San Francisco

For as long as Australia has had tertiary manufacturing and, to a lesser extent, services industries, there have been two major barriers to entry for Australian companies, especially small ones, aspiring to world markets - size and distance.

Too small a domestic market to allow them to reach the economies of scale needed to breach the vast distances to the major international customers.

The result for most of this century was inward looking, self-satisfied businesses that never grew too big and never challenged too many safe assumptions. They remained content in the knowledge that the same barriers preventing them from launching overseas prevented all but the most determined from invading their markets.

The global communications revolution and two decades of deregulation have, if not swept away, at least turned those barriers into something more akin to hurdles.

But their diminishment has exposed a new set of barriers to entry for Australian companies. While these barriers are the result of the two great tangible barriers of the past, they are largely psychological; issues such as what we understand a business to be and what our entrepreneurs can reasonably believe they can and should achieve.

John Stuckey, Managing Director of management consultants McKinsey & Co in Australia, says the "pointy end" of the new models of business evolution are in California's Silicon Valley. Although other regions in the US are also very advanced, Silicon Valley, the home of information industry giants such as Intel, Sun Microsystems, Apple and an explosive growth in new, start-up information industry businesses, has become synonymous with new ways of corporate organisation.

Policy-makers the world over have sought to emulate the success of Silicon Valley in creating wealth, but none can argue with complete conviction that they have found the magic bullet that mixes the ingredients of academic excellence, business acumen and access to patient capital into such a potent wealth creating force.

But one thing that Silicon Valley is very successful at is exporting its new models of corporate organisations, especially in small, start-up businesses, but also for established companies in brownfields industries facing ever more intense global competition.

These models have proved so effective that adopting them could well be a pre-requisite to entry into international markets for small start-up companies. If Australia clings to business models based on owner-manager or inventor-entrepreneur models, chances are the international investment dollars needed to bring them to world markets will shun them.

For large companies, these models of internal organisations could be a matter of survival.

Managing Director of San Francisco-based venture capital and business consulting firm, Blumberg Capital, David Blumberg, has long experience with Israeli start-up companies seeking to emulate the Silicon Valley experience.

Blumberg says the growth path followed by these companies follows a consistent pattern. They receive initial seed funding at home, get second round funding from a combination of Israeli and US investors and then move to an initial public offering (IPO) on the NASDAQ exchange in New York, or a trade sale to one of the US information industry giants.

But the story is a much more complicated one than simply the mechanics of raising money. Company founders seem much more aware of the opportunity to get rich from their ideas, having seen so many Silicon Valley millionaires created before them. Brian Gruber Managing Director of marketing consulting firm G/Media and a partner in Principals.com, says the awareness of so-called exit strategies permeates the thinking of entrepreneurs in Silicon Valley, seemingly from the moment they learn to walk.

"(For) me, having grown up in the 60s and 70s, capitalism was just a sinister thing - it was not hip to talk about. Here, 26 year old goateed guys are heavily into knowing about stock options and finance things and see the finance aspect as a natural extension and next step to what they are doing technically, and (therefore) what they are doing technically, for better or worse, doesn't mean anything until it builds a brand and is funded."

This attitude itself mandates a particular type of business organisation. Arguments in favor of the use of outsourcing are hardly rocket science in Australia, but the extent to which skills are brought into start-up businesses in the leading edge information industry start-ups is much less familiar to Australians. Australians tend to see outsourcing through the prism of corporate downsizing within big companies, with which it went hand in hand when the term became popularised. But for small start-ups in Silicon Valley the term is almost a misnomer, because it refers to the purchase of services and skills that have never really been insourced.

For example, Yahoo, presently one of the darlings of the equity markets, hired a public relations company when still in its infancy in 1995, paid for in part with equity. Since then it has hired a second, reasoning that it needed one which specialised in telling its technology story and a second when it had matured enough to need a consumer market image as well.

Venture capitalists investing in these infant companies want to maximise their return. They also know that these companies have to be able to compete in what is probably the most competitive environment in the world, where speed and flexibility to respond to changing business conditions is a matter of survival. Gruber says that there is a sense among people that if they fall asleep for six weeks, they might wake up to find they no longer have a company.

Outsourcing of skills in areas such as marketing enables the investors to ensure that they maximise the bang they get for their buck in two ways. Firstly, the less that their money and energy is spent on setting up internal service delivery structures - such as marketing and public relations - the more that money can be concentrated on developing the core intellectual property assets of the business. Secondly, the skills acquired from outside can be of higher quality.

What these models seem to have succeeded in doing in Silicon Valley and more latterly in Israel is to release entrepreneurial spirit, the ingredient David Blumberg argues is fundamental to wealth creation. In that regard, they have converged with the new models of large global corporations.

Stuckey says the term industrial venture capital has been coined to describe the model of businesses such as the UK's Virgin, the Swiss-Swedish conglomerate Asea Brown Boveri and medium-sized companies such Thermo Electron. While the outsourcing wave that swept through the corporate world beginning in the late 1980s started as an exercise in cost-cutting, he argues that the rationale for its use by companies of all sizes has converged around the idea of focusing on maximising intellectual property advantages.

Stuckey says large companies are seeking means of releasing entrepreneurial spirit within their organisations by letting people behave with greater autonomy, and giving them direct rewards - financial and otherwise - according to the results of their efforts. If people can be motivated in this direct way, the results can be companies capable of much more dynamic development than traditional command and control style conglomerates.

"Entrepreneurs are a special type people," Blumberg says. "If you take the top off the box, they will jump very high and they will achieve some amazing things."

Stuckey points to electrical and electronics products manufacturer Thermo Electron as an example of the theory in action. He says the company spins out business units where the president and executives of the new company are given equity, as well as the parent and several of the other spin-offs, with the parent maintaining overall equity control.

Again, Stuckey says it is Silicon Valley that is both providing the model and the possibility for these organisational models. Large corporations, he argues, have often been built on competitive advantages that resulted from market failures - imperfect information, regulatory advantages such as tariffs and other trade barriers, and economies of scale that were the result of the need to have a physical presence in many markets, rather than just simple production cost economies of scale.

He compares a corporation to a conglomerate rock, where the truly "hard" bits are bound together by weaker substances. As the communications revolution, driven by the giants of the information industry in the US, and economic deregulation have made for more efficient markets, the weaker parts of corporations have been weathered away, leaving exposed the harder cores of true competitive advantage. This segmentation of skills gives rise to a greater understanding of the need to act in loose co-operation.

Stuckey says companies such as Microsoft, Intel and Compaq, which grew from the embryonic form of the Silicon Valley start-up model, have always been organised in looser networks where each company feeds off the success of the other, but each concentrate on one aspect of the business as their core skills base.

"Everybody's fat and happy, everybody seems to do nicely out of the game, " he says. "So they seem to have this mentality, they seem to understand that, if you do well, and you and I are in the same web, we'll take over the world together, type of thing."

Blumberg points to the way this form of corporate alliance has reached its highest form in the new generation of Internet-based companies. "How many partners does Yahoo have? Netscape? These guys are partner mania," he points out.

So, how aware are Australian companies in understanding these issues? At the big end of town, many companies have at least been exposed to the ideas through their contacts with the likes of McKinsey, although there are none that are obviously breaking ground globally. But for smaller Australian companies, the question is more problematical.

Richard Carter managing partner of @mosphere in the Sydney Technology Park, says it is difficult to measure how far behind Silicon Valley Australia is, but in general, he says, Australia is about two years behind trends in the leading US markets.

Carter himself provides an interesting case study because @mosphere is attempting to provide the type of outsource marketing service to Australian information industry start-ups that Silicon Valley companies use, and because Carter is also a partner with Gruber and 12 others in a virtual marketing company called Principals.com. Principals consists of the heads of several specialist companies, each separately located, who come together on an as required basis with individual clients. The idea is to provide these companies with the highest level of skills from the outset, but in a form that can be scaled up as they grow.

Carter says there is no doubt that the US business community is more accepting and comfortable with new business models.

"It's slightly unfair perhaps to compare Australia with America, because America is a kind of freak show, even though a very creative and generative one," he says. "When you actually go to America and tour around the Valley, people are very comfortable with remote working. They are much more comfortable with virtual groups, virtual consulting groups."

His joint managing director in @mosphere, Michael Holt, says virtual consultants are the natural extension of the new, thinner form of client business.

"The idea of virtual groups is quite compelling, because it's saying how do I leverage and add to my knowledge asset in an effective, efficient way," Holt says.

Gruber, who was based in Australia to manage the marketing for the launch of Foxtel, says the level of awareness inevitably varies, but that there is undoubted a general lack of sophistication among Australian entrepreneurs compared to their US counterparts when it comes to understanding the financial and marketing skills that must accompany great technological ideas.

Blumberg says a similar mentality existed among Israeli technology developers 20 years ago. "Build a better mouse trap and they will beat a path to your door. Wrong."

And if an established venture capital industry is a prerequisite to these companies getting exposure to these ideas "Australia's not 2% behind, it's 200% behind", Carter says.

Blumberg, who visited Australia in June, says he sees strong parallels with Israel 20 years ago, and believes the role of Government in kicking off the process of learning is crucial. Israel then, he says, was hostile to information industries entrepreneurs.

"And I think Australia is not exactly hostile, but it's not a warm environment for the entrepreneur yet," he said.

"I think entrepreneurs are starting to learn to walk the right walk. Government is still lagging a little bit, in terms of changing tax policy, but they will, over time, I think."

But there is both opportunity and threat in the context in which he sees Australia. "In general...We see time collapsing, so Australia doesn't have to go through the same 40 year process it took to build Silicon Valley or the 20 year process it took to build Israel. You can leverage and go faster."

But at the same time, he sees the highest level of awareness of the new competitive realities in the young people of Australia and warns that this very global outlook creates an imperative for Australia to invest in its skill base quickly or risk losing it. He says he sees "a horizontal similarity of entrepreneurial culture" among young people in the US, Israel and Australia.

That means that the very generation that is creating the wealth explosion in the first two nations is likely to be more at home overseas than in Australia, unless the Australian business community and policy-makers do everything they can to deliver them the same level of opportunity.