A submission to the Financial Systems Inquiry by Innovation Australia highlights Australian market failure in early stage equity capital, saying it was a longstanding issue “particularly in relation to innovation-based and other innovation intensive startups”.
Innovation Australia has oversight over the government’s industry innovation and venture capital programs delivered by AusIndustry. It also administers Commercialisation Australia (whose grant program is currently on hold until after the budget is released) and the Innovation Investment Fund.
The report highlights a number of inefficiencies in accessible markets and funding, but said that there were “emerging new approaches to sourcing, managing and mobilising venture capital” which provided alternatives to the VC fund approach.
It singled out “low-capital lean startups that are software-based, web-mediated and disruptive to existing business models” as the type of companies that were benefiting from this approach.
It went on to say capital-intensive innovation (e.g. biotech, medtech, new materials and advanced manufacturing) were the areas that remained starved of capital.
Innovation Australia chair Nicholas Gruen, who signed off on the report, told StartupSmart he believed that most new “lean startup” companies now had adequate opportunities for early capital in Australia through a number of incubators and early stage investors.
“While I believe that to be the case, I’m quite open to the possibility that I might be wrong,” Gruen says.
Blue Chilli CEO Sebastien Eckersley-Maslin says while the situation for early stage lean startups is definitely a lot healthier than it was two years ago, it’s not a solved problem.
“Whilst there is more capital available at Series A now than there was even a year ago, there is a significant shortfall in ‘risk capital’ – money being invested in seed stage companies with high risk,” Eckersley-Maslin says.
“Risk capital comes with diversification of investments, which requires volume of opportunities. An investor who has made 10 investments is more prepared to take a punt on a high-growth/high-risk opportunity.”
Eckersley-Maslin says that assuming a timeline of startups of research and development (seed), prototyping and commercialisation (angel), growth (series A), expansion (series B), then “there is a lot of support at R&D through universities, through the R&D tax offset at seed”.
“There’s support at growth with the ESVCLP program by AusIndustry, the (now former) Commercialisation Australia matched funding program, and with Industry Funds Forum matched funding,” he says. “There is, however, a gap in the prototyping and commercialisation stage, which is the high risk area and is where the IP being generated at R&D is being turned into commercially viable products.”
He says a good comparison for the Australian early-stage funding scene is Israel, where a community with a population the size of NSW (8 million) has 24 incubators under the government-matched incubator program (where the government supplies 5:1 matched funding for startups built in incubators).
Investors’ Org president Brian Goldberg says he believed most early-stage lean startups accepted that they were to undertake the initial tech build and concept launch on their own time and effort. He added they were not well positioned for a VC at that stage.
Goldberg says those startups enjoy the current trends of joining an accelerator as a means to achieve this first stage.
“However, once the startup launches and needs funding to scale and grow, the challenge of successfully seeking VC funding in an efficient and timely manner is, in my view, not sorted,” Goldberg says.
The Innovation Australia report made a number of similar observations about access to growth capital saying that the Australian banking sector was not performing well in the provision of development finance.
The full report from Innovation Australia can be viewed on the FSI website, along with other submissions.
The report makes a number of recommendations, including:
“New channels for mobilising and managing capital include new pooled-fund models, including syndicated angel funds, which may be organisationally linked to accelerator and incubator initiatives, retail investor funds, and crowd-sourced equity, debt or reward funds.”