The Australian Government’s Innovation Investment Fund allows start-ups more scope for follow-on investments and has contributed to the supply of high-potential businesses, according to a new report from a UK university.
In 2010, three academics at the University of Exeter Business School were contracted by the Australian Government to undertake an independent analysis of the Innovation Investment Fund.
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The IIF was introduced in 1998 to help channel equity investments to younger and smaller “new knowledge-based” firms.
The program is based on the belief that capital-constrained firms, particularly those in the start-up phase, are constrained from maximising their innovative potential because of a lack of risk finance for growth.
To date, the IIF has committed $524 million of government and private capital to invest in early stage companies. The program has licensed 13 new venture capital innovation funds, helping almost 100 businesses commercialise their research.
The authors of the report say without the program, it is likely that fewer businesses would have started up and of those that did, their activities would have been more limited in both scale and scope.
“A positive feature of the IIF program is that early initial support allows more scope for follow-on investments,” the report says.
“Private sector equity providers, corporate venture capital funds, investment banks and foreign investors, in contrast, seem to favour larger scale, one-off investments in older, more established and less risky businesses.”
“Yet it is similarly risky new businesses that are most likely to contribute to major innovative change over time. Thus, it is fair to argue that the IIF program has contributed to Australia’s supply of young, high potential businesses since its inception.”
According to the report, the IIF continues to meet the needs, and provide clear benefits, for many young businesses.
“There is a considerable body of evidence suggesting that there is a market gap left by the migration of private sector investors out of classic venture capital activity,” it says.
“Capital-constrained young businesses in the biotechnology and industrial energy sectors are particularly vulnerable… In the absence of the IIF program, the needs of these innovative and potentially high impact businesses would remain unfilled.”
Not surprisingly, Innovation Minister Kim Carr has welcomed the report, saying the program is “able to accept some of the risks” of early stage innovation.
“The report has shown us that the program is effectively supporting start-up ventures in Australia… [For example, it has enabled the] commercialisation of vital products such as Bronchitol, which treats cystic fibrosis,” Senator Carr said in a statement.
Carr said venture capital has been a major driver of growth in high technology firms, contributing significantly to international productivity in countries like the United States.
“Most countries now support co-investment type funds similar to those that were established in Australia in the late 1990s,” he said.