Pre-budget submissions show support for government-backed venture capital fund
Tuesday, January 9, 2018/
In a series of pre-budget submissions, finance industry bodies have thrown their support behind a government-backed venture capital fund to further innovation in all industries while continuing to support Australian startups.
The Institute of Public Accountants (IPA) has submitted a recommendation for the government to establish a VC fund, citing a declining or insufficient amount of support from established VC sectors worldwide as a reason for governments to take matter into their own hands to support emerging businesses that are “likely to be unattractive to bank providers of debt”.
“VC remains a valuable but ‘niche’ source of risk capital for a small cohort of an economy’s highest potential young firms. Such firms are commonly involved in ‘new knowledge’ industries and particularly the early commercial application of new technologies,” the submission outlines.
“VC remains an important part of a modern entrepreneurial ‘ecosystem’ given its contribution to a spectrum of entrepreneurial finance products employed by high growth, and particularly innovative, young firms.”
Lack of venture capital is often seen as a barrier to growth for young companies, says the IPA. However, the institute acknowledged that the majority of publicly supported VC programs have given investors poor returns. A full cost-benefit analysis undertaken by the government would prevent this, it says.
The IPA also notes that while angel investment is often seen as an alternative to venture capital, angel networks such as Sydney Angels are increasingly “emulating their VC counterparts”, marking growing sophistication in the sector.
The recommendation suggests the government could go down one of two routes: either provide a “significant portion” of funds to assist VC managers or attract investors to other VC funds, or become an institutional investor itself in a number of VC funds.
Support of this nature “will improve the entrepreneurial environment in Australia and act as a catalyst in identifying and overcoming hurdles to successful and profitable investment”, the IPA says.
Additionally, the Australian Private Equity and Venture Capital Association Limited (AVCAL) has made a submission with a similar recommendation for the government to pursue equity co-investment in the form of a National Innovation Fund.
Previous proposals for a National Innovation Fund were eschewed by the government’s board of Innovation Science Australia, claiming there was no evidence of funding gaps which the government could fill. The board said they were”happy to look at proposals but we need to know there is a problem”.
AVCAL’s proposal would be modelled off the recently established Biomedical Translation Fund and would see a minimum government commitment of $500 million over two years with returns re-invested. The fund would be sector-agnostic and not just focused on startups.
The association also recommends an equity financing model over debt models, and also echoes the IPA’s suggestion of the potential fund investing in VC funds at “different stages of the company life-cycle”.
“As the Australian Government looks to formulate a package of measures as part of the next wave of the [National Innovation and Science Agenda], serious consideration should be given to such programs,” AVCAL says.
“While they may involve some budgetary cost in the short-term, they must be viewed as an important, long-term investment in Australia’s future.”