Strengthened government investment in innovation and tax policy changes to support that innovation are two outcomes a number of startup industry figures are looking for when the federal government’s budget is released on Tuesday night. However, one change they hoped would arrive in the budget now won’t go ahead, with the Australian Financial Review reporting that the government has put planned changes to employee share schemes on hold because it was at odds with the budget’s “tough love” message. Blue Chilli head of marketing Alan Jones says he is frustrated by the move. “[The delayed changes] would allow startups to attract employees and over the long term retain key employees,’’ he says. “It wouldn’t be out of step with the tough love message.” RSM Bird Cameron director Con Paoliello says the budget should recognise that the economy is no longer being driven by the manufacturing or services sectors, and should invest in incentives, infrastructure and innovation. He wants to see tax incentives for investors that would help get startups off the ground. “Investors rely on private investors or public resources to make the initial investment before they can access R&D tax breaks,’’ he says. “In Australia if a person invests in a startup company they don’t gain access to any tax benefits, which makes finding private capital difficult. “RSM Bird Cameron believes the federal budget should address this and consider options such as expanding the proposed exploration development tax incentive to non-resource startup companies or providing investors with a capital gains tax exemption upon sale of a startup company.” Cost cutting has been a bit of a theme in the lead up to the budget, but Australian Private Equity and Venture Capital Association chief executive Yasser El-Ansary says it’s only one part of the solution and government should also look to encourage more businesses to invest in innovation. “If we can unlock the growth potential of businesses, you’ll see that translate into more tax revenue flowing through to the federal budget,’’ he says. “When you look at our global competiveness position, Australia currently ranks number 15 in the group of 34 OECD countries [based on the World Economic Forum’s Global Competitiveness Index], and in order for us to lift our productivity and economic growth we are going to have to invest more in innovation.” It’s a view also held by OneVentures managing director and CEO Dr Michelle Deaker. “Government funding programs foster the broader investment community and the IIF [Innovation Investment Fund] model where the government matches private investor capital, sharing risk and taking a low capped return, encouraging capital from institutions and high net worth individuals to the venture capital asset class. “The multiplier effect of the government support is clearly visible when you look at OneVentures’ Innovation Fund through the additional capital realised into our companies via co-investment and syndication. “In the medium to long term, the quantum of new jobs in potentially new, emerging industries generated through this program for the economy represents a strong case for government support.” Dr Deaker says she expects the government will be looking at developing the Innovation Investment Fund even further, despite the National Commission of Audit recommending the fund should be abolished. The idea raised by the National Commission of Audit that funding startups should be left to the private sector is one that should be ignored by the government when considering budget policy, according to Australian Institute for Innovation chief executive Paul Cheever. “The fundamental flaw in this opinion is that it presumes a process of capital allocation that is irrational and non-evidence based, and therefore which itself offends the principles of economic management of an efficient market framework,’’ he says. “The reality is that almost every startup, in the absence of overwhelming evidence (repeat paying customers already present), is rationally seen by both investors and advisers as an alchemist’s offer to turn lead into gold.”
The federal government’s Innovation Investment Fund (IIF), set up to provide capital to foster Australian innovation, has failed and we need to move on and find better models, says The Australian Institute for Innovation chief executive Paul Cheever. Speaking to StartupSmart in response to the Innovation Australia Board’s (IAB) submission to the Financial Systems Inquiry, Cheever says the market failure to provide capital for new ventures has had adverse consequences for Australia’s economic future. Cheever says the IAB was right to point out in its submission that "past government response has been directed towards the VC fund mechanism with limited success", but that we need to go further and recognise the IIF has not achieved what it set out to do. “The intention of the IIF program was to "seed" venture capital firms, which were then expected to prosper and expand to meet the early stage capital and capability needs of the economy,” Cheever says. “It is time after 16 years to recognise the IIF program has failed.” Cheever says this was reflected in a few simple metrics, with the IAB noting that over its 16-year existence the program has funded 135 companies. “This is an average 8.4 investments per year, and given that the manager appointments and investment activities were concentrated in the early years, the activity level since 2007 has had a limited impact,” he says. “What is more concerning is that the number of personnel mobilised by this program to service the nation's start-ups is probably less than 85 in total, and less than 15 mobilised at any point in time.” According to Cheever, in total the IIF regime has placed $600 million into the market, and expended $130 million on fees and costs. Cheever believes the failure is in part due to bureaucratic shackles that restrict its own ability to take initiative in the market. “Innovation Programs themselves need the ability to pivot,” he notes. But while he believes the success of IIF is dubious, Cheever still says there is an important role for government to play through funding that enables collaborative bridge-building to improve entrepreneurial capability. He suggests that the model for the Medical Research Commercialisation Fund (MRCF) could be replicated as a successful model for tech innovation. He says ideally he would like to see three hubs emerge for Australian innovation, each with their own independent managers, namely the MRCF as it exists, a university fund and one for incubators and accelerators. “The Australian Institute for Innovation is confident that a combined Commonwealth and State expenditure of $15 million a year, committed for 10 years, would provide the inflection mechanism to unlock more than $1 billion of private investment capital and to connect through collaborative structures some 350-500 commercialisation experienced personnel to support our innovative new high growth enterprises, “ he says. “In contrast to the IIF experience, we believe these collaborative structures would support 35-60 direct new investments annually, and facilitate many more. And this program would reach beyond the lean start-up channel.”
Yesterday, we highlighted six ideas to kick-start Australian innovation, as outlined by Paul Cheever, CEO of the Australian Institute for Innovation.
It hasn’t been the best week for Australian innovators, given the announcement by Commercialisation Australia that it has been told by a surplus-fixated Federal Government to freeze all new grants to up-and-coming businesses.