The importance of being innovative | Sydney Morning Herald 15 Feb 2012

by Josie Gibson

A news editor pulled me aside once, after I had made a big editorial call, and said: “In future, I want us to be the second outlet to run a breaking story like that.”

Being chided, however tongue-in-cheek, rankled. I hadn’t landed us in hot water, it was a calculated risk. His words stuck with me over the years as exemplifying Australia’s risk-averse culture.

We like to win, to lead the pack, but we feel vulnerable out front. What if we fail?

Later, working with seasoned executives, I was fascinated by discussions of leadership, strategy and decision-making. The global financial crisis separated the best from the rest as leaders were forced to make tough decisions fast, based on less-than-perfect information, throwing out the rule book without sacrificing  growth potential.

Like it or not, crisis mode is the new norm. Today’s operating environment is hyperconnected, volatile and fragmented. Technology is a major driver, but the changes are more profound and the implications for Australia are far-reaching. Sections of our economy might be cushioned by resource wealth and Asia’s growing markets, but such advantages are selective and finite.

The key is innovation and, depending on your perception, in Australia it’s either a massive problem or a golden opportunity.

New research by global corporation GE underlines Australia’s quandary. The GE Innovation Barometer found that while 86 per cent of Australian business leaders agree innovation is the main lever to create a more competitive economy, only 2 per cent of the 2800 global executives surveyed nominated Australia as an “innovation champion”. Asked to assess their own country’s reputation, 18 per cent of the 100 Australian executives in the survey put us in the “champion” category.

Australia fared better in another study commissioned by GE, leading the world in key areas of support for innovation efforts such as university-industry collaboration, and research and development spending. But the GE findings indicate a deep disconnect between how we perceive ourselves – innovators, risk-takers – and how others see us.

Regardless of whether it is fuelled by complacency, arrogance or fear, this perception gap potentially condemns Australia to global irrelevance. While we boast promising sectors and companies with genuine  records in innovation, research by leading European business school INSEAD, the World Economic Forum and others indicates that our relative innovation performance is languishing. Asia, in particular, is catching up fast.

In Australia, the innovation debate is too often fractured, hijacked by semantics and skewed to science and technology at the expense of deeper questions about leadership, culture and national identity. Business blames government, government blames business, and the research community blames everyone else.

Within organisations, the situation can be just as dire. Innovation efforts are often narrowly defined and heavily protected. Most workers are shut out of the process. Is it any wonder Australian productivity is suffering?

Changing behaviour is a complex, long-term proposition. It is about doing and trying, not just talking. It involves courage and a sense of purpose. Change is led by leaders prepared to cop flak and take risks. We do have such leaders, but not enough of them – yet – to influence the debate.

Government has a critical role to play in ensuring settings that enable business to create jobs, generate wealth, explore possibilities and tap new markets. Political debate aside, the potential for the national broadband network, for example, to transform service delivery and drive the creation of new business models within the public and education sectors is immense.

What is increasingly clear is that the terms ‘‘innovation’’ and ‘‘employee engagement’’ are inherently linked. Innovation is, at its core, a leadership responsibility, and therein lies the real opportunity. Harness people’s natural curiosity and capabilities and the race is half won.

Research published last year by Harvard professor Clayton Christensen and his colleagues found that organisations regarded as high-performing by industry peers and investors actively encourage the behaviours that produce innovation. The strategy is clear and widely communicated. Responsibility and accountability are pushed down to those with direct carriage, leaving executives clear to survey the horizon. Questioning is encouraged and experimentation is the norm. Reasonable failure is not a sackable offence.

As Australians, by default, we gravitate to our comfort zone. But we have the resourcefulness, pragmatism and resilience that come from living in a harsh land far from just about anywhere perceived to matter.

We also have high-calibre, globally competitive executives, a skilled workforce, political stability and populous, fast-developing neighbours.

Such dualities in our national psyche have been part of the problem and acknowledging them is part of the solution. Being able to embrace multiple, competing realities is a hallmark of a new world where either/or is increasingly irrelevant.

Innovation is often couched in sweeping national terms – “frameworks” – or technological jargon that intimidate and divert leaders from the real task, which is to motivate their people to improve things and try new approaches.

The most thoughtful leaders I’ve met rarely mention innovation; they accept change as part of the operating environment. They constantly scan for trends and future opportunities. Their management style  provides clarity about big goals and autonomy for those under them. Their remuneration and reward structures encourage staff to collaborate, question, solve problems and strive to do well.

Today’s good leaders know that the only way to steer through uncertainty and ambiguity is to  focus on the big questions – “What might the world look like in five or 25 years, and what are the implications for us?” – instead of adopting somebody else’s stock answer, or being diverted by short-term market or political sentiment.

For Australians, accepting the mantle of individual leadership on innovation and seizing the opportunity to act – to “put a ding in the universe”, as Steve Jobs would say – is more than achievable; it’s a national imperative, and not just for economic reasons.

A former journalist, Josie Gibson established a CFO network and now runs a creativity and innovation advisory business.

The 10 start-ups to watch | BRW.

In an effort to support and promote the efforts of the founders of start-up businesses, BRW has produced a list of the top start-ups of 2011. We hope their success stories will inspire and help others who are contemplating stepping away from the comfort of a salaried position and launching a business of their own.

Judging start-up businesses is a difficult task. For most of BRW’s lists, businesses are assessed based on historical revenue results or the size of their balance sheets. But start-up businesses don’t have track records.

Eligibility for the Top Start-Ups list was determined by qualitative assessments of soundness of the ideas behind each business, the founders’ commitment to the cause and their opportunity for growth.

Do you agree with our 10 best start-ups? Write and tell us your view.

Technology-related businesses feature prominently. It was not BRW’s intention to produce a list that was skewed towards tech companies but the weight of evidence made it unavoidable.

Top 10 start-ups

How Australia’s top ten start-ups are positioning themselves for the year ahead

The past two years have represented the biggest revival in technology sector investment since the dotcom bust in 2000. Fortunately for all involved, investors in start-up technology companies require much clearer evidence of the path to profitability than they did over a decade ago. The advent of smart phones has also significantly expanded the opportunities on offer to entrepreneurs.

No longer is it just tech-heads who are looking to the web. There is also a growing recognition that the web and mobile devices provide a fast and efficient way to start a business. Jonathan Barouch from Roamz, a location-based smart phone application, explains his preference for technology: “We are just using the best tools we have,” he says.

The internet is attracting those entrepreneurs who want quick results and can’t afford to invest heavily in physical assets before launching a business.

Several of the companies we feature in the following pages demonstrate the extent to which technology can accelerate the start-up process. Grabble is the standout example, having been established, proven and sold within a year. Developed as way for retailers to reduce the need for paper receipts, US retail giant Walmart was so fond of Grabble’s solution that it bought the business and employed its founders, who have since relocated from Wollongong to California’s Silicon Valley.

But for all the excitement about the technology sector, there are still many start-ups using more traditional methods to achieve great things. Fortunately for budding entrepreneurs, the best businesses often have the humblest of beginnings.

The idea for Lupe Wines, for example, developed out of its founder’s frustration at not being able to get a glass of wine at a music festival. Espressogrow was born when one of its founders came to realise that most of the old coffee grounds at his local coffee shop were simply being thrown away.

Each of the start-ups featured in the following pages show promise but the reality is that success is far from guaranteed. Many good ideas never turn into successful businesses. It may be bad timing, a lack of capital, emergence of a competitor or any number of factors that prevent a good concept becoming a well-established business.

A broad-based lack of confidence in the global economy also presents a threat to the current crop of start-up businesses.

Despite all the potential obstacles, many people are still prepared to identify an opportunity and develop a business around it. The importance of start-up businesses cannot be overstated and those entrepreneurs who are prepared to have a go should be commended.

Espressogrow

| Andrew Heathcote

Notable achievement: Turning one man’s trash into treasure.

Mark Henderson was sitting in a coffee shop when he asked a barista what happened to the used coffee grounds. After being told they were put in the bin, he investigated further and discovered that at that shop alone about 10 kilograms of grounds were thrown out each day. “I went back to my office and thought there must be a better way,” he says.

He discussed it with a former colleague, Geoff Howell, and the pair then spent 10 weeks investigating the nutrient value of coffee grounds and the possibility of using them to produce fertiliser. They spoke to retailers, manufacturers and marketing experts before deciding to quit their high-paying positions as IT consultants and going into business together.

“Geoff and I were really hoping someone would tell us it was a stupid idea and that we should concentrate on our day jobs,” Henderson says.

Instead they set up Espressogrow, which is about to finalise its initial funding round. Espressogrow plans to pay coffee shops for their used grounds, then take them to a central manufacturing plant and turn them into organic fertiliser.

Henderson says there has been keen interest in Espressogrow from investors and large coffee chains. He says the production of the fertiliser is relatively straightforward and that once funding has been secured, they can begin making it quickly.

He says coffee grounds are high in nitrogen and can be used to produce a product that behaves similarly to slow-release fertiliser but without the bad smell.

Manufacturing plants are planned in Australia, Europe and the US. “The business is not hugely expensive,” Henderson says. “We have to move rapidly to take hold of the opportunity.”

Zookal

| Jessica Gardner

Notable achievement: Getting good advice from a global competitor.

Zookal was formed when five university friends pulled together some start-up funding from their parents and bought 300 textbooks in time for the start of first semester in 2011. They planned to rent the books to students and focused on their classmates in the business faculty at the University of Technology, Sydney.

In second semester, Zookal doubled its collection of books, using cash earned in the first half of the year but word had spread among its customers’ social circles and it started getting inquiries from students at other universities and interstate. “We realised that we were going to need a significant investment if we were to progress,” co-chief executive Tia Saunders says.

Saunders and her co-CEO Ahmed Haider had been talking to angel investors and the offers and terms they received suggested a company valuation of about $1.2 million.

In September 2011, they went to the United States and met the founders of Chegg, another student-founded company that had been renting textbooks since 2007 (and had revenue of $200 million in 2011).

Chegg founder Aayush Phumbhra took kindly to Saunders and Haider. “We went back to Australia and Chegg commenced a due diligence process,” Haider says.

An investment offer from Chegg was attractive but would take too long to meet Zookal’s needs. Instead the two CEOs finalised an undisclosed funding round with the local office of venture capital fund Artesian Capital Management, which had expressed interest previously. The investment values Zookal at $5 million, they say.

Meeting Chegg didn’t just pump up their valuation, it also taught the young entrepreneurs to think big. “When I said we needed $4 million to go nationwide,” Haider says, “Chegg’s CEO Dan Rosensweig said, ‘Think bigger, think Asia – where could you get to if we gave you $25 million?’ This was almost the opposite of what we’d been told by local investors.”

Grabble

| Jessica Gardner

Notable achievement: Being bought out by an industry giant soon after being set up.

Two mates from Wollongong, NSW, began tinkering with smartphone applications to “make shopping smarter” in December 2010. Stuart Argue and Anthony Marcar got their first win when their company Grabble was accepted to incubator Startmate’s inaugural class and then into 500 Startups in the US, both in the first half of 2011.

In November 2011, the start-up was acquired by the research and development arm of US shopping giant Walmart. Details of the deal, which was announced by a message on a holding page on their company website, are scant. The two founders have since relocated to Silicon Valley as employees of WalmartLabs and aren’t able to say too much about what’s happening next with their company or their idea – which is loosely based around getting rid of paper receipts and sending digital versions to customers’ phones instead.

By email, Marcar tells BRW the duo is working in WalmartLab’s mobile team – in a “fantastic environment”. The workforce is mostly made up of the founders of other US digital start-ups that have also been acquired by the company, he says.

One of Grabble’s mentors, US-based Australian serial entrepreneur Ryan Junee, can think of only one other example of a local start-up being acquired by a US firm so early in its life: the purchase of Where2 by Google in 2004, which went on to become Google Maps and spurred the establishment of Google’s Sydney office.

“This acquisition reflects the fact that Stuart and Anthony are thinking big,” Junee tells BRW by email. “Many Aussie start-ups focus (perhaps too much) on the short-term cash flow because that is what Aussie investors like to see. Grabble was either going to be a huge success or a spectacular flame-out but that kind of high-risk, high-reward is what excites people in the Valley.”

Roamz

| Andrew Heathcote

Notable achievement: Winning support of a big listed company in a hotly contested market.

Apps are everywhere. The smart phone has proven to be one of the most influential developments of recent decades and there is no shortage of entrepreneurs trying to capitalise on the business opportunities they create.

Standing out in a crowded field of app developers is Jonathan Barouch. He is the founder and chief executive of Roamz, an app that draws together social media content to allow people to find local events and opportunities that interest them.

Roamz has had more than 50,000 downloads since its launch in October. Barouch began planning Roamz in 2010 after selling another business, fastflowers.com.au. He says running a florist made him realise how difficult it was to market products to people who are both nearby and fit a specific demographic profile.

“It’s the holy grail of marketing,” he says.

Roamz and its competitors are trying to meet this need. The use of geo-location software on smart phones has been a hot area for the past year.

Barouch’s standout achievement has been to win the backing of Australia’s biggest marketing and communications company, Salmat. (It took a 60 per cent stake for $3 million before the launch.)

Many app developers are more than happy to take the money of venture capitalists. Salmat says many people were interested in investing but he chose Salmat because the deal gives Roamz access to databases and networks normally out of the reach of a start-up.

Barouch says the opportunities are endless. “There are billions of dollars at stake,” he insists. “Whole communities in China will have their first taste of the internet on the mobile phone.”

Andrew Heathcote

One Big Switch

| Nassim Khadem

Notable achievement: Tapping into discontent with the banks.

When Kevin Rudd’s former spin doctor, Lachlan Harris, and Harvard University MBA graduate Paul Hunyor founded One Big Switch in July last year, they didn’t anticipate a war with the mortgage broking industry.

Their plan was to tap into consumer discontent with the banks by arranging a group buying scheme that offers cheaper rates on home loans. Consumers register their details online (when the business started with the support of consumer group Choice, 40,000 people registered in the first month alone).

Once there’s a large volume of people looking for a new home-loan provider, One Big Switch approaches financial institutions and requests bulk discounts on their behalf. One Big Switch receives a commission for introducing customers.

The mortgage broking industry has criticised the scheme, saying One Big Switch is not a registered broker. Harris says he is simply giving consumers more clout. “We just use people power to negotiate discounts,” he says.

The initial flood of interest suggests One Big Switch has a strong concept but the business still has a long way to go. Harris says several hundred people are in discussions with new lenders but at this stage they’re small players such as Resimac and FirstMac.

The start-up has also moved into group buying of electricity, while Harris was overseas last week wooing potential investors.

Harris says about 2000 people have already switched electricity providers and One Big Switch is looking to move into further areas such as insurance, plus possibly expand overseas. He expects to have more than 100,000 members by year’s end.

Nassim Khadem

Signrider

| Andrew Heathcote

Notable achievement: Creating a new segment in an established market

Sometimes, as Dave McGree has found, the simplest ideas can be the best ones.

McGree has co-founded a business that puts advertising on cars. The average car, he argues, is seen by 1.7 million people each year. His plan is to create a new segment in the $500 million outdoor advertising market.

His business, Signrider, is a low-cost operation that can be scaled up quickly. It works by having drivers fill in questionnaires on the Signrider website about their cars and driving patterns. Advertisers who want to reach a targeted location can do so by selecting a specific type of car and location from the database of registered drivers.

Advertisements are installed on the back and sides of selected cars and drivers are paid about $60 a week. McGree describes it as easy money for drivers as they are not required to alter their driving habits once selected.

The business started in July and 2000 drivers have registered to take part. “Drivers are signing up in droves,” he says.

Signrider makes its money by taking a monthly agency fee from the advertisers, so the big challenge will be getting enough advertisers on board. Just before Christmas, McGree began a push for advertisers and hired six sales consultants.

The rapid development in geo-location applications on smartphones demonstrates a growing preference for tailored marketing services and Signrider fits right into this niche. McGree plans to roll out the concept nationally. “We see massive potential if we can get this ingrained,” he says.

ImageBrief

| Jessica Gardner

Notable achievement: Providing a legitimate rival to an established duopoly.

Simon Moss had been running a niche stock library with his wife Meg for five years. All the photos had to be comprehensively tagged with keywords so clients could search through the archive. The problem is that a photo taken in 1950 would need to be tagged as 1950, 50s, 50’s and so on, Moss says. “It’s impossible to capture all of the different things people might be searching for.”

Then he came upon web-based crowdsourcing businesses such as 99designs, where users post graphic design briefs and freelancers pitch for the work. “We thought, ‘My God! This is insanely amazing. Wouldn’t it be great if we could do this with photography’,” he remembers.

The two industry leaders for stock image libraries are Getty and Corbis. “We saw a lot of photographers with a tonne of content that couldn’t be found and a lot of buyers that were struggling to search and navigate,” he says.

Using ImageBrief, customers, who so far include publishers and advertising agencies, post a brief for the type of image they need and their deadline and budget. If photographers have images that fit the brief, they upload them to the website. “If a buyer finds an image they love, they can download it and pay by PayPal or credit card,” Moss says.

More than 4000 photographers have signed up to the website. ImageBrief raised $600,000 from a syndicate of unnamed angel investors, who have strong links to the media industry, after pitching at an Innovation Bay dinner in 2011. With the capital, Moss will open offices in New York and London in the next three months. (The amount of equity the $600,000 purchased is undisclosed.)

BugHerd

| Jessica Gardner

Notable achievement: Successfully raising three rounds of cash in its first year.

Alan Downie and Matt Milosavljevic have created software that aims to make communication between web developers and their clients, who are often not tech-savvy, simpler and more effective.

Their company, BugHerd, enrolled in the inaugural class at start-up incubator Startmate in early 2011. As part of Startmate’s standard terms, they received a $25,000 cash injection in return for 7.5 per cent of the company. However, Downie says Startmate is not about the money. “It was more about the mentors and the access to the network of people,” he says.

One of BugHerd’s key mentors at Startmate was Alan Jones, the founder of online strategy company Doing Words. Jones was the lead investor in an angel round that raised a further $240,000 for the company in return for 15 per cent.

When the company enrolled in Startmate, Downie says “we were probably undervalued but we were really keen to get into the program”.

Although BugHerd was still “pre-revenue” in July 2011 when the angel investment round closed, he reckons the six months of development work and enquiries from potential customers that had begun to flow in were two factors that contributed to the rise in the value of the company.

Finally, in January 2012, BugHerd announced a $500,000 investment from Australian venture capital fund Starfish Ventures. Downie would not disclose the total equity now held by investors but confirmed he and Milosavljevic still had a majority share.

“[BugHerd] is a brilliantly executed product that’s dead simple to use,” Startmate co-founder Niki Scevak says. “The initial customers are really happy and that’s enabled [Downie and Milosavljevic] to raise funding. They want to build a large company for the long term. It has the right ingredients.”

Jessica Gardner

Vaxxas

| By Kath Walters

Notable achievement: Raising $15 million, the most ever by a start-up biotechnology/medical devices company

Prevention is better than cure, and cheaper, which is why 1.6 billion doses of various vaccines were administered around the world last year – at a cost of $US21 billion.

However, the technology that delivers vaccines, the needle and syringe, is fraught with risks, complications and limitations. A new Australian company, Vaxxas, is leading the world in the next generation of vaccine delivery – it’s called the Nanopatch.

The needle is better than it was when it was first used in 1853 but no one really likes a jab. That pain is an impediment for adults and children and stops some returning for booster shots. Training is needed to give an injection safely and effectively.

And, as Mark Kendall, the pioneer of the Nanopatch, has established, vaccine injections deliver the treatment into muscles, which have few immune cells. The Nanopatch has thousands of small projections designed to deliver the vaccine to the abundant immune cells in the skin.

The race to develop a vaccine patch is intense, but past efforts have foundered at the manufacturing stage, according to Paul Kelly, an investment manager with OneVentures, the lead venture capital company backing Vaxxas.

“The problem is finding a way to manufacture the patches and coat them with vaccine in industrial quantities,” he says. “We believe we have a very strong intellectual property position for manufacturing at scale.”

OneVentures co-invested with Brandon Capital, the Medical Research Commercialisation Fund and HealthCare Ventures, an American company that has invested $US1.6 billion in more than 100 companies over 25-plus years.

The $15 million will take the Nanopatch into human trials. All investors have committed to contributing the same amount in a second round if necessary, putting the start-up on a good footing to negotiate with tough global pharmaceutical companies.

Kath Walters

Lupé Wines

| Andrew Heathcote

Notable achievement: Turning a problem into a solution.

The single-serve market for beer and pre-mixed drinks is well established but when wine drinkers want just one drink, they usually have to open a standard size bottle. Attempts so far to sell wine in smaller cans or glass bottles have been largely unsuccessful.

Georgia Beattie is confident she can change that and has started a company that makes recyclable wine glasses that can be used for pre-packaging and drinking wine.

Beattie says she had the inspiration for the business when she was unable to buy a single glass of wine at a music festival. She says there are many occasions, such as parties and outdoor events, when people could benefit from her product.

She began by designing her own glasses but wasn’t satisfied with the prototypes. So she visited the manufacturer of a similar but superior product in Britain and acquired the rights from him.

She now sells wine in her plastic glasses under the Lupé brand, which was launched in November last year. She says her main reason for selling wine herself was to prove the concept and her big plan is to offer her glasses to winemakers as an alternative distribution method.

“We’re a packaging company,” she says. “What we’re doing is creating a new market segment for wine.”