Cruxes Innovation’s Response to DISR Strategic Examination of R&D

1. What should an integrated, sustainable, dynamic, and impactful Australian R&D system look like? 

In a mature, complex, and diverse economy, the role of an R&D system can include creating and maintaining competitive advantage and boosting productivity in established industries; enabling resilience and adaptation to disruptions; informing public policy and national strategy; and stimulating the creation of new companies, industries, and sectors.  In this submission, we propose that the role of the Australian R&D system shifts so that it becomes a catalyst for the creation of entire new industry sectors that rely on intensive R&D to succeed.  We believe that this is necessary to maintain Australia’s standard of living in a net-zero, geopolitically unstable global environment.   

Cruxes Innovation’s vision is a world in which Australian innovations driven by Australian research lead the world towards a just, healthy, sustainable future, and as a result, Australia’s high standard of living is maintained by a flourishing complex, diverse economy.  To achieve this, R&D-based innovation must be embedded as a core pillar of our economy and our national identity, not a peripheral activity limited to academia and a handful of tech startups. 

As a result of deliberate policy choices over several decades, Australia’s economy has evolved so that much of our economic activity is concentrated in sectors (minerals, agriculture, finance) that have not required R&D-intensive innovation.  As a result, there are few established Australian companies for whom R&D-based innovation is central to their success, and most Australian business do not see Australian R&D providers (universities and PFROs) as critical partners, and vice versa.  This leads to low business R&D spending and limits commercialisation pathways for R&D. 

Climate change requires immediate, fundamental changes to Australia’s economy if we are to maintain our standard of living.  Several of our largest exports (coal, natural gas) must stop entirely, and another (agriculture) must transform significantly, and might not succeed in doing so.  Over the next few decades, we must develop entire new industry sectors that must become large new sources of export earnings.  We believe that it is unrealistic to expect these new sectors to be created by current Australian companies or R&D providers.   

Even more immediately, recent disruptions to global trade have demonstrated the vulnerability of Australia’s economy and standard of living as long as it is dependent on commodity exports and relationships with a small number of other countries.  Over-dependence on individual nations, even long-standing allies, is a huge risk.  We must take responsibility for derisking our future, and this requires us to build sovereign capability in large new export industries to diversity our economy.  Again, these will not naturally evolve from our present economy.   

To bring about these huge changes, we propose that Australia makes a multi-decade commitment to building critical mass in entirely new sectors of our economy that do not exist in a substantial way today.  These new sectors must be in areas where Australia has the potential to have a global competitive advantage, so they are likely to include emerging technologies such as quantum, synthetic biology, brain-machine interfaces, and hydrogen. They might also be aligned with the NRF priority areas.  

We propose that these new sectors are seeded by catalysing the creation of many new innovative, R&D-based companies in each sector, across all levels of the value chain.   This is very ambitious, but evidence exists to show that it is possible in Australia.  An example of success using this approach was the Australian Photonics Cooperative Research Centre (CRC) in the 1990s, which, through its commercialisation arm Redfern Photonics, created more than half a dozen startup companies based on Photonics CRC research.  These companies operated at multiple levels of the telecommunications value chain – components, subsystems, and equipment.  The legacy of this approach includes Finisar Australia, employing 270 people in Sydney, and emerging new ventures such as Cylite, Baraja, Terra15, and FiberSense founded by Redfern Photonics spinouts’ alumni.

Our observation is that that the creation of these new sectors will require three components that are missing from the Australian R&D system today: 

• New, mission-directed research translation organisations, which we will call ‘Catalyst Hubs,’ aimed at conducting the R&D necessary to stimulate creation of new companies, industries, and sectors. 

• Sector-specific early-stage venture capital to support a pipeline of startups spun out from the Catalyst Hubs, ensuring that multiple ventures emerge across the entire value chain in the target sectors. 

• Venture Builder Institutes.  Here we use the term ‘venture builder’ to mean  person(s) who has or is being trained to develop the expertise and networks needed to drive foundation of new ventures that reach ‘escape velocity’ from the Catalyst Hubs to commercialize research-based technology.  A ‘Venture Builder Institute’ is a structured, systematic, scalable program to efficiently and effectively create cohorts of new professionals who will spawn creation of entirely new industry sectors that rely on intensive R&D to succeed.  Venture Builder Institutes attract and train venture builders, match them with researchers and tech innovators, and enable them to develop, refine, and share best practice.

  
  

These components are described in more detail in our response to question 2.   

2. What government, university, and business policy settings inhibit R&D and innovation? Why? 

In this section, we ask instead: what government, university and business policy settings need to be in place for the Australian R&D system to catalyse entirely new sectors and industries?   We expect that these new industries will require significant government support over a decade or more and will not make significant contributions to the economy during this period.   

Today’s Australian economy includes sectors that are reliant on world-leading R&D to maintain their competitive advantage, such as medical devices, pharmaceuticals, and defence and aerospace.  Our vision is an economy in which there are more such sectors that make up a larger share of our economy.  Here we will discuss our observations on government policy settings that are needed to create more such sectors.   

Government policy settings:  

• Guiding policy: the federal government explicitly sets a 20-year goal of creating identified new sectors of the national economy by building a critical mass of startups in these sectors, at all levels of the value chain. 

  
  

• Need: creation of one or several ‘Catalyst Hubs,’ new, mission-directed research institutions aimed at carrying out the R&D necessary to stimulate the creation of new companies and industries in the target sectors.  Australia has a well-developed university system but, as many previous reviews of this system have pointed out, it is not set up to produce the intensely focused R&D necessary to catalyse the creation of entire new industry sectors.  Because of the urgency, magnitude, and importance of the task at hand, we believe that it will be more capital-efficient to create new institutions focused solely on this task rather than attempting to transform existing institutions. 

  • We propose that the target sectors are identified as part of federal government policy, but that the market (in the form of the sector-specific venture capital funds) picks projects (potential new companies) in each sector. 

  • We propose that the Catalyst Hubs, because of their strategic importance to the nation, are funded using an appropriation model like CSIRO.  Funding for the Catalyst Hubs could come from shifting existing applied research funding in the target sectors from universities to the Catalyst Hubs.  Like CSIRO, these institutions will hold equity in their spinouts, but (unlike CSIRO) their commercialisation function will be set up with a mandate to execute as many licensing transactions as possible as quickly as possible, rather than to capture maximum value for the institution.   

  • Policy need: visa schemes that enable the Catalyst Hubs to have low friction in attracting and retaining R&D talent 

  • Policy need: to enable the establishment and success of the Catalyst Hubs, universities will need policies that incentivise some of their academics to shift their career focus towards mission-oriented careers in the Catalyst Hubs rather than publications and short-term research income.  Academics that remain in the universities must be incentivised to collaborate with the Catalyst Hubs.   

  • Research institutions in other countries with similar mandates include Fraunhofer (Germany) and KAIST (South Korea).    

    
    

• Need: incentives for the creation of sector-specific early-stage venture capital funds.  Australia’s venture investment landscape today is dominated by generalist VCs that invest in isolated deep-tech startups but do not support an ecosystem of ventures within a sector.  This loses the opportunity for their founders to share earned market knowledge and create synergies needed to build new industries and value chains.   

  • Example: in the radiofrequency (RF) electronics sector, Australian venture investors have made at most one major investment per decade over the past thirty years (Radiata, Nitero, Morse Micro), and this has not created a valuable new Australian industry sector.   

  • In contrast, a contributor to the photonics success story mentioned in the response to Q1 was the existence of Redfern Photonics, which included a sector-specific VC fund.   

  • Brandon Capital is an example of a sector-specific VC fund that has contributed to the growth of Australia’s pharmaceuticals sector.   

  • Tenacious Ventures and Mandalay Venture Partners are examples of sector-specific VC funds that are attempting to create a significant Australian agtech sector.   

  • An opportunity to attract the amount and diversity of capital needed to build critical mass in the target sectors is the plentiful capital under management by existing Australian venture capital funds.  Australian superannuation funds have even larger investment potential.  The Photonics CRC / Redfern Photonics experience tells us that creation of critical mass in a target sector requires 10-20 early-stage investments in that theme by specialist thematic funds aligned with industry/sector goals.  Conversion of this critical mass into sustained value in each theme requires a range of funds with deep expertise in the theme and across all levels of the value chain and across the life span of start-ups and scale-ups.  That is, each target theme needs theme-specific pre-seed, seed, series A+, scale-up, and impact-focused investors.   

  • Policy Need: Targeted incentives (e.g., matched funding, tax benefits) to encourage sector-specific funds in priority areas. 

  • To support the establishment of the new theme-specific venture capital funds, we do not recommend that the government be actively involved in equity investments.  Instead, we recommend that the government incentivize the formation of these new funds by people with domain expertise.  Incentives might involve policies to increase the attractiveness for super funds to invest in all the required ‘flavours’ of these theme-specific funds and for VC capital funds to establish and manage them; and to remove barriers for collaboration between investors to pool their expertise and resources to address the target themes.   

    
    

• Need: incentives to create venture builders at scale.  Australia has no structured venture builder ecosystem to systematically drive foundation of new ventures to commercialize R&D. 

  • The Australian research commercialisation process is currently missing the practice of Venture Builder. The Venture Builder is the person that orchestrates the extraction of the research, development of product strategy, raising of funding, and team formation. This is a vital aspect of bridging the commercialisation gap.  The spinout practice in Australia today is generally carried out in an ad hoc way. The recommendation is to shift this to an evidence-based process which is methodically improved, driven by Venture Builders.  In addition, negotiations today to establish new spinouts to commercialise Australian university research typically have strong representation for the interests of the university but less (or less empowered) representation for the interests of the new company and its co-founders.  This contributes to low rates of new spinouts and high failure rate.  Properly supported Venture Builders will address this imbalance. 

  • The Venture Builder Institute will establish Venture Building as a profession and build and improve best practices of venture building, using evidence-based, sector-specific learnings by venture builders on what has worked and what can be improved.  Systemically engaging, recruiting, training, and supporting the right candidates and methodically improving this process will greatly enhance the likelihood of commercialisation success. 

  • Typical activities for the Venture Builder and required skills include:  

    • Sufficient industry/sector/domain knowledge to recognise when the target market is within a few years of being ready for adoption of new technologies 

    • Identification and development of early-adopter customers 

    • Research productization 

    • Specialised fund raising 

    • Team and company formation 

  • Our experience suggests that an intensive period of close partnership between technical founders (researchers) and venture builder is required for these early-stage technology-based ventures to reach escape velocity and become investible.  

  • Research shows that, with sustained, structured support, mentoring, and training, PhD students and early-career researchers can become highly investible builders of early-stage ventures based on their research (Reference: https://talkingtechtransfer.com/2024/03/15/panel-discussion-the-key-ingredients-of-successful-spinout-teams/).  The University of Sydney’s new PERIscope program is an example of an initiative aimed at starting this process.  Our experience shows that this process requires patience and can take several years to complete.  A current barrier is that the few existing venture builder support programs often do not run for long enough to enable the emerging venture builders to reach escape velocity and attract seed funding.  This is because the creation of new spinout companies is not central to the mission of the institutions (universities) that host these programs.   

  • Programs such as PERIscope include secondment funding to allow entrepreneurial early-career researchers to be ‘bought out’ of existing commitments (e.g. to progress the research project they were hired to work on) so that they can focus for several months on acquiring entrepreneurial skills and validating the market opportunity for the proposed venture based on their research.  Our experience is that this secondment funding is a critical element for the success of such programs.  However, in specialised fields such as quantum, finding researchers to ‘backfill’ during the secondment is not easy, so often it is necessary to bring in a new person – the venture builder – to drive market validation and take the project towards escape velocity.  This suggests that, even with widely available secondment schemes, more venture builders will be needed.  The present approach to finding venture builders is for university innovation managers and technology transfer offices to tap into their networks to find people who already have most of the necessary skills and experience.  Such people are still rare in Australia, even more so in specialised, emerging fields like quantum.  Even if clusters of these groups pool their networks, an idea in discussion, it is likely that more venture builders will be needed.  In addition, recruitment of venture builders by Technology Transfer Offices does not address the power imbalance mentioned earlier.  We propose that Venture Builder Institutes take responsibility for venture builder recruitment, targeting PhD students and early-career researchers who have domain-specific technical knowledge to help them build market validation, negotiation, and research translation skills.  We propose that they also target the potentially much larger population of people with a business background (with market validation and negotiation skills) looking for a change of career.  The Venture Builder Institutes will help these people build domain-specific technical knowledge and research translation skills.  Teams of several venture builders might become co-founders to bring together all the necessary skills.   

  • Policy Need: To support the emergence of more venture builders attached to the Catalyst Hubs to access the new sector-specific VC funding discussed above, we recommend government support for structured, systematic, scalable long-term venture builder creation programs, especially those aimed at early career researchers, potentially delivered by third-party service providers with the appropriate expertise.   

    
    

• Need: policy changes to enable government and government agencies to ‘create’ demand for the offerings of the new startups in the new industry sectors as early-adopter end-users of these offerings in the new sectors.   

  • The initial role of these agencies is to work with the emerging startups to co-design the products or services that they will eventually buy from them – with capability development for the agencies’ staff as needed. 

  • Potential examples: 

    • Defence as end-user of new quantum security / encryption services created by companies in a new quantum computing sector  

    • Energy market operators as end-users of new quantum energy network design and operation optimisation services created by companies in a new quantum computing sector 

      • This sector might include new companies that are suppliers of new materials, components, systems (quantum computers), software, and services 

  • This is not our area of expertise but required policy changes might include changes to procurement rules to enable government agencies to collaborate with and then buy from these startups without major delays. 

3. What do we need to do to build a national culture of innovation excellence, and engage the public focus on success in R&D and innovation as a key national priority? 

Our observation is that humans are more motivated to change to escape pain than to achieve gains.  So, we propose that the government’s message to voters and taxpayers about the massive investment required to enable this policy focuses on the imminent risk to us and our children’s jobs and standard of living if we do not immediately transform our economy to one that will flourish in an unstable geopolitical environment and a net-zero future, and create replacements for the sectors of our economy that do not have a significant place in this future.  A secondary part of this story, potentially more central as the new sectors of our economy begin to generate significant export earnings, could be about our ‘superstars of research entrepreneurship’ and their success on the world stage – an equivalent to the stories of Olympic glory that have maintained public support for Australis’s investment in elite sport since the late 1970s. 

These messages draw on Australians’ self-perception as creative innovators, resilient people who rise to a challenge, and plucky underdogs.   

4. What types of funding sources, models, and infrastructure are currently missing or should be expanded for Australian R&D? 

These elements are required to enable the Australian R&D system proposed here that is the catalyst for creation of entire new industry sectors: 

• New funding sources and models 

  • Sector-specific venture capital (with government support), described in our response to Q2 

  • Funding for the new Catalyst Hubs: see our response to Q2 

• New infrastructure:  

  • Mission directed research institutions, ‘Catalyst Hubs:’ see our response to Q2   

  • Low-cost contract manufacturing facilities for scale-ups.  

5. What changes are needed to enhance the role of research institutions and businesses (including startups, small businesses, medium businesses and large organisations) in Australia’s R&D system? 

In our response to Q2, we proposed the creation of a new type of research institution, Catalyst Hubs, with a new, singular role: the creation of new R&D-based startup companies at all levels of the value chain in the target sectors. 

Our response to Q2 described a role for universities as collaborators with the Catalyst Hubs and sources of some of their R&D talent.  An additional role for universities and existing PFROs is as innovation boosters for the new startups in the target sectors through expanding schemes such as ARC Linkage (or its successor) and CRC-P.   

For the creation of new industry sectors to be successful, existing large businesses (corporates) must ‘create’ demand for the offerings of these startups as early-adopter end-users of these offerings in the new sectors.  The initial role of these corporates is to work with the emerging startups to co-design the products or services that they will eventually buy from them – with financial incentives from government and government-funded capability development as needed.  This role for corporates complements a similar role for government and government agencies described in our response to Q2. 

Examples of this new role for corporates might include: 

• Banks as end-users of new quantum security / encryption services created by companies in a new quantum computing sector  

  • This sector might include new companies that are suppliers of new materials, components, systems (quantum computers), software, and services 

• Miners as end-users of new quantum mineral exploration services created by companies in a new quantum sensors sector 

  • Again, this sector might include new companies that are suppliers of new materials, components (quantum sensors), minerals exploration systems (sensors and processing), and services. 

6. How should Australia support basic or ‘discovery’ research? 

We recognise that basic research is vitally important to create a pipeline of applied research and ‘deep tech’ to seed the startups described in this proposal.  We also note that this is a strength of universities.  But this is not our area of expertise, so we will not comment on this.     

7. What should we do to attract, develop, and retain an R&D workforce suitable for Australia’s future needs? 

Another important role for universities in the vision proposed in this submission is to train the workforce that will be required in the new industry sectors.  Australian universities compete globally for talent, especially for PhD students and postdoctoral researchers.  Recent changes to visa processing are significantly hampering universities’ ability to attract and retain top talent.  

Today, more than 60% of Australian PhD graduates secure roles outside of academia. For some, this is due to a lack of positions available in academia, while other graduates find opportunities that are more interesting to them elsewhere. Despite this shift in career trajectories, many of those who graduate with a PhD in Australia today do so without the vital breadth of knowledge and skills required to sustain a career within the non-academic R&D workforce, with only 56% of recent Australian PhD graduates expressing satisfaction with industry and external engagement experienced during their candidature.  

To address this, we propose these changes: 

• Universities: Remodel the selection criteria for PhD candidates so that universities attract, recruit, and select PhD candidates who have the potential and aptitude to contribute to knowledge creation and knowledge dissemination for the benefit of society. Evolve the competency frameworks for skills taught in PhD programs to reflect the skills and capabilities required for PhD graduates to effectively apply their knowledge and skills in both academia and industry.  PhD programs need to include a breadth of discipline-specific knowledge, professional and technical development, and industry and stakeholder engagement, all built on a foundation of new knowledge contribution. Candidates come into their PhD with a range of academic backgrounds and skillsets, meaning programs need to recognise this and be adaptable to individual needs. This is possible via individual training needs analyses. Such programs exist; however, they are often associated with multi-year funded research centres such as ARC Industrial Transformation Training Centres and Centres of Excellence. A graduate from a strong and comprehensive program will be able to communicate their research to a range of stakeholders and apply their unique skills to a variety of potential career paths. Programs like these need to be accessible to all, not just those associated with well-resourced, externally funded research centres.  

• Employers: Increase involvement and engagement with collaborative research programs to help shape research directions to better meet their needs. Enhance hiring managers’ awareness of the unique skills and attributes of PhD graduates. Develop accelerated graduate programs that are suitable for PhDs.   

• Government: Continue to expand and increase the level of funding for programs that incentivise research-industry collaboration so that research investment and engagement is de-risked for industry, such as the National Industry PhD Program and ARC Industry Fellowships. Enhance exposure and employment opportunities for PhD graduates in the public service sector to improve overall STEM literacy and capacity. Reduce visa barriers so that graduates can secure employment in Australia post-PhD.    

8. How can First Nations knowledge and leadership be elevated throughout Australia’s R&D system? 

We believe that this is vitally important because it represents Australia’s unique competitive advantage, and because it is a critical component of reconciliation, to which we are committed.  But this is not our area of expertise, so we will not comment on this.     

9. What incentives do business leaders need to recognise the value of R&D investment, and to build R&D activities in Australia? 

The approach proposed in this submission will create new industry sectors with leaders who have come from an R&D background.  These leaders will recognise the value of R&D investment for the growth and success of their businesses and will grow R&D activities in Australia. 

As our response to Q5 described, this approach also requires leaders of corporates to become early-adopter end-users of R&D-intensive startups.  Targeted initiatives such as a researcher in residence program (a significantly scaled version of Industry Fellowships) can increase involvement and engagement of business leaders with R&D to direct R&D towards business priorities.  Emerging experience from the quantum sector suggests that government brokering of relationship building, mutual education, and eventual solution co-design activities between corporates and startups, with small government financial support for corporate leaders to participate, is sufficient incentive for corporate leaders to participate.  

Another incentive, currently under consideration by Science and Technology Australia, is to increase access for corporate boards to STEM and technology expertise.  

10. What should be measured to assess the value and impact of R&D investments? 

One way to measure progress towards the creation of new industries in the target sectors that rely on intensive R&D to succeed is the number of new ventures that secure Series A funding in two years in a single sector.  We recommend that the target be 10-20 investments per sector, at multiple levels of the value chain.   

Another measure is the total investment from theme-specific early-stage venture capital funds directed towards seeding new ventures in the target sectors.  

Other metrics might include: 

• Size of the Australian R&D workforce  

• Innovation adoption by Australian business (e.g. corporate end-users) 

• Australia’s ranking on the economic complexity index (a lagging indicator). 

Acknowledgement: This submission includes significant input from Australian research commercialisation legend David McKeague.