Joseph Skrzynski AO
CHAMP Private Equity
Joseph is the co-founder and co-chair of CHAMP Private Equity having pioneered private equity in Australia after entering the profession straight out of university in 1970. He has held senior government positions in entertainment and media including chairmanships of the Australian Film, Television and Radio School (AFTRS), the Special Broadcasting Service (SBS) and head of the Australian Film Commission where he introduced the innovative tax incentive, 10BA, to encourage investment in Australian films.
CHAMP has invested in several disruptive companies and technologies in and outside entertainment and media including SEEK, LookSmart, Datacraft and oOH! Media.
Q. How would you describe the state of innovation in Australia?
In global statistics we rank pretty poorly, we are at the bottom of the OECD leaders group. At the top are Sweden and Switzerland, high cost countries that understand in order to maintain your standard of living you have to be good at innovation. There's a real message for us there. What is exciting however is the 'early stage'. If you look at the BRW Rich List, it's mining and property. If you look at the Young Rich List – the top 20 are overwhelmingly technology entrepreneurs. That's having a 'Tiger Woods effect' – when all young men started playing golf because they saw you could be glamorous and make a lot of money. We are starting to see some of the best and brightest thinking of becoming entrepreneurs and that's fantastic.
In the big end of town companies struggle to be innovative. They're good at production and delivery around existing problems but not so good at finding solutions to the next problem. In big corporations, you're not rewarded for taking risk, you're rewarded for managing risk. Big companies haven't got the appetite to cannibalise themselves, they have internal antibodies for change. The outlier is Qantas which has done a fantastic job. They saw their disruption ahead – the no frills airline – and rather than trying to match their prices, they said, 'We've got to create our own'. They created Jetstar, which is quite separate, has its own culture but is flying many Qantas routes. They thought, 'It's better it be disrupted by us than by somebody else'. That's rare.
Q. How can big business overcome their 'internal antibodies for change'?
We're seeing a number of experiments; one is to set up your own VC arm, a separate organisation that you fund and they invest. In America 'corporate venturing' is quite successful. Google has done a lot of it. You could argue that Google has grown as much by acquisition of start-ups than by internal innovations.
Another model is joint venturing with smaller companies because you recognise that your culture may stop you coming up with new ideas. NSW Transport did that with entrepreneurs to create apps for train timetables. They used what's called 'open innovation'.
The other model I've seen around the world uses innovation consultancies. A traditional consultancy works on your existing processes to make them better – leaner manufacturing, or a more effective sales force – but innovation consultancies are about analysing your strengths and asking, 'What problems can those strengths solve that aren't currently being solved?' Using a team of entrepreneurs picked for the project, they set out to find a new problem to point your strengths at.
Q. What are the biggest errors you see people make when seeking support for their new ideas, products or services?
I'll address this in the context of a start-up and a corporate. I keep coming back to the corporates because when you look at the mass employment opportunity and the impact on GDP, established corporates have a more immediate impact on our economy.
The biggest error is getting excited about your solution without truly testing the hypothesis of the problem. This comes from not being customer-centric enough, not testing the hypothesis early and often enough. Innovators need to get the simplest model into the hands of a customer to see if it works and what it solves for them…or if it doesn't. If you say, 'I don't want to tell anyone because it will be copied; I want to launch it and surprise the world' the customer might say after you've launched your bells-and-whistles version, 'Well it's not really solving my problem' and by then you've spent all this money. It's similar to what happens with big companies or when people come to us with ideas in the mid-market space. There is a lack of real insight into competitors and customers. You ask them, 'That last contract you lost, why did others win it?' You generally get a very poor answer, you often get pub talk. Very rarely have they gone back to the customer to get the real answer for why they lost; it's a blind spot.
Another thing is the inflation in value. We see it in various asset classes and we're particularly seeing it in the early stage. There's this idea that if you put up a business plan showing the revenue line going up and the profit line going up then already it's worth a lot but you're yet to achieve it! There's too much money around; people are getting away with very high pricing but it will be to their detriment because they're not necessarily picking up intelligent money. We're going through a cycle we've seen before where it generally ends up in tears. Bragging rights about your valuation is not the end-game for a successful start-up company.
Q. What can an investor bring apart from cash?
We're seeing in Australia repeat entrepreneurs now and they're some of the best investors. Having the scar tissue from building a company yourself and knowing how to turn an idea into a business is valuable; there aren't courses that teach you that. Also, networks – being able to introduce you to the right partners and distribution channels and provide information on how to structure deals with them – they're the soft value-adds that are really important.
Q. What are the impediments for businesses seeking to be more innovative?
We were struck on the bum with a rainbow in Australia. With the pastoral benefits of the merino and wool and then gold, iron ore and coal, our natural endowments and agricultural excellence meant we progressed very well without having to take risks. Not surprisingly, with our size economy – about half the size of California – you tend to get oligopolies. You get comfortable relationships with your competitors and don't rock the boat: 'Yes, there's this new technology coming but frankly we can get another five or ten years out of the assets we have already. If we all do the same, we'll be fine.' There is that complacency of a small economy without external threat. Compare that with Israel; it's a much smaller economy but it's got plenty of threat. There's nothing like being hung in the morning to concentrate the mind, as they say. Their military had to be very smart through technology innovation to maintain security because they are surrounded by impossibly superior numbers. The spill-over effect to an entrepreneurial country with lots of migrants, lots of people in a hurry to do better, that created a culture of innovation.
Other structural hurdles are not having a Chapter 11 [a US bankruptcy law providing protection from creditors, given to a company in financial difficulties to allow it to reorganise] and the whole idea of failure. In America, if you go to a job interview and you've had a spectacular fall, provided it was an honest failure and you can speak articulately about what you learnt, you're a better candidate than somebody who hasn't hit the wall yet. Experience on somebody else's coin is attractive to the next employer. That's not the general attitude in Australia or Europe. The American economy does very well out of Chapter 11, it allows for more risk taking. If it doesn't work out, well, the pieces get reshuffled and the company can go on. Whereas in Australia it's the end of the story – inflexible administration – and rarely does a company recover.
Dividend imputation is another question mark. If you compare the stock market in America to Australia, America is a growth driven market and Australia is a yield driven stock market. People here want their imputation and their franking dividends so the atmosphere in boardrooms is very much 'steady as she goes' because that's what super funds want, that's what mum and dad investors want. You get rewarded for a great distribution record. It also means you don't want to expand into Asia because it produces unfranked income. The idea of not double taxing profits is sensible however the world of unintended consequences is very rich.
Q. Which sectors excite you the most, in terms of new opportunities?
What's happening overseas in technology is coming through here – clever algorithms around big data analysis applying to marketing, applying to customer insight and so on.
The world of sharing is also very exciting. It has social benefits as well as economic benefits. Take Uber, most people think it will disrupt the taxi industry but it will also disrupt the motor industry. With the ease of 'Uber-style' transport, we will have fewer private cars in the future. 3D printing is another great disruptive technology. Manufacturers often make more money from their spares than from their original equipment but what if the customer can print the spare locally? These things will change the way big business operates.
The last one is 'thinking machines'. For example, what does a bank really do? It says it has special knowledge about how to assess credit, so it can lend your money with security, get it back, pay you back and take a margin on the way through. What it's doing in the middle is just applying a lot of rules to data about the borrower. A computer can do that in a millionth of a second instead of three or five days. And it doesn't need 10 people to sign off up the chain, providing you have data integrity. The disintermediation of banks by peer-to-peer lending is through applying algorithms to the credit process, taking out all the human costs in the middle, as well as attacking excess margins.
The biggest change we'll see is in services, many will be road-kill to the thinking machine. Production has already seen it – robots in the blue collar world are assembling cars – but through machine learning and artificial intelligence, machines doing services is the obvious next frontier. In any 'rules based', or 'pattern recognition' job, from accounting to brain surgery, thinking machines, loaded with data and clever algorithms will displace people.
The last frontier will be the creative, lateral, EQ [emotional intelligence] based industries, so in terms of media, the content side of media, there is a fair way to go before thinking machines can come up with a script and characters you'd find really interesting but possibly they could come up with plausible sequels. Could you dispense with actors with 3D holography? You're photographed once in your life, in your prime when you're good looking and young, and then a director with computers could manipulate that data – because it's just a set of data – and put you in any scene and get you to smile, talk, jump, whatever exactly the way they want. That's scary, and hopefully a long way off! In the meantime, technology will continue to disrupt traditional production and distribution practices and values.