Australia needs to better target its investor incentives and follow the UK’s lead on several policies in order to address a “major funding gap” for deep tech firms, according to former Innovation and Science Australia chief executive Dr Charlie Day.
In a submission to Treasury’s review of the 2016 venture capital tax concessions, Dr Day, who was the inaugural chief executive officer of Innovation and Science Australia, and IP Group Australia managing director Michael Molinari, called on the federal government to implement a number of reforms around the scheme and copy some of the policies recently introduced in the UK.
Venture capital has a crucial role in addressing the funding gap for deep tech startups in Australia, the pair said, and the current investor tax concessions need to be better targeted to improve this situation.
They argue that an Early-Stage Innovation Company (ESIC) fund should be introduced, for losses from investments in ESICs to qualify for deductions, and for a new Knowledge Intensive Company category to be implemented to help address Australia’s commercialisation woes.
Australia still has a significant issue with funding deep tech firms, Dr Day and Mr Molinari said in the submission.
“A healthy deep tech investment ecosystem is critically important to Australia’s future prosperity, and closely aligned with key Australian government initiatives,” they said.
“To better address current needs and policy goals, in particular in deep technology, there is a need to consider more active support through further iteration of the venture capital programs, and in particular the ESIC program.
“As such, we argue that more attractive, better targeted incentives can drive more investment into priority areas and thus achieve the policy goal of stimulating additive investment of private capital.”
Under the current scheme, investors looking to chip in to early-stage companies can either do this through an Early-Stage Venture Capital Limited Partnership (ESVCLP) fund or as an individual and receive the associated incentives under the ESIC scheme.
But Dr Day and Mr Molinari argued that a new ESIC fund structure should be established to better facilitate investment in early-stage companies.
“Whilst there should always be a place for experienced angel investors to invest as they see fit, better mechanisms to bring investors together in the deep tech environment would, in our view, result in more and better investment in that sector,” they said in the submission.
Losses from early-stage investments should also be deductible under the scheme, they said, with the current situation not reflecting the reality of startups.
“This does not recognise the reality that the majority of early-stage companies will fail and result in a loss to the investor; it is more likely that an investor will lose money than generate a positive return on any given investment,” the pair said.
The UK government recently introduced the Knowledge Intensive Company category to its own scheme, defined as a company carrying out work to create intellectual property and expecting the majority of its business to come from this within the next decade.
The two experts are now urging the Australian government to also adopt this new category of company.
“We believe that introducing a similar definition here in Australia and providing additional incentives for investing in qualifying companies would create a step change in our ability to create industry-defining and industry-creating knowledge-based companies from our university research and elsewhere,” they said.
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