03/07/2001 - 22:00

Kick-start for venture capital

03/07/2001 - 22:00


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AS the major political parties jostle for the moral high ground in the innovation debate, a new wave of smaller fund managers are moving rapidly to invest in start-up businesses which are too small to attract existing venture capitalists.

Kick-start for venture capital
AS the major political parties jostle for the moral high ground in the innovation debate, a new wave of smaller fund managers are moving rapidly to invest in start-up businesses which are too small to attract existing venture capitalists.

The tech wreck has left a legacy of wary venture capitalists holding close to $5 billion who are reticent to place this money with anything that is not squeaky clean.

While the Australian Venture Capital Association wants tax and foreign investment rules changed to give inventors and entrepreneurs a leg up, several WA players have recently emerged to fill this void.

This new breed of more hands-on fund managers includes Add Venture Capital, a new WA group able to invest as little as $50,000 in a start-up, a level it claims is lower than anyone else in the market.

It joins Venture Skills (headed by Rob Newman, a co-founder of QPSX Communi-cations) and Zernike Australia (a European offshoot run by Peter Why, a former manager of Bentley’s Technology Park).

Their timing may be good, with politicians in election mode falling over themselves to help make innovation investment happen.

This week, the Federal Government rolled out two senior players – Attorney-General Daryl Williams and Minister for Justice and Customs Chris Ellison – at an AusIndustry function packed with industry representatives to announce its first Innovation Investment Fund licence for WA and a $22.3 million investment.

The pair were covering for an absent Nick Minchin, Minister for Industry, Science and Resources, who was “tied up with the Prime Minister”, according to Senator Ellison.

The announcement followed Labor’s Monday release of its Knowledge Nation policy for the upcoming federal election, promising more R&D concessions and spending, among a host of other initiatives.

WA venture capital expert Dotcomsult principal Steve Brown, who helped put together Add Venture Capital’s prospectus, said the high level of funds being raised was struggling to match up with the people needing capital.

“Interest seems to have increased the amount of funds raised but not increased the follow through,” Mr Brown said.

“Entrepreneurs are still running around saying they can’t get enough money.”

Foundation Capital managing director Ian Murchison believes things are improving.

“A lot more money is being invested down the rung,” Mr Murchison said.

But he said there had been a big change in the way fund managers examined opportunities since the tech wreck, which has made it harder for entrepreneurs.

“The general thought is the industry is basically seeing there is a high level of investment but the fund managers are being more circumspect and driving valuations,” Mr Murchison said.

“It is thought they paid too much in recent years.”

Foundation Management (IIF) Pty Ltd is the beneficiary of the new IIF licence.

The move offers evidence that WA’s venture capital industry is growing stronger.

Matched by private sector investment of $13.4 million in the WA fund and a total of $162 million nationally, the IIF program is up to around $360 million.

The March survey by the Australian Venture Capital Journal estimated the Australian venture capital industry was worth more than $8 billion, of which $3.7 billion has been invested thus far.

But Journal publisher Victor Bivell believes venture capital funds are not like big cash boxes, with the money available simply a commitment by investors to provide funding if and when it is needed.

In the last quarter, 14 investments were made in WA but with a combined value of only $9.25 million, or 3.7 per cent of total Australian investmentswhich are a long way behind the US where venture capitalists compete intensely.

A record $131 billion was poured into US venture capital investments in 2000. By comparison, Australian investment was $1.14 billion.

The average amount raised by companies in the US was $21.2 million, while in Australia the average was just $2.18 million.

Australian Venture Capital Association executive director Andrew Green said there were significant amounts of money available, probably around $2 billion, but that did not mean there was an overhang of capital.

“A couple of major buyout transactions could absorb a fair chunk of that capital,” he said.

“Valuations are now very attractive to venture capitalists.”

Mr Green said it was up to the market to determine and, at the moment, Australian start-ups were disadvantaged because of the tax treatment of foreign investors and for staff who take options instead of cash.

“Remove all obstacles and let the market decide how much capital it needs.”

“To say that there are not enough deals suggests that there is a limit to human ingenuity.”

“There is a huge amount of intellectual property bottled up in places like the CSIRO.

“If just 10 per cent of their current research projects get funding, we could see a very significant jump in venture capital activity in Australia.”


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