This is part two of a summarised and edited interview with Colin Graham of Causeway Innovation by Mike Sullivan, Editor of Business Acumen.

The video interview covers growing jobs and businesses in regional Australia and can be viewed in full here.

Clusters and family trees of businesses

“The big thing to realise with start-up communities is that one thing leads to another. So, it sounds a bit strange or weird, but if you get two or three companies, you’ve actually got the beginnings of a cluster. And, what you have to do in those cases is to promote that early success and you get more companies. And then an individual company can become mini clusters of talent themselves, naturally.

What you’ll find is in the big entrepreneurial hot spots of the world is there are really family trees of start-ups that happen. So, the natural dynamic is that a couple of founders will start the business. And, then over the course of a few years say 10 or 20 people join them. Typically, for a lot of people, their mental time span is about three years. So after a few years naturally some of them will think ‘I can do this myself’. And some of them will.

If you look at Cambridge in England, which is a very successful area, they have about 45,000 jobs in science, technology and innovation. If you look really closely you can see that a lot of these jobs were created by a bunch of key individuals who’ve started multiple companies from which in turn, people have left and set up their own companies. So, this family tree effect is really important.”

Most regions should focus more on startups and growing existing businesses rather than business attraction

“So, the bigger picture is to say, “How do we find ambitious start-ups?” and then, “How do we find growth oriented established companies?” Those are your two main routes for development. The third route is business attraction. So, attract businesses into your region. Just to quickly discard that one for most places, there is a fantastic study in the New York Times about two years ago, which in the US case, and I think it’s highly relevant here as well, it said that municipal authorities in the US had spent 80 billion – that’s billion – dollars per year on business attraction. And, the New York Times, after a massive in depth study found the net gain of that was zero

Business attraction is a complicated business. And many regions are deluding themselves that they’re going to be the base for the next Virgin or Boeing or whoever. I think they’re deluding themselves because they haven’t got any competitive advantage over other regions, and other cities, and other parts of the world.

Politics can get in the way because it’s easier to say, ‘Look. What does this region need? We need jobs, so we’re going to attract in a big company with 300 jobs, and that’s our strategy.’ And – in some regions – that’s fair enough and it will happen. And it’s part of the mix. But my point is that it shouldn’t be the only part of the mix, and I would put much greater weighting on ambitious start-ups but where I would put the greatest weighting on is ambitious growth oriented established businesses. Some people call them scale ups.”

Identify and support the Vital 6%

“So, where a lot of attention is needed – and where there’s not much attention going – is that those established growth companies is probably where the greatest potential is for growth and new jobs. And, obviously the start-up companies have got to go somewhere, at some point they’re no longer a start-p, so there should be a flow through, really. When it gets to the more established phase, there’s very some very good work from NESTA in the UK, which published a report called The Vital Six Percent. And, they found that six per cent of the business base in the UK created over 50 percent of the new jobs.

So, if you say ‘okay, we’ve got 35,000 businesses in this region’, after a point, you have to accept that some have greater potential for creating jobs than others.

The exact number doesn’t really matter. It might be 1,000 or 2,000 businesses, but it’s a more finite number. And those are the companies who are doing things like exporting, research and development and trading outside of that region. So we need to put a lot of time and effort to identify those companies and understand their needs.”

Capital raising – the money is there for good businesses

Q. There’s a lot of talk that there’s no real venture capital market here, banks aren’t helpful.

“Overall, I’d say the bigger problem is at the business end and not the investor end. I would say there’s a bigger shortage of backable businesses than there is of investment.”

No, it’s not what you normally hear. Because the easier argument is to say, “Oh gee, there’s no money out there.” And it’s a lot tougher to say, “Well, that might be because your business isn’t very good.” People might not like to hear that. And, you haven’t got a team, and you haven’t got a customer, and you haven’t got this, and whatever. You’ve got no plans for growth. So, there is genuinely a bigger issue about getting investable businesses.

The issue in many parts of Australia – in both cities and regions – is more about the amount of experienced talent. So the ideal world is you’d have somebody who’s been there and done it, and that person is the lead entrepreneur in that team, and they’d assemble a core group of people around them, and you’ve got a very strong team.

My experience with well over 120 start-up companies is that the companies that really want and need to raise investment have been successful. They are successful because they realise it’s a big job. It can often take six months to raise finance for your company. So, they realise it takes time, but they networked their way to the money. The best thing they can do is, first of all, get the easy money, which is things like R&D incentive and export market development grants. So, get the easier money first, with no strings attached to it and then network your way to the right investors, often they are high net worth individuals.”