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Beyond Start-ups: Thinking About Australia’s Technology Policy for Lasting Innovation

Writer's picture: Dr John H HowardDr John H Howard

Updated: Feb 6

John H. Howard, 4 February 2025

 

Australia's innovation ecosystem reveals a striking paradox.


While policymakers have championed venture-backed startups as the primary engine of technological advancement, this narrative captures only a fraction of our economic reality.


Most Australian enterprises generate value through methodical expansion, sustained by customer relationships, cash flows, and proprietor investments. A few are able to access an erratic flow of Government grants.


This misalignment between policy architecture and economic fundamentals presents a challenge and an opportunity to reimagine our national approach to innovation and growth.


The Dominance of Start-up Culture in Innovation Policy

For the past 25 years, the growth-leading potential of fast-growth venture-backed start-ups has dominated Australia’s innovation policy thinking. Advocates, analysts, policymakers, and the popular literature continue to champion start-ups as drivers of economic growth, with several State and Territory Governments maintaining strategies centred on this approach. From 2015 to 2023, the CSIRO also built its innovation approach around start-ups.


During this period, innovation hubs, co-working spaces, and accelerators flourished, supported by government funding, private investment, and universities. These spaces became essential to the innovation ecosystem, offering resources, mentoring, and networking opportunities (and hope) to chase the holy grail of being the next unicorn.

While these efforts injected dynamism into Australia’s innovation landscape, they disproportionately focused on the hype and potential of high-growth ventures and access to venture capital. This emphasis tended to overshadow more gradual, sustainable business models crucial for long-term resilience.


The Reality of Business Growth Patterns

In reality, venture-backed start-ups make up only a small fraction of the business sector; most businesses grow incrementally––one step at a time––funded by customer revenue and owner resources rather than venture capital. However, the focus on start-ups and venture capital highlights a critical gap: the lack of development finance for the broader high-growth business innovation ecosystem.


Venture capital plays a highly specialised and limited role in the innovation ecosystem. VC firms are selective, funding only about 1 in 100 business ideas. Their business model relies on taking significant risks in search of extraordinary returns. Investors operate on a portfolio basis, expecting most of their investments to fail while relying on a few blockbusters to offset losses.


Venture capital investors are after big winners. They seek propriety products, experienced managers capable of managing rapidly growing firms, minimum investment thresholds, and require extensive due diligence. From this perspective, few businesses start with the ideas and human capital necessary to secure venture capital funding.


Understanding Venture Capital's Limited Scope

The “Silicon Valley” type venture capital-backed start-up dominates some fields, such as information and communication technologies (and particularly software), and the life sciences (notably drug discovery), where new companies have to invest significantly large amounts of money before they realise any revenues. However, the well-funded and carefully planned start-up is the exception in most fields.


The prototypical venture-backed start-up has a technological solution to a mass problem––or opportunity. It produces something with a high selling price and high margins and is expected to be profitable in two to three years. During previous venture capital booms, many companies without these characteristics were funded. These included business-to-consumer companies, for example, that had characteristics of retailers – low margins, low average prices and a slow road to growth. We are now seeing this play out again.


The Funding Gap for Sustainable Enterprises

The start-up model excludes most enterprises that grow steadily and sustainably but do not promise the explosive returns venture capitalists require. For these businesses, the system fails to provide the patient, long-term financing they need to scale their operations.


Businesses in advanced manufacturing, renewable energy, aerospace, food and agriculture, for example, require substantial investments in expensive machinery and other capital equipment (usually with proprietary embedded software) that have a long-term payoff––investments that VCs are reluctant to support. Function-specific software applications support the business in numerous ways. And there is always the challenge of linking production systems with enterprise systems.  


The financial system compounds this challenge. Australia’s banking sector is heavily geared towards property investment, offering limited support for productive enterprise. The result is a significant funding gap for businesses outside the narrow profile favoured by VC investors.


Diverse Motivations for Business Creation

The motivations for starting a business are as diverse as the businesses themselves. While some entrepreneurs are driven by a desire to build wealth or achieve rapid growth, many go into business for entirely different reasons. Professional independence, work-life balance, and the pursuit of a personal passion to address a customer want, often take precedence over profit maximisation.


Others enter business out of necessity, such as being made redundant or forced into contractor relationships. Many are seen as simply "too old" for traditional employment. Policymakers must acknowledge these varied motivations and ensure that innovation and business support systems cater to this diversity rather than privileging one narrow model of success.


The reality is that very few new businesses grow into sustainable enterprises. In 2023 Industry, Innovation and Science Australia observed that Australia's business landscape is characterised by a predominance of small enterprises, which represent 93% of all businesses in the nation. These smaller organisations typically operate with constrained financers, capital equipment, business systems, and human resources, which hampers their ability to grow.


This gives rise to a significant structural challenge: a relatively small number of medium-sized enterprises, which are generally considered to be the major pillars of innovation, employment and growth––often referred to as the "missing middle." This gap arises, in large part, because businesses that want to grow have difficulty in accessing external development finance. 


Australia's Development Finance Deficit

It is now well understood by many in the innovation ecosystem that there is a significant shortfall in the availability of development finance—capital that supports businesses during their early and growth phases. This type of financing is essential for enabling investments in talent, business infrastructure, and innovation, which underpin long-term economic growth.


Globally, countries like Germany and South Korea have recognised the strategic importance of development finance. Germany’s Kreditanstalt für Wiederaufbau (KfW) and South Korea’s government-backed industrial banks provide targeted funding to businesses in critical sectors, prioritising economic resilience over short-term returns. The British Business Bank similarly supports small businesses through loans, guarantees, and equity investments, driving regional growth and innovation.


In contrast, Australia has systematically dismantled its development finance institutions. The abolition of the Commonwealth Development Bank in 1996 removed an important source of financial support for smaller regional businesses. The privatisation of the Australian Industries Development Corporation (AIDC) in the late 1990s further weakened the national capacity to fund industrial and infrastructure projects vital to economic development.


This retreat reflects broader ideological shifts of the late 20th century. Neoliberal policies prioritised private capital markets over state-backed institutions based on the belief that markets allocate resources more efficiently. At the same time, venture capital gained prominence globally, with its focus on high-growth, high-return businesses. The Australian Development Capital Association rebranded as the Australian Venture Capital Association in 1996[1].


The collapse of the State Banks in Victoria and South Australia was a significant factor in the retreat from state-backed financial mechanisms. While they highlighted governance failures, it also led to an overcorrection, sidelining development finance and creating long-term gaps in Australia’s innovation policy landscape. Revisiting these lessons is crucial to designing a balanced financial system that avoids past mistakes while addressing contemporary needs.


These shifts have left many growth SMEs without access to the patient capital necessary for sustainable growth. While programs like the Clean Energy Finance Corporation (CEFC), the Northern Australia Infrastructure Facility (NAIF), and the Australian Business Growth Fund are steps in the right direction, they may lack the reach and scale to meet the wider needs of the innovation ecosystem. The National Reconstruction Fund Corporation has yet to shift the dial.


By focusing narrowly on startups and venture capital, policymakers had overlooked the broader financing needs of Australia’s economy. Revisiting development finance is essential to address these structural gaps, particularly for sectors critical to economic resilience and long-term innovation.


Without these mechanisms, Australia lags its international peers in offering the patient capital necessary to foster sustainable growth and long-term innovation.


A Broader Framework for Sustainable Business Growth

Australia’s innovation policy needs a paradigm shift. Instead of fixating on fast-growth start-ups and venture capital, it must adopt a broader framework that supports sustainable growth across a wide range of businesses. Key priorities include:


  • Creating (recreating) Development Finance Institutions: Establishing a national development finance institution to provide long-term, patient capital. This institution could learn from international models like KfW, focusing on sectors with high potential for economic and technological impact.

  • Diversifying Funding Options: Developing mechanisms and aligning prudential regulations to encourage private-sector investment in early- and growth-stage businesses, such as co-investment schemes, well-targeted tax incentives, or government guarantees.

  • Supporting Gradual Growth Pathways: Recognising that most businesses do not follow a fast-growth trajectory. Long-term and stable policies and programs should cater to businesses that grow incrementally, supporting their access to finance, talent, and markets.

  • Enhancing Industry Collaboration: Leveraging the infrastructure and expertise of established industries to foster growth in smaller enterprises. Established firms can provide mentorship, market access, and technical resources.


The challenge ahead is not to abandon start-ups but to integrate them into a broader, more inclusive innovation policy. Fast-growth start-ups play an important role in driving disruption and entrepreneurship, but their success must be complemented by support for the wider base of technology-oriented businesses that grow steadily and sustainably.

This means addressing structural issues in Australia’s financial system, creating development finance pathways, and fostering collaboration across the innovation ecosystem. By doing so, Australia can build a resilient economy that supports businesses of all shapes and sizes.


Australia’s technology and innovation policy must evolve to reflect the realities of business growth. By moving beyond a start-up-centric narrative and addressing systemic failures in development finance, Australia can unlock the potential of businesses across the growth spectrum.


The future of Australian innovation depends on recognising that fast-growth start-ups are not the sole drivers of progress. With a broader and more inclusive approach, we can ensure sustainable growth, technological sovereignty, and long-term prosperity for all Australians.

 

Dr John Howard is Executive Director of the Acton Institute for Policy Research and Innovation. He is an expert in science, research, and innovation policy, working with government, universities, and industry to enhance R&D and innovation performance.

For inquiries, contact john@actoninstitute.au  

 


[1] In 2019 AVCAL rebranded again as the Australian Investment Council to reflect its growing focus on private equity investment.

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