Australian venture capital model emerges

AUSTRALIA’S venture capital industry is fast catching up with its overseas counterparts.

The venture capital industry is a vital one needed to help small firms expand to the next level.

Venture capital has provided a major boost for US ventures,

particularly in the information technology sector.

In the US, securing a venture capital backer, such as the Silicon Valley Bank or Blumberg Capital, is considered vital to gain credibility.

Such backing is also seen as a prerequisite for listing on stock exchanges such as the NASDAQ.

It also provides a foot in the door with distributors.

Bill Gates, who was not short of funds even in the early days, sought venture capital backing to give his fledgling Microsoft company more credibility.

The Israeli push into the IT world has largely been the result of government-funded venture capital.

The Israeli government set up incubators to move small, high-tech ventures past the initial start-up phase.

The ventures are given about three years to find their feet then turned out of the nest to make their fortune.

Australia’s high capital gains tax rate has previously meant venture capital funds were thin on the ground – particularly in WA.

However, with CGT cuts in the offing, things are looking up.

A distinctly Australian venture capital model also seems to be emerging.

In the US, venture capitalists look at the calibre of the management teams behind the ventures. In Australia, venture capitalists tend to put their own team in place.

Instead of the venture capital fund giving ‘market cred’, Australian venture capitalists make sure the product can do that on its own.

Zernike Australia managing director Peter Why said simply throwing money at a company was not an answer.

“We look at the personnel. Who is behind the idea? Are they easy to work with?” Mr Why said.

“We have to make sure the people involved can deliver in a business sense. Then we look at the finance that is needed.

Allen Buckeridge Asset Manage-ment chief Roger Allen said his group took a hands-on involvement with companies.

“We help with management, recruiting and marketing. We help

to design stock options for the companies,” Mr Allen said.

“Often we are luring people away from big packages. People are going from $500,000 a year to $100,000 a year plus equity in the company.”

Mr Allen’s company is currently acting as investment manager for the Ord Minnett-sponsored Bluepeak venture capital fund.

Millhouse IAG corporate analyst Colin Kinner said, when a venture capital fund made an investment, it also wanted at least one board seat.

“We don’t give the company the funds in one hit, we set up payments on a milestone basis,” Mr Kinner said.

“We usually work on a ratchet mechanism where, if the founder doesn’t meet milestones, his or her equity can be diluted. By the same token, exceeding the milestones means their equity is increased.

“There is also a lot of training now to improve the business skills of entrepreneurs.

“Those sort of skills are not readily available in Australia except in a handful of companies.”

l This is the first in a series of articles on the venture capital industry.

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