The upcoming Federal Election and the continued need for government support of innovation in Australia gave me pause to reflect on how government innovation policy has changed over the past twenty years.
The environment leading up to 2000
Back in 2000, when the idea of establishing Uniseed started being discussed, Australia had been through a decade-long bull market, with mining and agriculture as the major investment classes. The dot.com bubble also meant technology was becoming more widely accepted as alternative investment option. Australia’s scientific research was already recognised as on par with the best in the world, so it made sense that it should produce some great commercial opportunities.
Despite this favourable backdrop, the Australian venture capital industry was still very immature. The Australian Government had backed the first Innovation Investment Fund (IIF) managers in 1998 with a $200 million investment, but there remained a low pool of venture funds — particularly for early stage investments. At the time, early-stage venture capital represented just 1% of Australian Gross Domestic Product (GDP) compared with 4% of GDP in the United States.
In addition to IIF, the START grant scheme was in place, providing matching funding for investment to support the commercialisation of Australian research. There was also an R&D Tax Concession in operation, whereby R&D investment was 125% deductable — though only after a company became profitable.
Despite this, technology developed in Australian research institutes was not being funded to a significant extent. Put simply, Australian venture capital funds were not interested in university technology or seed-stage investment because it was too early and too risky. Research-based ventures had historically been poorly organised, had intellectual property that was poorly defined and managed, had high science and people risk and needed intensive hands-on assistance. There was excellent Australian science, but virtually no assistance to commercialise it. Uniseed was established in October 2000 to bridge this gap.
The investment landscape 2001–2005
In 2000, the dot.com bubble burst. The subsequent economic downturn saw the Federal Government introduce several initiatives that were critical for assisting innovation and for Uniseed in its early years.
Four further IIFs totalling $160 million were established in 2001. That same year, the Government supported the establishment of four new Pre-Seed Fund (PSF) managers (totalling $100 million) that were designed to invest in companies spinning out from universities and public sector research organisations. The program had a significant positive impact on the availability of pre-seed funds in Australia — as both the first investors in new start-ups, and as follow-on or co-investors in already established startups.
Unfortunately, the PSF scheme was not renewed. The ethos behind the scheme was flawed in that it assumed that an earlier, riskier fund would make a significant return on capital over 10 years at a time when later stage venture funds in Australia had been unable to do so. Another disappointing aspect of the PSF scheme not being renewed was that a number of VC managers who had learnt the trade were lost. In addition, the IIF scheme was not supported again for many years — eventually being resurrected in 2007.
Other schemes, such as the introduction of the $40 million Biotechnology Innovation Fund (BIF) and Venture Capital Limited Partnerships (VCLPs) — saw the pool of venture capital in Australia grow rapidly. From a level of $230 million in 1999–2000, capital levels reached $478 million by 2000–2001, and continued to grow in subsequent years.
But despite the growth in VC funds, there were still limited funding options for early stage university spin-outs and follow-on rounds were usually at or close to flat valuations due to the limited pool of capital. It was still a “buyer’s market”.
2006–2010: A Near Death
One of the biggest negative events for the innovation sector over the next decade was the collapse of Lehman Brothers in September 2008 and the onset of the Global Financial Crisis (GFC). Investment funding availability dried up considerably as funds moved away from riskier alternate assets and into safe havens.
Notably, the GFC came on the back of the axing of the Commercial Ready grant scheme in May that same year — CommReady being the grant scheme that effectively replaced the START and BIF schemes. This left many small growth companies in the difficult position of having to secure alternative private funding quickly which was not an easy feat.
Despite this, the negative economic environment produced some positives. Following the resurrection of the IIF scheme in 2007, two further IIF managers were supported (a total of $90 million in capital). In 2009, the Federal Government provided further IIF funds and also introduced the Innovation Investment Follow-On Fund (IIFF) — a pool of $83 million made available to 20 venture managers to support companies after the GFC.
2011–2015: The Recovery
The introduction of the refundable R&D Tax Credit in July 2011 provided a further boost, with a 45% cash rebate on eligible R&D for non-profitable companies with turnover below $20 million. This has proved to be by far the most important scheme for start-ups as the relative certainty of the rebate means that start-ups can plan their budgets around this.
However, in 2014–15, scientific research funding was cut to less than 0.6% of GDP and the Government also commenced reduction of the R&D tax credit from 45% to 43.5% in July 2016 and then cut again in 2018 from 43.5% to 41%. Further cuts were also proposed by linking the rate to the company tax rate, though this has been deferred until a later review.
On the positive side, changes were announced to the Significant Investor Visa Program in 2015 to mandate that $500,000 of the $5 million investment application fee needed to be invested into alternate assets such as venture capital. The National Innovation and Science Agenda also set a focus on science, research and innovation as long-term drivers of economic prosperity, jobs and growth, with $1.1 billion committed over four years to 24 measures.
In 2014 and 2015 the mood changed considerably, following high value deals by Fibrotech Therapeutics (sold to Shire for US$75 million plus milestone payments), Spinifex Pharmaceuticals (sold to Novartis in a US$700 million deal) and Hatchtech (sold to Dr Reddy’s Laboratories for US$200 million), which returned significant capital to shareholders.
Atlassian’s IPO on the Nasdaq in December 2015 — the largest float from an Australian company on US markets — was also heavily oversubscribed, further demonstrating that Australian technology was an attractive investment class.
On the back of these deals and incentive schemes, there was a groundswell of interest in innovation and entrepreneurship and the mood of the Australian economy shifted positively. Entrepreneurship became fashionable, and some superannuation funds have returned to support venture capital.
All major research organisations now have programs in place to support innovation, including incubators/accelerators such as CSIRO-ON, UNSW’s 10X, USyd’s Incubate, UQ’s iLab and UniMelb’s MAP and TRaM.
However, we have an election looming and we should be nervous that once again innovation will be an easy target to achieve the desired fiscal result. Look at the past as a lesson. In 2004, the START grant scheme morphed into the CommReady Scheme after a change in Federal Government, whereby the START and BIF schemes were absorbed into the new scheme. This started an alarming trend over subsequent years where each new Government (with each change in political party) would to throw out the old scheme and introduce a new, slightly less friendly and less generous grant scheme. In each case, the changeover was tedious and provided uncertainty to start ups and investors. And let’s not get into the tinkering with the R&D tax credit over the years … enough has already been written by others about that.
So, it is with some trepidation that I view the agenda for innovation policy following the Federal Election in May. Let’s hope that the elected government doesn’t follow the same route as previous governments have in the past and introduces new and better ways to support the innovation sector in this country.