Govt commits $100m to SME fund
Scott Morrison: "The fund will deliver patient capital to these businesses so they can grow without having to give up control."
The federal government has committed $100 million over five years for a fund providing "patient capital" to Australian small and medium businesses in a move that a tech industry group has labelled "startup policy by stealth".
While the fund providing equity funding for early-stage businesses will likely be especially appealing for startups, the government has entirely avoided mentioning the sector in its announcement.
The government first announced plans for the Australian Business Growth Fund late last year, but has now decided to stump up Commonwealth funding for the first five years of its existence.
It hopes that banks and superannuation funds will get on board and contribute to the fund, helping it to grow to $1 billion over the next five years, with between 30 and 50 businesses with annual turnover of between $20 million and $50 million receiving funding each year.
The fund will support existing small and medium businesses to expand by providing them with equity without forcing them to turn to further debt or giving away control of some of the company.
The government shied away from mentioning startups or the tech sector in general in outlining the fund. An early-stage startup looking to expand rapidly is much more likely to want to access equity funding like what is an offer than a traditional SME, but the government is deliberately not focusing its announcement on this sector.
The $20-50 million turnover range for a company means it will likely fall into a Series A round for a more established startup looking to expand.
Fintech Australia general manager Rebecca Schot-Guppy said the business growth fund is "startup policy by stealth".
"While the government has gone out of its way to spell out that this isn’t for startups, the turnover and headcount criteria outlined specifically target early-stage growth companies. The industry can read between the lines here, and see how this policy will only work if it’s aimed at both startups and SMEs. Government should use announcements like this to bridge the divide, not widen it," Ms Schot-Guppy said.
Although it is being modeled on a similar fund in the UK that has focused on emerging, innovative sectors, there are concerns in the local tech industry that the government has not flagged a similar focus for the local fund.
Treasurer Josh Frydenberg pointed to more traditional industries when announcing the government’s contribution to the fund.
"This is for those businesses like local breweries or restaurants that want to expand interstate or even overseas, or maybe a family owned construction company wanting to grow so they can meet demand," Mr Frydenberg said.
The government has so far struggled to get private support for the fund, with NAB being the only bank to officially back the scheme.
But Prime Minister Scott Morrison said the federal funding will help to bring it to life.
"As time progresses they’ll see the wisdom of joining in what has been a successful initiative in other jurisdictions. If you don’t start them then they won't grow. You start things, you remain committed, you work on them and that’s how you get success," Mr Morrison told the media on Tuesday.
The fund will be providing "patient capital", Mr Morrison said, with no focus on a quick return.
"Many small and family businesses can only get equity funding by giving up control of their business. The fund will deliver patient capital to these businesses so they can grow without having to give up control," he said.
"We know small business is the engine room of Australia and we pledge to back them every step of the way."
While the funding is welcome news, the government should be more focused on the creation of new businesses, rather than supporting traditional sectors, according to Giant Leap Fund investment manager Rachel Yang.
"It is strange that government refuses to acknowledge startups and the creation of new businesses in what should be a policy focused on driving innovation and future employment. We should be embracing technology to ensure we don’t get left behind rather than treating innovation as a dirty word. Excluding startups from the conversation only does the government a disservice," Ms Yang said.
The fund will need to be carefully designed to ensure private investors aren’t pushed out, Ms Yang said.
"The devil will be in the detail, as poorly designed government policies and programs can have negative impacts such as crowding out private investors. Hopefully, the fund design will be developed in consultation with investors and SMEs to mitigate the risk of issues such as short-term thinking, insufficient flexibility or too small or too large initiatives," she said.
"Consideration of the pathway to sustainability of these businesses beyond funding will be important to ensure they don’t become reliant on government funding."
Paula Barry, the co-founder of hiring platform TechDirect, said the fund offers a perfect opportunity for her company, but appears to not be its target market.
"While it’s clear that we aren’t the government’s intended target for this funding, it will have a substantial impact on our business. This kind of loan would give us the runway to hire more employees and scale faster, either helping us bootstrap our growth or making us more attractive to VCs down the line," Ms Barry said.
"A policy like this would be the difference between us getting our company off the ground or simply packing up due to a lack of runway. It directly targets a gap in the market. We only hope government won’t deny us this opportunity because we’re not expanding a cafe chain or are buying new equipment for a hairdressing salon."
The Australian Business Growth Fund will be regulated by APRA and be administered by an independent board and chair, as appointed by its shareholders.