Does Aus govt venture capital throw money at the wrong problem?

Does Aus govt venture capital throw money at the wrong problem?

Summary: Startups approach venture capitalists to expand, but early stage businesses keep running out of money before they get there. So why does the government fund startups at the VC stage if it wants them to succeed?

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Over the weekend, the Federal government announced another funding round of AU$350 million that will flow through its Innovation Investment Fund (IIF) and trickle through venture capitalists to startups. While any funding is welcomed by startups, some feel that the government is throwing buckets of money at the wrong problem.

Speaking to ZDNet, Roamz Founder and CEO Jonathan Barouch said that it was positive that startups were becoming an important focus of the government, but said that the funding was "too little, too late".

"The reality is, in the US, $700 million is one single, late-stage round for a technology company," he said.

"I think they'd be far better off working out other ways of unlocking venture capital, of getting wealthy individuals into Australia, and to help mentor the next wave of entrepreneurs."

Barouch argues that the Federal government shouldn't be trying to fund winners, even if it is via VCs that have more experience picking good bets, but to concentrate on encouraging private investors to help out startups earlier.

"What you really need to do is allow investors to have favourable treatment if they're taking risks and betting on Australian companies that are going to grow in the future," Barouch said.

"One way you might do it is ... if an angel invests in a startup on day one, write off the full amount of the investment. You put $100,000 in, and you get the equivalent of a $100,000 tax reduction."

There's too many companies in Australia that are failing simply because they ran out of money. That's not something you would see in the US.

Pollenizer, an online venture builder that helps grow startups in Australia and the South East Asia regions, has a similar line of thought. Its CEO, Phil Morle, told ZDNet that there's a gap in the startup lifecycle where entrepreneurs are left exposed in the lead up to when they are actually in a state to apply for venture capital.

"There is a gap, which is funding companies while they're discovering themselves and understanding what they are, and there's too many companies in Australia that are failing simply because they ran out of money. That's not something you would see in the US," Morle said.

He too wants to see private investors given greater tax breaks if the current funding situation changes; for example, due to a change in government after the next election.

"I'd definitely want to see private investors given some sort of tax concession for taking an interest in and financially, or otherwise, supporting early stage companies that need a yank up," he said.

"Our community has lit up a little bit this morning because there's been some references in the media to the fact that there's been some tax concessions for angel investors, but no one is quite clear on what that is."

Morle is referring to the Gillard government's Plan for Australian Jobs (PDF) announcement on the weekend, which promises new venture capital tax arrangements.

"Changes to venture capital tax concessions will provide incentives to private investment in startups, and help Australia to be a competitive destination for investment capital," the Minister for Innovation and Industry Greg Combet said in a statement.

The plan states that it will "improve tax treatment for private sector investors, and to facilitate increased investment in venture capital by domestic and foreign investors, managed investment trusts and 'angel' investors", much like the concessions that Morle and Barouch are arguing for.

But the new tax arrangements are actually enhancements to the existing Early Stage Venture Capital Limited Partnerships (ESVCLP) and Venture Capital Limited Partnerships (VCLP) programs, the new, full details of which are not yet fully available on the Department of Innovation's website.

What is known so far is that changes to the ESVCLP program will decrease the minimum investment capital required from $10 million to $5 million. In contrast, Pollenizer, which focuses on helping startups that fall in the "gap", raised $1.1 million from investors recently and has high hopes of being able to use just that funding to reinvest in its existing portfolio of startups, while generating new ones.

The known changes to the VCLP program are intended to make foreign investment more attractive, but still maintains the $10 million minimum.

At the ESVCLP stage, the risk has gone and you're basically asking for growth capital for something that is already proven.

Neither of the programs in their known state address the issue of bridging the gap, according to Morle.

"The gap is in how do you fund a business prior to the venture capital stage, where all of these initiatives start. The argument can be that at the ESVCLP stage, the risk has gone and you're basically asking for growth capital for something that is already proven."

Shadow Innovation Minister Sophie Mirabella has also expressed her frustration at the lack of clarity around the proposed tax breaks, and would have to wait until the proposals are formalised before assessing it.

"We will assess any detailed proposal and the bills presented to the Parliament, but at the moment, the funding basis for the Prime Minister's package is unclear and creating confusion. The Prime Minister needs to release and explain the financial modelling used for all the promises made in the package," she told ZDNet in a statement.

In the meantime, Barouch warned that if Australia doesn't pick up on the opportunity it has been handed, it could miss it altogether.

"We've got a huge opportunity. We're right next to countries where the internet is exploding, and smartphones are the first taste of the internet all across Asia. We'd be kind of silly to go from the mining boom to nothing when there's clearly a tech boom happening, and Australia's in a wonderful position to capitalise on it."

Topics: Start-Ups, Government, Government AU, Australia

Michael Lee

About Michael Lee

A Sydney, Australia-based journalist, Michael Lee covers a gamut of news in the technology space including information security, state Government initiatives, and local startups.

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3 comments
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  • Government gambling with the tax payers' money

    Not a good idea. Period.
    D.T.Long
    • Helping innovative companies at seed stage is immensely important!

      @D.T.Long - Sir, you could not be more wrong. This type of attitude, so ingrained in our society, is responsible for our national failure to develop a viable technology industry, and to diversify or economy away from mining and agriculture.

      The government wastes billions of dollars annually on failed programs such as the Home Insulation scheme and many others. There are many examples of these *monumental and costly* failures. Such spending by both the federal and state governments is all about politics and has virtually no potential for growing jobs and improving our economy.

      Providing support for small (even tiny) highly innovative companies is vey different. The best way to understand this is to look at Silicon Valley / San Francisco Bay area in the US, where I lived for a number of years.

      At any given point in time there are over 25,000 start-up companies, each employing 5-10 people on average. Many, in fact most of them, never make it. But wile on a microscopic level you may perceive this as "failure", on a macroscopic level, these companies are the innovation engine of a $500 Billion (yes - that's half a TRILLION dollars!) local economy - that's 30% more than all of Australia's mining exports, and almost 40% of the total Australian GDP generated in an area the size of greater Sydney!!!!

      Silicon Valley companies like Apple, Intel, AMD, eBay, Oracle, HP, Yahoo, Adobe, Google, Cisco, Facebook, LinkedIn, Symantec, WesternDigital, SanDisk, Nvidia, Salesforce - these globally prominent giants - all started as a 2 or 3 man start up, often in somebody's home or garage. That's how *all* companies start - as tiny little seeds. The real question is what do you do with these seeds. In the US seed companies are nurtured, supported by a massive ecosystem of experience and a huge pool of capital. Venture capitalists in the US invest over $30B a year, with another $20B coming from angel investors. While the risk/reward balance needs to be right (and Australia is in dire need of tax reform in this regard), a perhaps more important issue is a cultural one.

      Australian investors, to be blunt, don't "get" technology - both at angel level and VC level. The only way to change this is to have successful tech entrepreneurs who will re-invest into other start ups. This, of course, is a chicken-n-egg situation. The only way to rectify this is though *large scale* government support, from seed level up. In my view this does mean direct dollar spending by the government, not just tax breaks for angel investors (though you need this too). And no - this is not about picking winners. It's about creating an ecosystem of commercial innovation and entrepreneurship that over time will create immense value for all Australians.

      The benefit of the above may be obvious, but is worth spelling out:
      (1) Huge job growth, and not just nerdy tech jobs - for every tech job in Silicon Valley there are dozens of well paid jobs in retail, restaurant, hospitality, banking, building construction, building maintenance, etc, etc, etc.
      (2) Diversification away from mining - we desperately need this. While the miners may paint a rosy picture, the end of the mining era is clearly in sight. Our total dependence on the mining dollar makes our economy immensely vulnerable.
      (3) National self-sustainability and security - in our daily existence we rely on tech as much as we do on raw materials and food, yet as a nation we have virtually no capacity to create and to make the tech. This is a serious problem.

      But back to the question: Is government spending on tiny companies equivalent to gambling with taxpayers' money? ABSOLUTELY NOT - IT IS A NECESSITY! Anybody who fails to comprehend this is doing us, as a nation, a great disservice.
      T.W.
  • It's Not About Whether Those Companies Succeed Or Fail...

    ...it's what they spend the money on. Money doesn't disappear: it goes round and round. Even if these startups go bust, they still had to spend funds on salaries, utilities, rent, equipment purchases and all the rest. All that keeps the wheels of the economy going round, so it doesn't go to waste.

    As a private investor, you worry about your own profits and losses; as a Government, you take a holistic view. That's what taxes are for.
    ldo17