12/08/2010 - 00:00

Investors holding all the cards as state’s innovation sector plays patience

12/08/2010 - 00:00

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Time is money, but research takes time. It’s the paradox facing innovative entrepreneurs across the state attempting to source capital to commercialise their ideas.

Investors holding all the cards as state’s innovation sector plays patience

EVEN in today’s world of instant gratification and the ever-quickening pace of information growth, the key virtue for the venture capitalists and innovators of business is patience.

Rome wasn’t built in a day, so the saying goes, and it takes much longer than that for a new technology to go from concept to commercialisation, according to the executives at a recent WA Business News boardroom forum.

Trying to communicate that need for patience to investors is a crucial challenge for those wanting to commercialise new technology, Coretrack chief executive Nanne van ’t Riet says.

Mr Mr van ’t Riet told the forum a lack of patience displayed by investors in Western Australia was a real challenge for a technology-based company, as most unsophisticated investors didn’t understand the timeframes surrounding the commercialisation of a new idea, and were instead expecting a fast return for their dollar.

Coretrack has been researching and developing its drill rod technology for application in the oil and gas industries since 2005, and is currently poised to commercially market its real-time drill core measurement tool, known as a Core Level Recorder System.

“Research and development, new technology, it takes time,” Mr van ’t Riet said. “We have been very open and up front in saying ‘we have new technology, it is going to take time to develop’, but people’s memories are very short, people miss opportunities as they see it in the market.

“That is a very difficult battle, particularly if you are trying to grow the company and attract new capital because retail investors in particular have a very short mindset, whether that’s driven by their brokers or their own expectations of a quick return, and that is difficult to manage.”

Mr van ’t Riet said Coretrack had been able to attract its required capital by constantly updating investors, keeping them informed and keeping confidence up on both sides.

But he said there was another challenge inherent with developing new technology to be applied in high-risk/high-reward industries.

“On the one hand there is attracting capital, but the second bit we find in oil and gas, when you’re talking about big projects, expensive wells and you’re trying to introduce new technology here, to be the first one to run a particular technology, in our case you run a particular tool or piece of equipment, everyone says ‘yeah we want that, but why don’t you run it on his well first?’” Mr van ’t Riet said.

“That’s a practical issue, and we’ve overcome that effectively but that does take time, dragging people along, getting them comfortable, technical due diligence, whatever you need to do.

“If somehow that process could be facilitated, that I suspect for companies like us would be a huge benefit.”

The Valley of Death

In the state’s venture capital sector, not all companies can display that required patience, or demonstrate a commitment to keep investors in the loop.

CSIRO group executive in energy, Beverley Ronalds, said the time factor between the genesis of an idea and its appearance on the market could be a difficult exercise in balance that needed the support of higher education and government institutions; otherwise, she said, companies risked falling into collapse, with the technology never seeing the light of day.

“Institutions like the universities and CSIRO, we really want to get more involved,” Dr Ronalds said.

“We talk a lot about working with the smaller companies as well as the larger companies and it is the balance, always, of that time factor.

“Research is a long timeline, and the ‘valley of death’ as everyone calls it between the researchers’ idea and something that is sufficiently less risky to take to market is a real challenge.

“It is not easy, we have examples of where it works but we really need ongoing effort and incentives to really bring the parties together around these key areas of strength, we can’t do it in all of these areas.”

Curtin University chemistry and resources precinct executive director Mark Woffendon, who was former chief executive of institutional research organisation the Parker Centre, said studies of cooperative research centres indicated the period from the identification of new science to the commercial application of that science was an average of nine years.

He said that time frame needed to be understood better by the capital markets in WA to advance new technologies and develop a knowledge economy.

“For the research organisations there needs to be a sense of stability in terms of that funding arrangement, which is quite important,” Mr Woffendon said.

“We’re employing people, we’re engaging students on three year phDs and so forth, we need to have that element of stability in the overall innovation system.”

Access to capital

Ernst & Young senior partner, Robin Parsons, who is an adviser specialising in accounting processes for research and development and new technology firms, agreed that the lack of patience was a real factor in the competition for capital with other more-established sectors of the economy.

In WA, Mr Parsons said, the majority of investment capital was centred on the resources industry.

“The capital is here, albeit it goes through peaks to troughs from time to time. The lack of patience is a real factor,” Mr Parsons told the forum.

“The fact that investors need to see a plan around a return very quickly tends to favour the miners, not necessarily correctly, but the miners sell a better story.”

Australian Venture Consultants principal consultant, Larry Lopez, who has been in Australia for four years, said convincing investors to apply their methodology to technology and life sciences was very difficult.

“It’s not that there’s not capital floating around West Perth, there’s probably as much capital as there is floating around Sand Hill Road [in Silicon Valley], the ability to get those investors comfortable with technology and the patience it requires is a big challenge,” Mr Lopez said.

“It is scary that that hasn’t changed and in fact it’s gotten worse since I’ve been here.”

To combat the competition for capital from the mining and resources sector, technology companies have been forced to look outside their domestic borders in order to raise the capital necessary to advance their ideas.

Alexium executive chairman Gavin Rezos said there was money for high-risk/high-reward ventures in Western Australia, but that capital had to be replaced quickly, usually by an overseas source.

“You can start something here but at some point you have to look at getting it out of WA, because you will not get the development capital to take it to the next level,” he said.

“On the unlisted side, we don’t have a deep venture capital market in WA, or Australia for that matter, so there is a limited choice of who you can go to, and it’s a club.

“So if you’re going there with a concept to fund you know you’re not going to get the best deal you can get than if you went international.”

Carnegie Wave Energy managing director, Michael Ottaviano, said the capital market in Europe and North America was much more mature and more sophisticated, particularly for renewable energy concepts.

“We’ve stopped looking so hard in Australia, we’ve recognised that Europe is probably a better place for us as a company,” Dr Ottaviano said.

“You’ve had a carbon price for years, you’ve got renewable energy standards, you’ve got in half a dozen European countries wave energy feed in tariffs, wave energy targets, wave energy growth programs, and they just get this stuff.”

But Dr Ottaviano said despite Carnegie’s ambitions of chasing capital in Europe, there was still a natural strength in being based in WA that gave the firm a competitive advantage.

“We’ve got a pilot plant facility that would be extremely difficult to replicate in Europe, and we’ve got a phenomenal demonstration facility out the back of Garden Island that would also be extremely difficult to replicate in Europe, so our idea or goal would be to maintain both of those as the core of the company,” Dr Ottaviano said.

Natural strength

Mr Parsons said the natural strength of the WA economy was the mining and resources sector, but the mining industry was not necessarily a competitor to innovative venture capitalists and technology firms, rather it provided an avenue for the growth of a knowledge- and technology based economy in WA.

“The mining industry is painted poorly, I think some of our best innovation and our best science is embedded in there,” he said.

“People exploit marginal resources and I think we’ll see far more of that as the easy deposits are probably gone.

“I think there is a bit of a sales job for mining to do that. WA has a fantastic natural strength, partly because of our lucky endowment but partly because of the people and skills we’ve developed.”

Nearmap non-executive chairman Rob Newman said there was a larger parallel between mining companies and technology companies than many would expect.

“The only difference is instead of running out of resource it just becomes the walking dead,” he said.

And according to Dr Ottaviano, a natural strength in WA, partly due to the size of the mining industry, was the availability of skilled workers in technology-based fields.

“Carnegie’s technology is an offshore subsea mechanical system, and the best people in the world at subsea mechanical are generally in Perth because of the oil and gas industry,” Dr Ottaviano said.

“Now we can’t compete on a salary basis for that talent, but we can offer them a very attractive workplace and a very attractive sector and that’s what we do, we get a lot of our staff coming from fossil fuels into our company because of what we offer, and they are highly skilled people that we wouldn’t be able to attract in Europe because they’d cost twice as much.

“So there is a real competitive advantage for us to stay here, but the sophisticated capital in our sector is in Europe and the marketing capital is in Europe.”

Mr Woffendon said it was a matter of leveraging this natural strength, and creating a knowledge-based economy in WA.

“There is no reason we should not see Perth, which is blessed by being in a state which has an abundance of natural energy and resources, a state blessed by having a culture which embraces those industries, blessed by having very strong research capabilities, blessed by having a very strong business capability, we should aspire to being the best in the world in minerals research and education to support then, a much stronger venture capital base of activity as part of the future of Perth.

“Other cities are doing it, Aberdeen, Stavanger, Houston are doing the same, so why can’t we be doing it?”

Designing high-tech fabrics that will help soldiers during biological and chemical warfare may seem an unusual niche for a Perth company to be pursuing, but that is precisely what Alexium International Group is doing.

Alexium is a product of Australian capital and commercial management combined with technology developed by the US military.

The company is listed on the Australian Securities Exchange, after the shell of former winemaker Evans & Tate was used for a backdoor listing of the technology business.

Current Alexium chairman Gavin Rezos, who is principal of Viaticus Capital and has a history of investing in and managing technology businesses, put the deal together.

Alexium’s reactive surface technology can be used for multiple applications including waterproofing, oil proofing and UV protection of textiles, paints, glass and other materials.

Mr Rezos said the US military had invested about $US30 million in the RST technology.

The company has signed agreements with the US defence department and the technology’s inventor, Jeff Owens, to gain global rights for the technology in exchange for sales royalties.

Since March, when the technology acquisition was completed and ETW relisted on the ASX under its new name, the company has passed several milestones.

It has formally entered into a cooperative research and development agreement with the US air force’s airbase technologies division, focused on expanding the applications of RST technology for military products.

In April, it was shortlisted to provide the chemical protective suit for US air force’s joint fire integrated response ensemble – which is jargon for describing a suit that enables fire fighters to respond to emergencies in a contaminated area.

In June, the company commissioned its first textile-coating unit at North Carolina State University, in a bid to demonstrate the energy, financial and environment advantages of the RST technology.

The latest news, announced last month, was that Alexium completed the first sales to the US defence department of textiles treated with its reactive surface technology.

Alexium’s US-based chief executive Steve Ribich said the military sales demonstrate the technology’s capability for potential commercial customers.

Nutting-edge drilling technology developer Coretrack is set to break free of its R&D tag with the imminent release of its flagship product.

Since the Perth-based company’s inception in 2005, and subsequent listing on the ASX, the main focus has been on bringing its oil and gas-coring tool to the market.

The Core Level Recorder System was developed in response to the uncertainty around existing processes and is expected to significantly reduce exploration risks.

The CLRS will enable real-time measurement while coring, including immediate core jam notification and improved core recovery data.

It is estimated that the oil and gas industry spends up to $1.7 billion on coring each year.

Despite early challenges surrounding issues with wind and heat resistance of the CLRS, Coretrack managing director and chief executive Nanne van ’t Riet was named the inventor of the year by the Western Australian government in 2007.

Before his appointment at Coretrack, Mr van ’t Riet negotiated multi-million dollar oil and gas infrastructure contracts for Qatar Petroleum.

Fast-forward to earlier this year, and the acquisition of Warren Strange’s company Globe Drill means Coretrack is well placed to take advantage of the growing energy market.

Mr van ’t Riet said at the time that the acquisition would allow the company to provide “uniquely tailored drilling services to the broader energy and mineral sectors, including the rapidly expanding geothermal energy sector”.

Mr Strange, an industry veteran of 34 years, built 14 rigs under the Strange Drilling banner, which he sold for more than $30 million. He has been appointed executive director of Coretrack and general manager of Globe Drill.

In March of this year, Coretrack completed a $3.4 million capital raising, which was underwritten by Cygnet Capital.

However, Mr van ’t Riet told WA Business News there were still hurdles on the horizon.

“We’ve got all of the financial expertise to come up with good solutions, we just for some reason can’t get governments, whether its federal or state, to buy into that,” he said.

The first drill rig is expected to be operational by the second quarter of the 2011 fiscal year.

NearMap chairman Rob Newman has a very simple description of the company’s goal: to put Google Earth out of business.

Whether or not the Perth company gets there, it certainly gives NearMap focus and an aspiration.

NearMap is a PhotoMap media company, and says its competitive advantage is the ability to supply frequently updated photo and terrain maps in very high resolution at a fraction of the cost and time of other systems.

It regularly covers 75 per cent of Australia’s population with PhotoMaps and its images of the five largest cities are updated monthly.

The company has already started earning revenue from sales of its maps to government agencies; in the year to June 2010 it generated sales of $2.3 million to 28 clients.

This market in Australia is estimated to be worth $56 million per year, while globally it could be worth $2.8 billion.

The longer-term goal is to also generate revenue from the media market, including through location-specific advertising.

An impressive commercial and technical team has been assembled to pursue these opportunities.

The company’s founder and the technology’s inventor, Stuart Nixon, has been involved in the geospatial industry for 20 years. He sold his previous business ER Mapper to the multinational Erdas group in 2007.

NearMap’s chairman Mr Newman also has a track record of developing and selling successful technologies.

Financial support comes from listed company ipernica, which bought NearMap in 2008.

NearMap’s latest move was the recruitment of a new chief executive Simon Crowther, who comes from an international media and sales background.

His appointment will allow Mr Nixon to focus on technology development.

The technology that sits behind the business includes an aerial camera system, a supercomputer based processing system and distributed web-serving technology.

The take-up of NearMap products has been fastest among local and state government agencies, including those in road and environmental management, police service and land planning.

One of the major challenges for the business is preventing unauthorised use of NearMaps images, and in that area the business is able to draw on ipernica’s expertise in litigation and legal processes.

The idea behind wave technology is simple, according to West Perth-based Carnegie Wave Energy – it is a renewable energy that can power the world twice over.

And it forms part of an industry estimated to be worth $US500 billion by 2020.

Since listing on the ASX in 1993, Carnegie has been at the helm of wave energy technology development.

The company plans for its five-megawatt wave energy project off Garden Island launched this year to become the first commercial scale wave energy unit operating in Australia.

The project is expected to save 500,000 tonnes in greenhouse gas emissions and generate power for 3,500 households.

Earlier this year Carnegie won the WA Sustainable Energy Association developer award for the project, highlighting its key point of difference to its competitors – a fully submerged operation.

Carnegie’s technology also won the support of the Victorian government earlier this year, which granted an investigation licence to explore three potential wave energy sites. It was the first wave energy company to be awarded the licences.

The company’s east coast expansion continued this month after being granted a wave energy licence from the New South Wales government.

The three-year licence will allow Carnegie to investigate the potential of a project on the NSW south coast.

Carnegie chief executive Dr Michael Ottaviano told WA Business News the company was the largest employer in the wave technology industry in Australia, affording it a competitive advantage, particularly in WA.

Dr Ottaviano joined Carnegie in 2006 and has been instrumental in securing state and federal government support of the technology, including a $12.5 million grant from the WA government’s Low Emissions Energy Development fund in 2009.

Yet Dr Ottaviano conceded that Europe was shaping up as a “better place for us as a company” due to its advanced technological capabilities and “sophisticated capital”.

“We’ve put in place a very important strategic partner for us in Europe, one of the world’s largest power generators, Electricity de France,” he said.

“Deliberately we’ve gone for a large partner, but the market there is just so much further down the track in this space.”

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