Super dreams – where’s the money?
Making Australian tech innovators more interesting to Australian superannuation funds
It is surely a policy failure that Australia is home to one of the world’s largest superannuation pools and yet struggles to fund its own home-grown innovators. This failure is both puzzling and embarrassing, given that Australia is also home to world-class research institutions.
This might be a nice problem to have. That is, a big pool of money on one side and excellent researchers on the other. But it is a problem nonetheless because Australia is well documented over many decades as an underperformer in the commercialisation of its institutional research.
And of course, the issue extends to the funding of the home grown startup sector, which has been making the most noise in recent times about the need for government intervention on the funding side.
The startup sector has been looking jealously at the pools of superannuation for some years, and have made representations to government over a long period to try to get a small, mandated portion of these giant funds set aside for these technology innovators.
And with local VCs, startups have also been pressing for direct government funding subsidies – specifically for the reinstatement of the Innovation Investment Fund, or a similar alternative. The IIF, in which government provided matching dollar investment for a handful of accredited funds, was discontinued in Joe Hockey’s first budget in May last year.
Neither mandating a portion of super (effectively conscripting Other People’s Money) nor dipping into the pockets of taxpayers – through direct government contribution – is particularly appetising. Neither addresses the ongoing issue of effectively connecting the two sides of this equation. That is, connecting the outputs of our researchers and innovators with the nation’s large pools of long-term capital.
Paul Cheever brings some insights in this area. Mr Cheever has been active in the Australian venture capital scene for decades, and has been an architect of a number of the nations’ most successful commercialisation funds and institutional collaboration structures. These days he runs a think-tank, the Australian Institute for Innovation.
Which brings us back to the nice problem that Australia has: “It is a fact that, contrary to the [Murray] Financial System Inquiry’s conclusion that the financial system is working well, it is not operating effectively to connect our large pools of long-term capital in our superannuation system with the capital needs of our startup and smaller growth enterprises.”
Simply re-starting a government fund like the IIF – as Opposition leader Bill Shorten promised to do in his Budget reply speech earlier this year – does not make sense.
Publicly funding our way to the creation of more venture money misses the point – there is already a pool of money. But institutional money is not attracted to the current structures.
It doesn’t mean that there is no appetite for this kind of investment from these institutions. Australia now finds itself in a somewhat ludicrous situation whereby some of our Super funds invest in wholesale funds in the US to get exposure in tech and tech-enabled startups. Ditto for the Peter Costello-chaired Future Fund.
When a US-venture funds drops a large investment in a growing Australian company (sometimes accelerating the process by which that company takes its IP, if not its headquarters, offshore), there is a good chance that Australian super has helped to fund that investment. Largely unwittingly.
Australia’s track record of delivering sustained returns to investors in the tech sector is patchy. This is despite boasting significant expertise in commercialisation. The problem for commercialisation is in the siloed nature of the expertise, Mr Cheever says.
He is promoting a structure of innovation marketplace platforms.
This concept of a marketplace platform is itself not new,” Mr Cheever says. He points to Stock Exchange as an obvious example. “This is a marketplace platform that brings together companies requiring capital with sources of capital, facilitating this capital engagement through providing predictable and reliable transaction processes, access to liquidity for portfolio management and critically, serves to mobilise, and safeguard the integrity of, the information which allows for informed and rational capital allocation.”
“Government plays a key inflection role through itself monitoring the integrity of the platform’s activities, and thereby bringing authority and confidence to the platform,” he says.
It is the predictable and systemic nature of the processes that brings comfort to both sides of the investment equation. For commercialisation directors in universities or research institutes, such a marketplace allows for sharing of expertise and innovation ideas. For investors it provides systematised, gateway approach to the maturing of research outputs.
Australia already boasts such an innovation market that would reasonably be considered world’s best practice through the Medical Research Commercialisation Fund. This connects more than 50 medical research institutes and public hospitals with capital, capability and markets. It works.
One of the keys to success of these marketplaces is invariably a social network element. “This is not a “social network’ of beer and pretzels but rather one of common or overlapping experience and ambition, matched with a recognition that, while there are points where self-interest needs to prevail, collaboration is more valuable than a silo approach.”
Both Silicon Valley and Israel operate as a form of innovation marketplace platforms. “Silicon Valley has grown organically but with a high level of collaboration (with inflection points of its growth stimulated by various government programs),” Mr Cheever says.
“In a sense Silicon Valley is self-regulating as participants are admitted to the platform based on their willingness to collaborate and ability to add value. The Israeli system has been government initiated through the articulation of the objective, the mobilisation of knowledge and capabilities by exploiting the social networks embedded within its military and research organisations, and by government again contributing at key inflection points.”
The experience of the construction of Medical Research Commercialisation Fund is not directly transferable. But it does provide a framework for other innovation sectors.
Certainly it provides the kind of predictable, process-driven collaboration and stage-gate progressions that may start to become interesting to large scale investors like super funds. These are ideas worthy of broader discussion.