Graeme Philipson
June 22, 2016

AVCAL calls for scale-up support

Capital

AVCAL calls for scale-up support

Yasser El-Ansary: Time to get serious about funding for startups becoming scale-ups

The Turnbull Government’s National Innovation and Science Agenda was all very well, but it concentrates on startups. What is needed is support for ‘scale-ups’, says the Australian Private Equity and Venture Capital Association (AVCAL).

AVCAL defines scale-ups as the next stage beyond startup. They are “those businesses that have graduated from the initial startup phase with a proven product and market opportunity which now need further capital (often $5 million to $20 million) and expertise to hire staff, drive sales growth and invest more deeply in research and development.”

InnovationAus.com has often made this very point. We must agree with AVCAL. The association has now released a pre-election document called ‘Funding the new economy: A scale-up policy blueprint’, which cogently argues for more policy support for businesses that have graduated from thetart-up phase with a proven product and market opportunity.

AVCAL has been around since 1992 as the Australian Venture Capital Association Ltd. It changed its name to incorporate private equity in 2006, and is a vocal advocate of the interests of Australia’s growing venture capital (VC) and private equity (PE) industries.

Its blueprint document quotes research showing most VC investment is in startups and early stage companies, while most PE investment is in larger small to medium enterprises (SMEs). It says PE-backed businesses contribute more than 4 percent of Australia’s GDP, and support over half a million jobs.

AVCAL has called on the new government to do more to help Australian scale-up companies, with a call for US-style limited partnerships:

“Australia’s current suite of collective investment vehicles is out of step with international practice, necessitating complex structures and deterring foreign investment. If Australia wishes to grow the funds available for investment into unlisted assets such as high growth Australian businesses, a new best practice vehicle must be created. Limited partnerships are the globally accepted PE and VC vehicle of choice, and could be transformative for the industry.”

The blueprint also calls for a better targeting of Australia’s foreign investment framework:

“Given Australia is a net capital importer, our national interest necessitates an internationally competitive foreign investment framework. Some recent changes have created artificial barriers to offshore passive investment into non-sensitive parts of the economy.

“These changes have had a disproportionate impact on Australian PE and VC given a majority of funds are now sourced offshore. Consistent, principled policy is essential to the continued funding of high growth Australian businesses.”

AVCAL Chief Executive Yasser El-Ansary says that the next government should proceed with a new phase of Australia’s innovation reforms, which he calls NISA 2.0.

“Currently, a lack of institutional funding at this vital stage pushes maturing, innovative Australian companies abroad. Making sure that these companies receive the support they need has economy-wide implications, including the nation’s ability to drive innovation, productivity and employment growth into the future.

“Over the last five financial years only 19 percent of VC-backed companies received later stage funding, down from 30 percent of companies in the previous five years.”

The blueprint also addresses:

  • superannuation investment in PE and VC: “Government policies that have had the unintended effect of discouraging investment into PE and VC need to be addressed, particularly at a time of slow global growth.”
  • Tax and regulatory settings: “Government [should] ensure regulation is stable and principled, providing investors with the certainty necessary for medium and long-term investment.”
  • Developing a world-class startup and scale-up ecosystem: “More can be done to encourage an entrepreneurial business culture, expand government/private sector commercialisation co-investment, and attract entrepreneurs and innovators to Australia.”

On this last point, the blueprint says the government should introduce a package of innovation measures including: funding commercialisation and business skills courses for tertiary STEM students; establish a Biomedical Translation Fund and systematically exploring further co-investment opportunities; adopting quarterly R&D tax credits for innovative, cash-poor businesses; and continuing reform of employee share scheme rules.

AVCAL’s blueprint is supported by StartupAUS, with CEO Alex McCauley saying it is a “sensible” addition to the innovation policy debate, and that supporting scale-ups is critical to ensuring fast growing local companies stay in Australia.

“This is a period of unprecedented opportunity for Australian startups, and we must be careful not squander it. A record $1 billion has been raised or is being raised in PE and VC funds in the last year. That investment is an enormous boost to our early stage startups, and a great indication of the powerhouse of high growth startup brands emerging around the country.

“However StartupAUS shares AVCAL’s concern that unless we take a long-term approach to supporting these startups, we may lose many of them to offshore competition or local funding challenges,” Mr McCauley said.

“We also want to see an increase to research and development in this country, because it’s the best way governments can support innovative young companies in Australia," he said.

"This isn’t about fixing something that’s broken, it’s about taking a government initiative that is working fantastically for startups, and making it even better.”

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