is built on the back of entrepreneurs who embrace experimentalism, risk, and failure. This culture has helped make the United States the unrivalled leader of the digital revolution because it enables the flow of capital to new ventures, innovative management practices, and the audacity to commercialise technological breakthroughs. To the extent that other countries are able to foster a similar culture — underpinned by social capital to sustain it and adapted to their own contexts — they will position themselves to become engines of innovation.
“…beyond public policy, beyond government, we need something else: a culture of striving. A culture of innovation. A collective belief that innovation is the essence of the Australian way.”Australia’s chief scientist, Alan Finkel, AFR Innovation Summit, 2017
The American experience helps frame a major challenge for Australia. Australia has its own advantages, including a stronger social safety net and an egalitarian ethos, that allow it to embrace elements of American innovation culture while spreading it to pockets of the economy that have been insulated from the frontiers of technological and managerial innovation. Recasting attitudes towards entrepreneurial failure, however, will be crucial. Overcoming the stigma around failure is connected with many of the factors that has Australia ranked 23rd in the 2017 Global Innovation Index1 and 26th for innovation in the World Economic Forum’s 2016-2017 Global Competitiveness Report.2
Drawing on insights from the US experience, this paper assesses the cultural challenge of embracing failure constructively. It argues that there are encouraging developments in the innovation arena in Australia; the start-up and venture capital communities appear to be on the cusp of dramatic growth3 as the government’s National Innovation and Science Agenda has highlighted the importance of a culture of innovation. Nevertheless, there remains a lot to do. Cultural transitions are hard. But even modest initiatives can generate momentum, especially when their effects are combined.
Some key recommendations include:
- Schools and career advisors should bring entrepreneurs into their learning sites to share real life stories of learning from failure.
- Universities should give academics time and training to pursue entrepreneurial activities, and allow them a pathway to take sabbaticals or unpaid leave to pursue their entrepreneurial ideas with the failsafe of returning to their full-time academic role.
- Local community leaders should systematically celebrate entrepreneurial activity, including examples of learning from failure, and identify ways to shape the local discourse on entrepreneurship.
- Innovation and Science Australia, in collaboration with the Behavioural Economics Team of Australia and the start-up community, should investigate effective ways to promote discussion of entrepreneurial failure in homes, schools and workplaces.
Introduction
Few Australians have heard of Peter Tattam. Yet, as a lone hobbyist on the margins of his day job in the psychology department at the University of Tasmania in the early 1990s, Tattam wrote a program that enabled Microsoft Windows users to connect to the internet from their personal computers using dial-up servers.4 Tattam called his software Trumpet Winsock after a newsreader he had built — and because he liked playing trumpets.5 He distributed the program as shareware, without corporate backing or slick marketing, and only asked users to send him $25 if they went beyond a try-out period. Tattam’s creation was the best software for connecting to the internet and its use grew exponentially.6 Once Microsoft bundled Winsock functionality with Windows, the game changed forever: now anyone with a PC could access the wider internet without the limitations of a proprietary service.7 Tattam was a genuine technology pioneer. And he did it all from Hobart.
Tattam’s story highlights something novel about our digital age: innovation can come from anywhere and spread fast. Innovation has been democratised. The twin revolutions of Moore’s law (everything digital gets faster, cheaper, and smaller at an exponential rate) and internet connectivity, unleashed an explosive force that “changed the very nature of innovation, relocating it from the centre (governments and big companies) to the edges” (20-somethings in their garages).8 While the internet has made it easier and cheaper to launch a product or business and succeed, “it has also made it easier and cheaper to fail”.9 Embracing this logic at scale, in an adaptive way, is the cultural underpinning to modern innovation success.
For Australians, this doesn’t come easy. Donald Horne, arguably Australia’s most important post-war public intellectual, worried as far back as 1964 that “technology has produced a greater momentum than the Australian concept of entrepreneurship may be able to keep up with”.10 At the time, Horne could not have imagined the digital revolution, but his view that Australia’s “social climate” is “largely inimical to originality”11 is more relevant than ever.
A modern economy can be seen as a “complex system” where surprising patterns of behaviour emerge out of many interactions; it involves more than the sum of its parts. In these systems, the most influential leverage points — “places in the system where a small change could lead to a large shift in behavior” — concern goals, paradigms, and culture.12
Cultural constraints to innovation are a factor across the board, from small businesses to large corporations, but start-ups provide an exceptional opportunity to break out from these. Hence the crucial question: how did an “imagined community”13 of start-up economies emerge in the United States, with pro-innovation social norms and the social licence to take risks? And what might be holding back something similar in Australia?
“Innovation” as described by its chief intellectual architect Joseph Schumpeter, an Austrian-American economist active in the first half of the 20th century, is “the market introduction of a technical or organisational novelty, not just its invention”.14 It is “the specific instrument of entrepreneurship”.15 And an entrepreneur literally means “bearer of risk”.16
Embracing failure is a necessary part of innovation but it would be easy to mischaracterise this. As supervillain tech CEO Gavin Belson in HBO's Silicon Valley tells a group of fired employees: “Failure is growth. Failure is learning. But sometimes failure is just failure.” Failure should not, for instance, be an excuse for poor strategy or research.17 Failure is something that happens on the way to achieving excellence, not an end in itself. The challenge is to “fail well” — to generate new ideas and learning. As an Australian government report puts it, “innovation is about market experimentation. It involves the acceptance, or at least tolerance, of uncertainty and the risk of failure, on the basis that valuable learning will also come from failure”.18
Twenty-six years of uninterrupted economic growth has, however, hampered the emergence of a constructive view of failure in Australia. Australia’s economic success has had the unintended consequence of making high-risk investments less appealing. If investing in a sure thing is an option, why invest elsewhere? With so many economic winners around, start-up failure in Australia has become more tightly associated with personal failure and lack of entrepreneurial acumen.
It is difficult to be precise about the extent to which attitudes towards failure are holding back Australian innovation, which may help explain why this challenge is often cited but left as a vague observation. The 2016 Performance Review of Australia’s Innovation and Science System conducted by Innovation and Science Australia, found “no strong evidence” of Australia having a risk-averse culture, despite “common references” to it, although it acknowledged the limitations of the framework used.19 Interestingly, the report found: “The process of innovation can be significantly inhibited if failed attempts cannot be openly discussed, evaluated, reviewed or dismantled in a supportive environment in order to inform the next attempt.”20 While difficult to measure, there is a widespread sense that a problem exists. These perceptions deserve attention as they profoundly shape the economic and social climate.
The innovation imperative
New growth theory argues that economic prosperity stems from progress in ideas, rather than the means of production, such as capital and labour. Knowledge, unlike physical capital, is open to increasing returns over time. As US economist Paul Romer argues, “All innovation is a culmination of things, people and ideas that have existed before”, adding that “We consistently fail to grasp how many ideas remain to be discovered. Possibilities do not add up; they multiply”.21 More recent work in cognitive science supports the view that humans are wired to rely on each other’s ideas. In their book, The Knowledge Illusion: Why We Never Think Alone, cognitive scientists Steven Sloman and Philip Fernbach argue that incomplete understanding propels technological progress.22 But ideas alone are not enough; they need to be brought to life in the market.
In Australia, businesses less than two years old “are the largest contributor to job creation”, representing 90 per cent of net positive job creation from 2004-05 to 2010-11.
New firms, and especially start-ups, demonstrate this dynamism. New firms are the engines of job creation in Australia and the United States alike. Between 1977 and 2005, existing firms were net job destroyers in the United States, shedding one million jobs per year, while new firms added an average of three million jobs.23 More recent data indicates this is a persistent trend, with young firms accounting for “nearly all net new job creation” in the United States.24 Similarly in Australia, businesses less than two years old “are the largest contributor to job creation”, representing 90 per cent of net positive job creation from 2004-05 to 2010-11.25 Despite notoriously high failure rates, start-ups epitomise high-impact entrepreneurism, representing young firms with the most potential for dramatic growth.26
As the cost of failure has dropped dramatically, especially in high-tech industries, the nature of entrepreneurism has also changed. Eric Schmidt and Jonathan Rosenberg, two senior executives at Google, stress how “It’s ridiculously easy to imagine and create a new product, try it out with a limited set of consumers, measure precisely what works and what doesn’t, iterate the product, and try again”.27 They point out that with digital prototyping, 3-D printing, and online market testing and fundraising, the same logic is being extended to manufacturing.
These developments should transform how failure is perceived. As technology and internet-focused academics Joi Ito and Jeff Howe underline, “as the cost of innovation declines, the nature of risk changes”.28 In particular, reducing losses is subservient to amplifying wins. (Indeed, this is the basic logic behind venture capital.)29 With the onset of low-cost innovation, it doesn’t make sense to tie up resources in excessive planning when failure is a “bargain-priced learning opportunity”.30 This paradigm is paramount in Silicon Valley, which is heir to an American tradition of experimentalism.
Land of promise
The best place to start to understand American innovation culture is with the great nineteenth century interpreter of American society, Alexis de Tocqueville, a Frenchman who in his towering 1835 work Democracy in America captured better than anyone the American embrace of failure in pursuit of prosperity.
“In the United States, fortunes are easily lost and made again… The primary reason for their rapid progress, their strength and greatness is their bold approach to industrial undertakings. There, industry is like a vast lottery in which there are a few daily losers but the state is a consistent winner; such a nation is, therefore, bound to view favorably and to respect industrial speculations. Now, any bold undertaking risks the fortune of the man who embarks upon it as well as the fortunes of all those who put their trust in him. Americans, who regard commercial rashness as a kind of virtue, would not be able to condemn any of those who practice it… That is why, in the United States, a trader who goes bankrupt is viewed with such an unusual degree of indulgence; his honor is not impaired by such an accident. In that, Americans differ not only from European nations but from all contemporary trading nations.”31
Tocqueville observed a distinctly American entrepreneurial mindset: markets were to be created, not simply dominated. This is a transformative way of thinking about markets.
In Tocqueville’s view, entrepreneurial risks were tied to American notions of honour, since the courage most prized was that “which makes a man indifferent to the sudden loss of a fortune acquired with so much labor and which immediately prompts him to fresh endeavors to gain another”.32 He drew a connection between the American circumstance — a land of abundance and spirit of newness — and the cultural attitude towards risk-taking it produced.
“[For Americans], whatever does not exist has simply not yet been tried… This universal activity which prevails in the United States, these frequent reversals of fortune, these unforeseen shifts of public and private wealth, all combine to entrench in men’s minds a kind of feverish agitation, which predisposes them to make every possible effort and keeps them, so to speak, above the common level of humanity. For Americans, their whole lives are spent as if in a game of chance… The same causes operate simultaneously on every individual and thus, in the end, give an irresistible impulse to the national character. Choose any American at random and he should be a man of burning desires, full of initiative, enterprising, and, above all, an innovator.”33
Despite this legacy, there is evidence of more recent entrepreneurial stagnation in the United States. Tyler Cowen, an iconoclastic American economist, bemoans the rise of complacency that is sapping Americans of the “pioneer spirit” that made their economy the most productive and innovative in the world.34 Recent data counters some of Cowen’s pessimism, however, with net establishment formation accelerating since 2015,35 and, according to the Kauffman Foundation, a nonprofit focused on advancing entrepreneurship, high-growth entrepreneurship rebounding since 2008.36 Regardless of whether these trends hold, the history of Silicon Valley reveals key cultural lessons for any region hoping to generate breakthrough innovation.
Fail fast, fail often and the Silicon Valley creed
The Silicon Valley mantra “fail fast, fail often” is now so widely touted it sounds trite. But the ascendance of this mindset is perhaps the most important distinguishing feature of its success.37 The US academic AnnaLee Saxenian has documented how the mid-twentieth century pioneers of Silicon Valley saw themselves as outsiders to American east coast industrial traditions, while the geography of the region — a peninsula — “minimized physical distances between companies and facilitated intensive informal communications”.38 A common, collaborative culture and ethos emerged centred on technical experimentation.39 The region and its professional networks, rather than individual firms, became “the locus of economic activity”.40 Moving between firms became acceptable. The new culture paved the way for “open innovation” — firms using internal and external ideas to create value.41 Silicon Valley’s early success owed as much to “its rich social, technical, and commercial relationships as to competitive rivalries and the initiative of individual entrepreneurs”.42
Crucially, the emergent social dynamic generated new norms around failure. As Saxenian recounts, “Having left behind families, friends, and established communities”, these technology pioneers were “unusually open to risk-taking and experimentation”.43 They emulated the entrepreneurism observed by Tocqueville, updated for a modern era:
“Not only was risk-taking glorified, but failure was socially acceptable. There was a shared understanding that anyone could be a successful entrepreneur: there were no boundaries of age, status, or social stratum that precluded the possibility of a new beginning; and there was little embarrassment or shame associated with business failure. In fact, the list of individuals who failed, even repeatedly, only to succeed later, was well known within the region.”44
This cultural shift has had far-reaching implications. For example, potential entrepreneurs are not expected to wait for years before seeking early-stage investments. As Alec Ross, the former innovation adviser to Secretary of State Hillary Clinton, observes: “It is not a coincidence that Google, Facebook, Microsoft, Oracle, and countless other information-age companies were started by people in their twenties — and started in the United States.”45
Silicon Valley culture has provided a model for other American cities. Startup America, an initiative launched by the Obama administration in 2011, sought to boost start-up activity nationally. Start-up culture is indeed spreading across the United States, as evidenced by a closing “dynamism gap” between large cities and the rest of America, and a growing crop of cities embracing start-up culture, including in sectors like manufacturing, healthcare, and transportation.46 Cities like Austin, Denver and San Diego have more start-ups per million people than Sydney or Melbourne.47
The idea that every state and city can be part of America’s start-up economy underpins the “Rise of the Rest” initiative of the venture capital firm Revolution and its founder Steve Case.48 Herbie Ziskend, a former director of Rise of the Rest Investments and director of public policy at Revolution, told me that the Silicon Valley culture of embracing risk and experimentation was spreading to other American cities: “It is part of the larger American culture and ethos — the nation of immigrants that came here to start from scratch.”49
The lucky country’s fear of failure
In a 2013 international survey, the World Economic Forum found that “cultural support” — including risk and failure tolerance as well as role models and celebration of innovation — was relatively weak within Australia’s entrepreneurial ecosystem. This “pillar” was considered readily available by only 29 per cent of Australian respondents, compared to 90 per cent of respondents from Silicon Valley, or 64 per cent across other American cities. This pillar was by far the biggest gap between Australian and Silicon Valley respondents, outstripping differences in market access, human capital, access to finance or mentors, regulation and infrastructure.50
Global Entrepreneurship Monitor data points to a considerable challenge for Australia when it comes to a fear of failure. According to the 2016/2017 report, 42.9 per cent of Australians aged 16-64 years old51 indicate that a fear of failure would prevent them from setting up a business even when they perceive good opportunities; in contrast, this figure was only 33.3 per cent in the United States.52
Forty-three per cent of Australians aged 16-64 indicate that a fear of failure would prevent them from setting up a business even when they perceive good opportunities; in contrast, this figure was only 33 per cent in the United States.
The impressions of those involved in Australia’s entrepreneurial ecosystems are even more telling. Chris Styles, dean of UNSW Business School, observes: “In the US, multiple attempts at start-ups are worn as a badge of honour, and are almost a prerequisite to attract investors. In Australia, not getting a new venture off the ground is too often seen as a failure rather than a learning experience that increases the chances of success next time around.”53 Steve Baxter, the Queensland government's recently appointed chief entrepreneur, pleads for Australia not to punish entrepreneurs who fail. “They probably have five or six years of golden experience, and their next business is going to be ten times better because they had that failure. Right now we treat them like a bloody criminal, which is crazy.”54
Such attitudes may be widespread but trying to describe Australian culture is treacherous terrain. Discussing national traits can make them appear immutable. Divergent narratives also tend to compete for ideological advantage, while diverse experiences render loose generalisations unhelpful. By focusing on innovation-related culture we can avoid some of these pitfalls even if a comprehensive account remains elusive. Australia, like the United States, has over time cultivated traits and norms which are valued or recognised quite widely. Narratives about the national character shape daily and public life, including economic life, even when based on myth as much as reality.
Historical legacies
In The Lucky Country, Donald Horne argued Australia’s luck, including mineral wealth, had become a source of complacency, stifling ingenuity and creativity. He rejected the notion that “miracles” of Australian settlement had inspired Australian talent,55 and worried Australia would be left behind since it had “not been a country of great innovation or originality”, having “exploited the innovations and originality of others”.56 In a strikingly similar assessment, the Committee for Economic Development of Australia wrote in a 2016 report that Australia’s natural resource advantages had led to a strategy of copying foreign innovation, thereby creating “a false impression of convergence: the nation may be close to the technological frontier but, in many respects, it is a long way from being able to move that frontier forward”.57
Numerous commentators have, however, stressed the “practical improvisation” which characterised Australia’s industrial development.58 Australian writer David Malouf sees this as part of our British inheritance, an Anglo-Saxon “habit of mind… that prefers to argue from example and practice rather than principle… is flexible, experimental, adaptive, and scornful of all those traps it sees in habit and rule”.59 This saw the early settlers adapt “to new and unknown conditions”.60 Such strengths had their weak side too, with Charles Darwin in 1836 observing Australian “anti-intellectualism and complacent philistinism”.61
Looking at the nineteenth century, Australian writer George Megalogenis observes while the United States “claimed every other nation’s tired, poor, huddled masses yearning to breathe free”, Australia wanted “the migrant to improve the national stock”.62 He suggests Americans emerged “a religious people distrustful of government,” while Australians became “an intemperate people with a paradoxical dependence on government”.63
Come mid-century, Horne berates Australian elites for being “conformist”. Even so, he had confidence in ordinary Australians’ capacity for change.64 Australians “could be skilful improvisors”.65 In Horne’s estimation, “The saving Australian characteristic... is the ability to change course quickly… and seek a quick, easy way out”.66 Read in a more positive light than perhaps Horne intended, this could be viewed as a variant of what Tocqueville observed as the American determination to find “the shortest route” to prosperity.67 Australian pragmatism turns out to be a great innovation asset.
This strength is no more evident than in the quintessential Australian notion of “having a go”, which Horne calls a defining characteristic of Australian people, alongside “fair go” and “having a good time”. Horne also identifies the Australian aversion to pretension and self-delusion — both in oneself and towards others. “This deeply inlaid scepticism is a genuine philosophy of life, a national style determining individual and group actions… It may be the most pervasive single influence operating on Australians.”68 This can cut both ways: combined with “having a go” it can inspire new ways of doing things, unencumbered by fads or trivial trends, but it may also encourage undue negativity about the ambition that drives breakthrough innovations.
The paradox of economic success
The baby boomers achieved economic prosperity with little need for large career risks. Their theories of success are naturally more likely to combine working hard, good luck and safe investments. This approach has also seeped into business culture. In a recent study, the chair of a top ASX-listed company revealed a preference among boards for “doing nothing” rather than innovating, to protect reputations in case things go wrong.69 This can lead to throwing good money after bad to avoid the stigma of a cancelled project.70 Ben Heap, founding partner of leading Australian fintech and data investment firm H2 Ventures, told me that in Australia “a corporate board is unlikely to back a CEO who tries a handful of innovative initiatives that don’t work”, even though this is an “entirely flawed way to think about innovative or risk-taking ventures because by their very nature, most innovation initiatives are unlikely to work”.71
This cautiousness is deeply ingrained in Australia’s investment climate. Wyatt Roy, the former federal assistant minister for innovation, told me that Australians — personally, in business or government — “traditionally have invested in very secure things that have a small return over a long period of time. Think resources, property, infrastructure”. He points to the example of superannuation. “You’ve got the second largest retirement savings of any country on the planet and that is heavily geared towards long-term investments with a small but secure return. That’s a good thing when you’re talking about retirement savings but that investment culture basically ensures that when people are successful they’re probably more inclined to invest into property or blue-chip shares than they are to invest in innovation and high-risk enterprises.” And this shapes attitudes towards failure: “If you are seen to have failed before, in Australia that is conceived as a big negative; you wouldn’t look to invest in somebody who has failed. Whereas in Silicon Valley, or certainly Israel, you are not taken seriously unless you have failed. The failure is your opportunity to open up the door to other opportunities. People wear it as a badge of pride; over here it is something that people instinctively try to hide.”72
Following a quarter century of economic growth, it is unsurprising that Australians’ risk tolerance is relatively low. According to “prospect theory” developed by behavioural economics pioneers Daniel Kahneman and Amos Tversky, people tend to be more risk averse in the domain of gains, and less risk averse in the domain of losses.73 When times are good, we stick to the status quo. When things aren’t going well, we are more willing to try something different. As Liberal Party pollster Mark Textor characterises Australians’ fear of decline, “When you are sitting on an economic pedestal, you ask yourself, ‘How do I maintain this?’ The only way is down”.74 To encourage greater risk tolerance, effort is needed to destabilise the status quo and highlight negative consequences of stasis.75
Yet, the available evidence suggests Australians are collectively prepared to embrace entrepreneurship if the climate was more supportive.76 Moreover, the actual experience of successful Australian entrepreneurs is striking: 41 per cent of start-up founders have previously founded at least one other start-up,77 while a staggering 82 per cent of founders of successful Australian technology start-ups had previously created at least one company.78 Among start-up founders, 21 per cent describe “experience from founding a start-up previously” as a “critical” event in founding their start-up.79 This data suggests there is a strong undercurrent of risk-taking entrepreneurism in Australia. The challenge is therefore to amplify this on a wider scale; to take it mainstream in our economic life and public narrative.
Social capital and the new economy
Joseph Schumpeter’s conception of innovation and the “creative destruction” it generates80 can have drastic implications for the people driving it. Rocking the boat makes one a target for those who wish to defend the status quo so most shy away. This is also why large organisations tend to struggle with innovation.81 To better understand the conditions in which failure is not only permitted but embraced in a meaningful way, it is helpful to look at this phenomenon through the lens of social capital.
A social norm that prizes experimentation and tolerates failure is a missing ingredient in Australia’s stock of social capital as it seeks to participate in the new economy. The consequences of this can be hidden when productivity gains are made through inputs of financial, human and physical capital, but it comes to the fore when transitioning to an innovation-driven economy. This type of social capital which emerged in Silicon Valley has only recently been emulated in other countries in a serious way. Co-working spaces and incubators, hackathons and mentoring programs, are outward expressions of an underlying logic: generating the social capital that fuels an entrepreneurial economy.
Following US political scientist Robert Putnam's landmark 1995 study on civic engagement, social capital can be understood as referring to “connections among individuals — social networks and the norms of reciprocity and trustworthiness that arise from them”.82 The importance of the social dimensions of markets, especially the role of trust, has long been established, including by the father of modern economics Adam Smith.83 Entrepreneurs often rely on the support of social networks, such as those provided by friends, collaborators and family, when engaging in new ventures. Fortunately, economist and parliamentarian Andrew Leigh’s study of social capital in Australia finds “little evidence of a collapse of trust” (even though he finds decline in other areas).84 High-trust relationships can enable risky investments in bold ideas, including by family and friends who tend to be crucial sources of seed capital for early-stage ventures, alongside personal finances,85 including in Australia.86 Where social capital is weak, potential entrepreneurs might prefer conventional careers, lest they incur the stigma of failure. In contrast, where social capital is strong, they can experiment, confident that their social standing will not be diminished if they fail.
Where social capital is weak, potential entrepreneurs might prefer conventional careers, lest they incur the stigma of failure. In contrast, where social capital is strong, they can experiment, confident that their social standing will not be diminished if they fail.
Social capital sustains start-up ecosystems where “the interests of the participants are aligned such that the success of each participant leads to the success of the start-ups and the ecosystem as a whole, thus avoiding behaviours that benefit one entity at the expense of others.”87
A particular challenge is to build communities where failures can be surfaced for individual and collective learning. As Ben Heap, founding partner of leading Australian fintech and data investment firm H2 Ventures, told me regarding the Australian context: “There aren’t many people running around who have failed a handful of times and are still at it. And the ones that are running around that have failed a few times are certainly not silly enough to talk about it and so there’s not a sharing of those lessons learnt. It’s more like gamblers anonymous in an Australian context where it’s hard to find someone else who has dealt with a gambling addiction because people aren’t going to talk about it, even if they might have some terrific experience to share. Until the culture changes you don’t have the sort of knowledge out there and the experience — the lessons learnt — which is the thing that makes failure valuable.”88
These conversations can only happen in a social context which welcomes them. Like cities,89 effective start-up ecosystems facilitate productive human interactions. Reid Hoffman, the US internet entrepreneur and founder of LinkedIn, highlights common spaces in Silicon Valley — places where the “very creatures of entrepreneurial life mingle and learn from one another” — like restaurants known for venture deals, coffee shops where programmers and students mingle and get recruited, and accelerators where entrepreneurs “swap insights and commiserate about the insanity of start-up life”. He argues these are “just as vital to Silicon Valley as the headquarters of Facebook, Google or LinkedIn”. Hoffman suggests thinking of Silicon Valley as “a vast, deep learning machine that sends information careening through its network”. Crucially, these dynamics “can take root just about anywhere that you have a few successful entrepreneurs willing to pay it forward”. So this is how to identify the next Silicon Valley: “Is there a density of talent sharing, swapping and learning from each other’s experience?”90
Analysis by the Australian innovation department chief economist concurs on the benefits of “geographical clustering” which creates “economies of scale associated with shared access to infrastructure, skilled labour and other resources” and allows firms, universities and research institutions to build “trust and cooperation” that reduces transaction costs and encourages ideas exchange.91 However, as the national start-up advocacy organisation StartupAUS highlights, “Australia’s startup landscape is remarkable for its lack of density. There are no start-up precincts of globally significant scale in any Australian cities. Ecosystems are scattered, with focal points becoming isolated co-working spaces, incubators or accelerators. The cultural impact of this fragmentation should not be underestimated. Entrepreneurship is invisible for most Australians. And without focal points, any build in cultural momentum supporting start-ups has been difficult to maintain”.92
The push for “innovation districts”, or “innovation precincts” — including from StartupAUS93 — addresses this challenge. According to research by the Brookings Institution, these are “geographic areas where leading-edge anchor institutions and companies cluster and connect with start-ups, business incubators, and accelerators”. Furthermore, “They are also physically compact, transit-accessible, and technically-wired and offer mixed-use housing, office, and retail”.94 By concentrating interactions, these precincts can increase the trust and common mission that characterises the best innovation hubs in the United States. We are beginning to see these emerge in Australia. Following a recent visit to Melbourne, Brookings analyst Julie Wagner called it “a city to watch” because “there are multiple innovation districts… in various phases of development, which cumulatively has the potential to create a broader innovation ecosystem — or innovation spine — across the city.”95 There is hope that the new Startup Hub located in the heart of Sydney — backed by $35 million from the NSW government — will also emerge as a globally significant innovation district.96 Two new start-up hubs in Brisbane are also positioning it as an emerging precinct. Local governments are also playing an important role.97
The chair of a top ASX-listed company recently observed: “[Australia is] still too tribal, and certainly the people that run businesses are not properly or sufficiently connected with the leaders of innovation in this country."
While so few Australian investors have themselves engaged in risky start-ups — let alone talk about their failures — they are less likely to see the value in aspiring innovators willing to take on high-risk projects. Networks can thus have the opposite effect to those in Silicon Valley: more networking produces more conformity. While improving, Australia’s corporate sector is not as integrated into start-up ecosystems as it could be, thereby limiting the mainstream impact of start-up culture.98 The chair of a top ASX-listed company recently observed: “We are still too tribal, and certainly the people that run businesses are not properly or sufficiently connected with the leaders of innovation in this country. We have pockets of innovative excellence… The problem is they are pockets and we don’t have that nationwide culture.”99
When it comes to social capital, entrepreneurs in regional cities may have advantages. StartupAUS identifies emerging innovation centres in several regional locations from Bunbury to Ipswich.100 For budding entrepreneurs, strong community ties can translate into a supportive environment and easier access to professional counsel through personal networks. Of course, the converse may also be true: in some smaller communities, the idea of standing out from the crowd, only to fail, may be overwhelming. The lack of a critical mass of human capital or role models, and limiting social expectations of some groups such as young people, may also be a barrier. Nonetheless, regional cities present a tremendous opportunity.
Retooling for the twenty-first century
Rethinking education
Education systems can inspire experimentation and entrepreneurism. They can also do the opposite. The billionaire Silicon Valley-based venture capitalist Peter Thiel, for example, worries American education prizes competition and conformity, rather than nurturing talent.101 This dynamic may be even stronger in Australia where the Australian Tertiary Admission Rank (ATAR) boils down a student’s ability into a single score. As the Mitchell Institute notes, in earlier years children “are encouraged to be curious, to experiment and to learn through trial, error and eventual mastery. These are inherently scientific traits. However, once they enter primary school, this approach is often replaced… by a narrowing of focus towards achieving high NAPLAN scores and working towards an ATAR, to secure university entry”.102 In its place, the Mitchell Institute recommends a greater focus on creative problem-solving and capability-building in the curriculum.
This approach can shift attitudes towards entrepreneurial failure, initially among a critical mass exposed to such education and eventually at a societal level. This type of education focuses less on conveying specific knowledge and more on fostering experimental inquiry and developing a range of competencies. It empowers people to explore new disciplines, create and maintain coalitions, avoid groupthink, seek feedback from peers, communicate ideas, and demonstrate resilience.103 It should enable students to effectively manage risk and to develop what business researcher Adam Grant calls “risk portfolios” — that is, help them figure out how to take safe bets in one domain of life so they can simultaneously pursue ambitious, high-risk ventures without compromising their mental health or livelihood.104
Many of these competencies — essential for interpersonal skills, creative and decision-making tasks, and information synthesis — are also fundamental for a future of work defined by intensifying automation and the rise of AI.105 As MIT economists Erik Brynjolfsson and Andrew McAfee write in The Second Machine Age, “We’ve never seen a truly creative machine, or an entrepreneurial one, or an innovative one”.106 Computers help us find answers but not pose new questions. The audacity to pursue new ideas is largely contingent on the willingness to be wrong, and social mechanisms to support that.
In the United States, investments like those made by the Kauffman Foundation, a nonprofit founded to advance entrepreneurship, mean more than 400,000 students participate in entrepreneurship training each year,107 while 4.4 million school students participate in Kauffman’s Junior Achievement program, exposing them to entrepreneurship principles through experiential activities.108 In Australia, there are only a handful of initiatives at the primary school level such as those run by the Club Kidpreneur Foundation, which encourages entrepreneurial thinking in primary-aged children. Although there are some opportunities available for secondary students through courses like those delivered by Phronesis Academy, an online platform that teaches children entrepreneurial and business development skills,109 there are no widely implemented entrepreneurship programs in Australian high schools.110
A 2015 report by Spike Innovation for Australia’s chief scientist found that “Producing and training entrepreneurs is not seen as a priority” for most Australian universities.111 The report acknowledged promising initiatives, but overall assessed programs to be small and unreflective of best practice; it provided a comprehensive set of recommendations to close the gap. Experiential programs in particular, such as incubators and pitch competitions with seed funding, were identified as helping students “fail fast in a safe environment”.112 The recent surge in university-based incubators, accelerators, mentoring schemes, and entrepreneurism courses (a recent report by Universities Australia identified more than 100 such facilities in Australia)113 can therefore promote capabilities needed to turn ideas into ventures while debunking negative attitudes towards failure.114 University programs based on Lean Startup methodology — described as “the international gold standard in entrepreneurship education”115 — have particular promise in this regard. This approach calls for adapting to the needs of customers, starting with a minimum viable product and iterating towards success. It turns small-scale failure into a strategic asset.
Beyond campuses, Lean Startup methodology is already shaping Australia’s start-up economy. A survey of Australian start-up founders found that The Lean Startup by US entrepreneur and writer Eric Ries was their most recommended book.116 CSIRO is using Lean Startup methodology to boost entrepreneurship among its staff and more widely through its accelerator program.117 As the influence of this methodology spreads, the effects over time could nudge thinking on entrepreneurial failure.
Clay Shirky, a US academic who writes on the social and economic implications of the Internet, argues that the key to successful tech management is “learning to metabolize failure”.118 This insight extends to all entrepreneurial success. In 2011, the Harvard Business Review dedicated an entire issue to “examining the art and science of failing well”.119 This should be at the heart of Australia’s burgeoning entrepreneurship training programs. Those going into business will need to learn to operationalise “intelligent failure”, such as by codifying and sharing what is learnt.120 Building resilience is also key.121
Rethinking careers
Adam Grant finds “When achievement motivation goes sky-high, it can crowd out originality: The more you value achievement, the more you come to dread failure. Instead of aiming for unique accomplishments, the intense desire to succeed leads us to strive for guaranteed success”.122 This can have systemic effects. Australian writer Lisa Pryor, writing in The New York Times, suggests Australia is in danger of squandering its enviable prosperity and lifestyle because “when you have a nation full of people trying to get to the top, eventually most of the population is forced to run just to keep up”.123
Australian writer Lisa Pryor suggests Australia is in danger of squandering its enviable prosperity and lifestyle because “when you have a nation full of people trying to get to the top, eventually most of the population is forced to run just to keep up”.
The pressure to compete on the same terrain as others may sap entrepreneurial creativity and drive. Peter Thiel believes American universities promote conformity by fostering “fierce rivalries with equally smart peers over conventional careers like management consulting and investment banking”.124 This critique may also be apt for Australia, where many undergraduate students focus on a particular professional goal rather than seeking a well-rounded foundation from their tertiary studies, and there may be great pressure to stick to conventional careers. As Alex McCauley, the CEO of StartupAUS, told me: “It’s that conversation young people have when they sit down to family dinner and get asked ‘What are you going to do with your life?’. The kid is supposed to say, be a lawyer or a doctor, or an accountant or architect, something with a bit of cachet about it and that has a professional degree and a clear path you can follow. That conversation needs to evolve: smart kids need to be able to say, I’ll actually do something new and create some jobs by building a business.”125 Once graduates enter the workforce, conventional career paths often drain what is left of their entrepreneurial ambition.
In the tertiary sector, one obvious reform would be for Australian universities to follow their American counterparts in offering greater scope for academics to pursue entrepreneurial activities, including through sabbaticals. This would minimise personal risks for researchers such as Australian engineering professor Andreas Fouras who left his academic post — and sold his house — to focus on his early stage medical start-up, 4Dx. As Australian journalist John McDuling writes in the Australian Financial Review, “It is exactly the kind of risk taking we are trying to encourage as a nation. But we sure don’t make it easy”.126 Worries about being locked out of academia haunt researchers making the leap into commercial territory.
It is difficult to build innovation in large organisations, where hierarchical bureaucracies tend to be risk-averse. This is why technology companies such as Google — which drives innovation by “failing well” — are remarkable. A good illustration came out of its Sydney office. Google Wave, a new way to communicate online, was launched in 2009 with much fanfare but didn’t gain traction and was scrapped. As Eric Schmidt and Jonathan Rosenberg describe in How Google Works, “It failed quickly: We did not pour good money after bad. It failed without anyone being stigmatized: No one on the Wave team lost their jobs, and in fact most of them were highly recruited within Google after the project shut down, precisely because they had worked on something that had pushed the boundaries”.127 Innovators notice how failure is treated: if it is punished they will naturally become more cautious. According to Schmidt and Rosenberg, managers should create systems that get stronger as a result of failure, or what American scholar and author Nassim Taleb calls becoming more “antifragile”.128
Recommendations for Australia
Aspiring entrepreneurs need to be given room to experiment — and fail. This is the social and cultural task, as distinct from the technocratic or commercial one, of nations seeking to become innovation leaders.
Recent reform of Australia’s corporate insolvency laws demonstrates how concrete steps can be taken to ensure we don’t excessively penalise failure,129 potentially helping shift attitudes towards failure over time.130 This brings Australia closer to the more entrepreneurship-friendly American approach to bankruptcy.131 More broadly, political and corporate leaders have a vital role but so do parents, teachers, and journalists.
Australia has achieved profound economic and social success. Now, it must rethink the meaning of failure to ensure this prosperity continues.
The following ideas are a sample of steps that could be taken in various Australian sectors to embrace the best of American innovation culture when it comes to valuing failure. They are intended to indicate that modest practical measures can cumulatively impact culture, rather than to resemble a comprehensive list of solutions.
- Local governments and community leaders should systematically celebrate entrepreneurial activity, including examples of learning from past failure, and identify ways to shape the local discourse on entrepreneurship.
- Entrepreneurial training programs should use methodologies (such as Lean Startup) that encourage systematic experimentation and iteration which leverages low-cost failure, and promote capabilities needed to “fail well”. They should also assist aspiring entrepreneurs to develop skills to communicate personal narratives around past failures.
- Schools, careers advisers, and entrepreneurial training programs should help students to develop the self-awareness and capabilities to effectively manage their personal “risk portfolio”, as detailed in the section "Rethinking education".
- Schools and career advisors should bring entrepreneurs into their learning sites to share real life stories of learning from failure.
- Universities should give academics time and training to pursue entrepreneurial activities, and allow them a pathway to take sabbaticals or unpaid leave to pursue their entrepreneurial ideas with the failsafe of returning to their full-time academic role.
- Innovation and Science Australia, in collaboration with the Behavioural Economics Team of Australia (BETA) and the start-up community, should investigate effective ways to promote discussion of entrepreneurial failure in homes. This might include online platforms that curate and disseminate start-up experiences.
- Governments at all levels should continue to work with the start-up community to identify ways to strategically support the emergence of world-class innovation precincts.
Australia’s challenge was presented forcefully by Bertrand Russell, the great British philosopher, who penned an article for The West Australian upon his arrival in Australia in 1950 in which he emphasised the importance of enterprise and investing in scientific research, even when we know much of it “will probably prove unfruitful”. He added: “Perhaps you will be content with a moderate and humdrum success, but I hope not. I hope that the more enterprising spirits among you will be inspired by a golden vision of a possible future, and will be content to take the risks involved in aiming at great success rather than acquiesce in the comfortable certainty of a moderate competence.”132 In the decades since, Australia has achieved profound economic and social success. Now, it must rethink the meaning of failure to ensure this prosperity continues. The American example demonstrates there is no time for complacency, and no room for pessimism.
Acknowledgements
I am grateful to numerous people who generously shared their insights and expertise on themes covered in this paper, in particular Nathan Albrighton, Helen Baxendale, Greg Campbell, Ben Heap, Alex McCauley, Wyatt Roy, May Samali, Monica Wulff, and Herbie Ziskend. I am also grateful for the feedback provided by two anonymous reviewers on an earlier draft. Several of my teachers have in one way or another inspired me to pursue ideas discussed here, including David Eaves, Joi Ito, Nicco Mele, Dani Rodrik, Roberto Mangabeira Unger, and Jonathan Zittrain. I would also like to acknowledge the Australian- American Fulbright Commission for supporting my postgraduate studies in the United States, which enabled me to meet many entrepreneurs and innovators working in Boston, Silicon Valley, and beyond. This provided some very helpful background context when writing this paper. Finally, I would like to thank Jared Mondschein and Claire McFarland at the United States Studies Centre for their support. Claire in particular has been instrumental in guiding this project from the outset and I am extremely grateful for her thoughtful input and advice throughout the process. The views expressed in the final product are of course my own and they do not necessarily reflect those of the Australian Government.