San Francisco

There is at least one area of bipartisan agreement in industry policy between the major parties in Australia – if Australia is to participate in the high growth, knowledge intensive industries driving economic prosperity around the world it must encourage venture capital.

Australian high tech entrepreneurs have long lamented the lack of crucial early stage financing from traditional sources of capital. The banks require bricks and mortar security that businesses based on the value of their intellectual property do not have, and the public equity markets cannot stomach the risk associated with companies that are still embryonic.

After toying with the idea of attempting to re-establish a second board on the Australian Stock Exchange, the Government in 1997 announced the establishment of the Investment Innovation Fund. It will provide $130 million of taxpayers' money to be matched by $70 million of privately raised finance, to be managed by five licensed fund managers. The Opposition has indicated its support for the scheme.

The idea is to try to emulate the US venture capital funds that last year invested $US12 billion in high tech companies, and link Australia into the apparently self-sustaining wealth creation machines in places such as Silicon Valley and Route 128 outside Boston. Like Israel before it, Australia wants to integrate its financial and high tech entrepreneurial assets into the global market for knowledge-based industries, which is driven out of the US.

These are the industries that have driven economic growth in the US over the past decade. They were responsible for 41% of US economic growth in 1995 alone. Without them, it is hard to see how any developed economy can develop high paid jobs to replace those that are disappearing in the semi-skilled and skilled trades being replaced by technology and the globalisation of manufacturing.

And without a model for funding them, it is hard to see how Australia's intellectual capacity for creating ideas can ever be turned into industries.

But while as Australia is attempting to re-create the Silicon Valley institutional framework to provide the crucial financial ingredient in the mix of entrepreneurs, investors and knowledge creators in the US, there is evidence emerging that the financing mix in that country might be undergoing a fundamental shift.

Research by the Center for Venture Research, a world-leading researcher into private investors, or business angels, suggests venture capital firms in the US are moving up the food chain away from seed and start-up funding into later round, shorter term investments. See article How Angels are Giving Flight to the High Tech Boom and An Audience with Professor Jeffrey Sohl.


What does this mean for Australia's attempts to create a financing environment for its own high tech start-ups? The five IIF licensees might be able to operate at the early funding point in the financing cycle that their US counterparts are apparently moving away from.

But at least two of the five are known to be struggling to raise their initial funds from Australian investment institutions, and some are seeking to attract some US investment money into some of their funds. The Israeli experience shows that their exit strategies will mandate that the companies in which they invest either list in the US or are sold to US-based technology companies, because the US is where there are the deep pockets that make possible the big capital gains their funds require.

This would suggest they will have to operate at least with an eye to US venture capital market mores, especially in terms of the time they can wait before cashing out of an investment. Otherwise, they will not be attractive as partners for US investment institutions that are increasingly requiring quick returns.

But the center's director, Prof. Jeffrey Sohl is not in favor of government attempts to create angel financing markets out of nothing. He says attempts by governments to create angel markets by making available seed funding themselves have overwhelming failed. He calls such attempts the "Field of Dreams" approach, based on the idea that if you build it, they will come. Typically, providing the first round of external investment through means such as grants has not had the effect of motivating private investors to follow with subsequent rounds of funding, leaving the start-ups to whither.

Better to mobilise the existing wealthy individuals to do it themselves, Sohl says, through methods such as awareness-raising. The Australian Government's Corporate Law Economic Reform Program released last year included moves to liberalise the investment information requirements for small companies trying to attract investment from high wealth individuals. This could provide a crucial building block for motivating more angel funding. Building on this with a concerted program to raise the profile of angel investments could well prove as important – and a rather cheaper – a policy initiative as the IIF.