Time for start-up investment is now

Summary:Eighteen months after the Federal Government severed an important lifeline for innovative Australian start-ups, a new $196 million program has been announced to help fill the Australian funding void. But will it really help?

Eighteen months after the Federal Government severed an important lifeline for innovative Australian start-ups, a new $196 million program has been announced to help fill the Australian funding void. But will it really help?

When the Federal Government cancelled its Commercial Ready grants scheme without notice in May 2008 it cast into jeopardy the future of dozens of Australian technology start-ups. Many were midway through their applications — a lengthy and costly process — and cancellation without notice left them in a worse position than if they had never bothered in the first place.

However, the bigger crime was to cancel Commercial Ready with no viable alternative, and at a time when Australian venture capital markets had slumped. Commercial Ready had provided around $200 million each year to small and medium businesses, which were left to enter the global financial crisis with no clear alternative source of funding.

With one of the reasons for cancelling Commercial Ready being that many of the applications would have proceeded without public funding assistance, it was a slap in the face to companies that would witness private funding options close.

Though this week saw the announcement of a new grant scheme dubbed Commercialisation Australia. The scheme was first mooted in the May budget, and will provide $196.1 million over four years and $82 million each year thereafter. That's a long way short of the $1 billion that Commercial Ready injected into potential high-growth Australian companies.

The new grant scheme will open in early 2010, and will enable companies to access $250,000 for proof-of-concept activity, or up to $2 million in repayable grants for early-stage commercialisation activities. Under Commercial Ready, companies could apply for funding up to $5 million, but only two applications ever received the maximum amount.

Successful applicants will be assigned case managers to assist in the development of their business.

But many entrepreneurs are scratching their heads as to what the new program will actually deliver, and who will comprise the panel of case managers.

"They say they are going to appoint a seven-person board that is comprised of people experienced in growing early stage companies," says entertainment and technology entrepreneur Chris Gilbey. "So that seems promising. But the truth is that it still isn't enough."

The new scheme is important in filling the gap that was left by Commercial Ready — albeit later than most companies would have liked, and in a limited form.

But the fact that it is necessary however simply shines a spotlight on the elephant in the room — Australia's weak venture capital and angel funding capacity. The government has failed to provide any greater stimulus for the private sector (or superannuation funds) to direct funding towards the high growth start-up sector — although in fairness the higher risk in these investments has not been made any more attractive by the financial crisis.

But if any part of the funding process needs stimulation it is the private capital sector. Australia's early stage venture capital investors have shrunk to a handful of battle-hardened investors, groups such as Sydney Angels, Capital Angels and IPitch are working to create stronger linkages between angel investors in the hope of encouraging larger and more frequent investments.

But more needs to be done to encourage funding into the early-stage sector.

Those companies that are capable will raise their funds overseas, such as the Australian online fraud control specialists ThreatMetrix, which this month raised US$6.1 million from a Silicon Valley VC. President and CEO Reed Taussig says the money will be used for operating capital and expansion purposes.

"It's been a difficult financing environment in the United States, but our business has been doubling quarter over quarter, and so as a result we were able to attract a US VC who is a top tier venture firm in Silicon Valley," Taussig says.

ThreatMetrix launched in the US in January and will end this year with around 70 customers, a number that Taussig is confident of coming close to tripling that next year, and move to being cash flow positive in the third quarter of 2010.

Companies like ThreatMetrix demonstrate the sort of growth path that is possible for Aussie tech start-ups. But a lot more needs to be done to stimulate private sector investment — and now is the time.

The story of Australia's venture community is one of investors that have only been able to raise money — and hence invest it — at the peak of the market. The way to generate real returns is to invest now — when valuations are low and market rebound means that returns will be stronger off a low base.

Without an injection of funding now Australia stands little chance of either creating effective solutions to climate change or capitalising on the government's investment in broadband infrastructure. Unless the government can find new ways of unlocking private sector funding, Australia will miss another opportunity to step up as a player in the global technology sector.

Topics: Banking, Start-Ups

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