Venture capital vital to our nation's hi-tech survival
The vital role that innovation plays in our nation’s development is, rightly, well recognised.
But what is not well understood is how management expertise and capital move ideas and concepts from laboratories, garages and backrooms into innovative, commercially viable products and services, adding to the economic well-being of Australia.
A major source of entrepreneurial expertise and funding comes from the venture capital (VC) and private equity (PE) industry.
Entrepreneurs and innovators seeking support and backing for their intellectual property have limited options to access capital and expertise. There are few advisors and consultants that cater to the early stage market. Early stage companies are high-risk investments often with little or no collateral. Consequently, the firms that are in the best position to invest and advise early stage companies are those that are run by former successful entrepreneurs, scientists, doctors and engineers themselves – a VC firm.
Fund managers running VC firms can bring with them a unique business mindset that seeks out and manages early-stage investment opportunities on behalf of investors (mainly superannuation funds, institutions and wealthy individuals). Their hands-on ability to work closely with the founders/management of innovative companies, on matters of strategic planning, recruitment, and access to international markets and technology, makes them a partner who brings more than just capital to the table.
There are around 200 seed, early and late stage companies backed by local VC managers.
In the 2011 financial year, 37% of the total VC dollars invested were in the information communication and technology sector (ICT). Life sciences received the majority of VC investments in FY2011; a statistic which has been steady over the last six years. The largest proportion of investments in ICT went into business related software, followed by communication and networking services. Other ICT sectors include semiconductors, consumer electronics and connectivity, networking and communication software.
Some well-known VC successes in the ICT sector include Seek, Looksmart, Hitwise and Wedgetail. Successes in life sciences include Cochlear, Resmed and Pharmaxis.
VC fund managers bring a “business focus” to new companies, helping them grow to the next stage of their life-cycle, before being sold to another investor or merging with a competitor to create a larger market share.
While I would like to say the amount and number of VC investments is growing, the reality is that the VC industry has been contracting in Australia and around the world, even in the US.
The VC sector has faced headwinds in recent years, with investors seeking increased liquidity and reluctant to back higher risk, longer term investments.
The Australian Government spends around $8 billion a year on research, much of it ‘blue sky’ adding to the knowledge base but also in the hope that something will come out of it to contribute to the nation’s productivity.
Despite this government expenditure, little focus is given to commercialise the investment. VC fund managers take on the financial risk to help innovators commercialise their concepts. To help them continue this vital role in the nation’s innovation system, there needs to be greater policy support to these “enablers”.
One area of support in recent years has been the Government’s Innovation Investment Fund (IIF) program, started in 1998 just before the tech crash. It co-invests with private sector investors in VC funds to assist early-stage companies to commercialise the outcomes of Australia's strong research capability.
However the IIF has only one more tranche of funds left before it ends later this year. Worryingly, there is no appetite from the Government to extend it in any form despite a very positive independent review and the Government’s own praise for the programme, leaving the massive taxpayer funded expenditure into R&D without any adequate commercialisation mechanism.
Historically, Government intervention into a unique asset class such as VC has been crucial to its growth. Governments in the US and UK have backed their respective early stage sectors for decades and have especially increased their initiatives towards the innovation sector post-GFC.
Australia maintains a robust ecosystem that advocates innovation in technology: for example, the Government’s zeal to establish a national broadband network is testament to its goal to better the Australian IT infrastructure. Australia is one of the easiest places to start a new business and is one of the best places for laws relating to ICT. Furthermore, Australia’s proximity to emerging technology-based Asian powerhouses like China, India, Indonesia and the Philippines gives us access to an agile product testing environment.
AVCAL, the Australian Private Equity and Venture Capital Association Limited, was established in 1992 as a forum and voice for participants in the private equity and venture capital industry. Membership includes almost all the domestic and international PE and VC fund managers active in Australia. PE and VC are key sources of capital for companies of all sizes, to enable their growth and realise their potential. VC is one of the few sources of capital available to enable entrepreneurs to convert innovative ideas into sustainable enterprises. Australian PE has $23.6b under management while VC has $2.9b under management. To find out more information please visit www.avcal.com.au, www.twitter.com/avcal1 and www.linkedin.com/in/avcal.