With the Federal Government due to release its National Industry Investment and Competitiveness Agenda this afternoon, Yasser El-Ansary, CEO of the Australian Private Equity and Venture Capital Association Ltd canvasses some of the things that need to be done to ensure the cash gets to the most innovative people.
Australia has some of the world’s best entrepreneurs.
For decades now, we have demonstrated a consistency in our ability to innovate through world-beating technologies, or through adaptation of existing technologies. Companies like Cochlear, ResMed and SEEK are the tip of the iceberg – there are scores of other home-grown Australian businesses that have made the leap from humble beginnings to multinational status.
For the most part, many of those success stories have all had a common thread.
The common feature has been a willingness on the part of investors to allocate significant amounts of risk capital to back the commercialisation of those ideas. Without early stage funding through sources such as venture capital, there can often be an economic speed limit or barrier imposed on the ability of those high growth businesses to realise their full potential.
Thinking about the successes of the past serves as a good reminder of one thing – that, as a nation, we unequivocally have the ability to nurture and develop highly innovative businesses. And at a time when our nation is staring down the barrel of a significant deterioration in economic productivity outcomes, it’s comforting to know we have the intellectual know-how in this country to help us rise to the challenge.
But in order for us to catalyse the next wave of economic prosperity in Australia, we have to do some major groundwork.
Our capacity to provide early stage funding to back high growth potential Australian businesses has diminished considerably over recent years.
For the five year period between 2010 and 2014, the amount of money raised by Australian venture capital funds to invest in high growth potential businesses was just over half that raised in the five year period leading up to 2009. Those who have, in the past, made significant allocations into venture capital funds – such as superannuation funds, for example – are now not allocating as much to the asset class here in Australia. For some, the reason for this lies in there being a mismatch in scale.
Superannuation funds are now multi-billion dollar operations and for many of them, the proposition of allocating a relatively small amount of $10 million or $20 million into a local venture capital fund is well below their minimum investment threshold.
But there are some superannuation funds, along with other investors such as family offices and high net worth individuals, who are still supporting investment into Australian venture capital. They seem to be very clear on the critically important role played by venture capital in backing innovation across our economy.
Numerous economic studies over the years have identified that a major disconnect exists between publicly-funded research and business collaboration. Analysis has shown that businesses which had strong collaboration with researchers made productivity gains of more than 31 per cent over their non-collaborating counterparts.
So it’s quite reasonable to ask ourselves some questions. Why we are starting to see more offshore venture funds invest in our innovative Australian businesses? Is last week’s Invoice2go deal, involving two US-based venture funds, the latest example of an emerging trend that should cause us concern?
The answer to the second question, is no. The fact that we have high quality Australian businesses that are attracting the attention of investors from offshore confirms what we already know, that many of our best high growth businesses are world-class and they are recognised as such.
The answer to the first question is more complex.
Offshore venture funds will be very selective about the opportunities that they choose to put their money into. And because the scale of many offshore venture funds is considerably larger than ours, it means that the current gap in the equity investment continuum will persist; the gap is right in that middle zone between angel investment and larger offshore venture or growth private equity funds.
It’s a big gap, and it’s one that has historically been filled by domestic venture funds.
Part of the solution to this problem rests with the government: it must put in place a clearly defined long-term commitment to a comprehensive innovation system for Australia.
For too long now we have seen frequent innovation policy changes made on the back of short-term, ‘quick win’-type strategies that, for the most part, have not really delivered the desired results. Investing in innovation is a long-term game that necessitates maximum certainty in respect of government policy settings. Just as private sector investors have to be patient, so too does the government.
Countries like Canada, the United Kingdom, Israel, New Zealand and Singapore have long-term commercialisation programmes that are focussed on delivering significant socio-economic payoffs well into the future: Australia needs to adopt a similar patient approach to policy in this area.
And while there is an urgent need for a comprehensive innovation blueprint to be mapped out – and we’re hoping that the government will unveil its plan when it releases the much anticipated National Industry Investment and Competitiveness Agenda in the coming weeks – there are some very simple policy roadblocks that the government should clear straight away.
Since 2009 startups have been adversely impacted by changes made to the employee share scheme tax rules. Providing employees with a slice of equity in the business can be an effective substitute for a higher salary elsewhere. But the problem is that the current tax rules act as a disincentive for startups to use share schemes in attracting and retaining the best talent.
Other changes need to be made to our corporate laws and regulations to make it easier for equity crowd funding to take its place in the capital-raising cycle for small scale startups. Opening up access to crowd funding will help to increase the pool of high growth potential businesses that could lead to the emergence of the next Atlassian.
Many of our developed economy competitors have taken steps to nurture home grown businesses through well targeted policy initiatives, and we need to ensure we can more effectively compete with them.
Much of the recent offshore venture investment into Australian businesses has been anchored in the ICT sector, but there is still plenty of scope for us to improve our support for the biotechnology sector, where the availability of venture capital funding has been declining steadily over the last few years.
The government has announced a plan to establish a medical research future fund, which is a good idea. However, what would take it from being just a good idea, and instead make it a great idea, is to ensure that the fund has a focus not only on research, but on translating and commercialising that research.
In the end, greater commercialisation of Australian research could play a very big role in driving new economic activity and creating new employment opportunities in high technology markets into the future. And that’s exactly what our nation needs right now.