Denham Sadler
January 16, 2018

New calls for govt VC fund

StartupLand

New calls for govt VC fund

Michelle Deaker: A government-run fund could help unlock Super funds for VCs.

A number of high-profile members of the Australian investor and tech sectors are calling on the government to establish its own venture capital fund to back local entrepreneurs and early-stage companies.

The push has been seen in a series of pre-budget submissions to Treasury, including by the Institute of Public Accountants and the Australian Private Equity and Venture Capital Association Limited (AVCAL). Several other heavyweight VCs and investors have also backed the concept of a national innovation fund.

The idea of a new government-run or -backed VC fund has been on the cards since the launch of the National Innovation and Science Agenda in late 2015. In August 2016 then-innovation minister Greg Hunt announced the establishment of a national innovation fund would be one of his top priorities in the role, and that it would be based on the $500 million Biomedical Translation Fund.

But the need for such a fund was questioned, and the idea was dropped after Mr Hunt was moved on from the role. His successor Arthur Sinodinos never ruled out the policy, and with new innovation minister Michaelia Cash, there are growing hopes in the sector that the next tranche of innovation policies will be unveiled this year.

In its submission, the Institute of Public Accountants said the government should either provide the majority of capital to a newly created fund, or become an institutional investor in a range of preexisting funds.

“This type of support by government to small business equity finance will improve the entrepreneurial environment in Australia and act as a catalyst in identifying and overcoming hurdles to successful and profitable investment,” the Institute of Public Accountants said in its submission.

“This absence of VC is seen as one barrier to the development of new innovation capabilities in an economy. Weaknesses and problems in the banking sector have meant that debt finance for young firms have been rationed.”

The organisation proposed a hybrid public-private venture capital fund led by the government, pointing to examples of this in the UK, Denmark and New Zealand.

In its own submission AVCAL also supported the policy. It said the VC fund should be closely modelled on the Biomedical Translation Fund, which is a “prime example of government funding operating to attract private capital into a sector of the economy which otherwise would not attract adequate investment”.

The government committed $250 million to that fund, which has been matched by private investors. The fund invests in commercialising biomedical technologies and is managed by three private sector fund managers.

One of these fund managers is OneVentures, and its managing partner Dr Michelle Deaker said a government-run fund could help unlock superannuation funds for VCs.

“The role of government should always be to support areas where there is failure in the market. The market failure that we still face here is a problem where only a handful of superannuation funds are committing to a venture capital funding program. Most superannuation funds have become so large that even private equity, let alone venture capital, is no longer part of their investment strategy, despite the importance to Australia of creating the new industries of Australia’s future,” Dr Deaker told InnovationAus.com.

“Technology is a significant area of jobs growth for Australia’s future. As managers establish new funds addressing what in their view are opportunities in the market, they can approach this pool of funds. This fund should have the strength and scale to enable managers to address venture growth opportunities and leave the government to undertake ecosystem development.”

A number of state governments have already launched their own public-private venture capital funds, with South Australia recently launching a $50 million fund run by Blue Sky Venture Capital.

The idea of a federal government-supported fund was rejected in 2016 due to claims that there was no longer any funding gap it could plug. An Innovation and Science Australia review of the proposed policy concluded with: “We are happy to look at proposals but we need to know there is a problem.”

And Australia’s VC sector has grown rapidly lately, with 2016-17 proving to be the second consecutive record year. More than $1.3 billion was raised since July 2016, up from $568 million in the previous financial year, according to the StartupAUS Crossroads report.

But AngelCube founder and angel investor Adrian Stone said there is still a significant startup funding gap that a national innovation fund could fill by providing Series A rounds of between $1 million and $3 million.

“There is a definite need for funding for scaling-stage startups, as huge dollars have flowed into the leading VCs in the past two years. As the dollars flow in, VCs tend to invest upscale, leaving a huge hole in the Series A funding range. A government fund with a mandate to plug such holes would be great,” Mr Stone told InnovationAus.com.

But Blackbird Ventures co-founder Rick Baker said that although he believes Australian startups are underfunded, this will be covered by the private sector in the coming years, and government funding is more needed in education.

“As the venture capital industry matures, a handful of Australian venture capital managers are emerging who have the experience and track record to raise larger funds and invest the larger pool of capital. I feel that the capital in our super funds and in the wider private sector, as well as potential overseas investment into Australian venture capital, should be more than enough to cover the gap in the coming years,” Mr Baker said.

“We don’t need a whole load more tech startups in Australia. What we need are more super high quality, world-class startups. You don’t get these by just pouring more capital into the system. The rigour of the private markets and some scarcity of capital ensures a high quality bar for funding new startups.

“Overall I’d rather see any new government capital directed towards education, from primary to universities, rather than into the venture system right now. This is a longer term play, but that’s the way we will create more high quality innovation and startups.”

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