System stifles venture capitalists’ enthusiasm

RECENTLY I was at a party discussing business with an inventor.

That tag may prompt an image of a wide-eyed zealot unable to get a pair of matching socks together. But in fact Bob (for the sake of anonymity) has admirable dress sense and is an experienced veteran of the game, with a number of products successfully commercialised.

The point of our conversation revolved around access to venture capital – the life-blood of the innovation process.

Bob’s current product – which is pitched at the global recreation market – has been out and available for the past two years. In that time it has totted up sales of 2,000 around the world, generating a turnover of about $1 million.

It can’t be counted as a success yet, but it is a good start.

Bob has just finished doing the rounds of Perth’s venture capitalists looking for another round of funding to cover the extension of his intellectual property protection in various markets. The bill for the extra legal coverage will be around $100,000.

The answer from the local VCs was “thanks, but no thanks”. Actually that is not quite true. A number of the firms were happy to invest but the price they wanted to extract took no account of the product’s progress, in Bob’s view, so they parted company.

It is a tale of frustration that many Australian innovators have experienced.

But given Bob’s track record, the fact that he has a product that is available and selling well, and the recent expansion of the local venture capital sector, the knock backs are even more frustrating.

Lamenting the availability of venture finance in Australia is nothing new, but this tale did set me thinking more widely about the position we find ourselves in ... not just Bob’s situation.

This party of 40-somethings (and above), with about 40 couples along, would have had a net asset value of probably $20-plus million. The vast majority would own their own home and probably had some other investments on the side.

In terms of what Bob was after, a quick whip around of the hat should have been able to turn up 10 lots of $10,000.

But while that clearly happens among some groups, it was not even on the radar in this situation.

Anyone with any surplus cash is many times more likely to be off to the real estate agents to pick up a rental property to negative gear it against their income.

Maybe the more daring have a bag full of T2 shares and are regretting the experience.

Given our tax system, the property option is probably the rational thing to do. But you get the impression that, in the same situation in the United States, party-goers would be quite comfortable with the idea of being approached.

In fact they may well be resentful if they were not offered the opportunity.

So while we have a reflex to whinge about our VC industry, which is still nowhere near up to speed, there is every good reason to go into the room of mirrors and have a good hard look at just what we are prepared to do to drive innovation.

And to contemplate the inanity of tax perks like negative gearing in the 21st century.

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