RESEARCH INTO INDUSTRIAL TECHNOLOGY POLICY TRENDS IN AUSTRALIA - ASSISTING THE CREATION OF NEW INDUSTRIES

Prepared for NEDO by Jane Ford & Associates, Canberra March 2001 rfco

02 000501 CONTENTS

1.0 VENTURE CAPITAL INDUSTRY AND GOVERNMENT POLICY 1970-2000 1 1.1 Venture Capital in the 1970s 1 1.2 Venture Capital in the 1980s 1 1.3 Management and Investment Companies (MIC) Scheme 2 1.4 Venture Capital in the 1990s 2

2.0 CURRENT STATE OF VENTURE CAPITAL IN AUSTRALIA 3 2.1 Current Size of the Industry 3 2.1.1 Industry Surveys 3 2.1.2 Australian Venture Capital Journal Survey 1999-2000 3 2.1.3 Australian Bureau of Statistics Survey 4 2.1.4 Comparison of AVCJ and ABS Survey Results 5 2.1.5 Sources of Venture Capital Funds 6 2.1.6 Conclusions on the Venture Capital Industry 7 2.2 Australian Venture Capital Organisations 8 2.2.1 Allen & Buckeridge Pty Ltd 8 2.2.2 Australian Mezzanine Investments Pty Ltd 9 2.2.3 Australian Bioscience Trust (ABT) 10 2.2.4 Hambro Grantham Ltd 11 2.2.5 Biotech Capital Ltd 12 2.2.6 Medica Holdings Ltd 13 2.2.8 Uniseed Pty Ltd 14 2.2.9 Australian Technology Group (ATG) Pty Ltd 15 2.3 Case Studies - Investee Companies 16 2.3.1 Alchemia Pty Ltd 16 2.3.2 Cytopia Pty Ltd 16 2.3.3 ExGenix Operations Pty Ltd 17 2.3.4 Pacific Knowledge Systems Pty Ltd 17 2.3.5 Proteome Systems Ltd 18 2.3.6 Redfern Broadband Networks 18 2.3.7 Technico Pty Ltd 19 2.3.8 Thrombogenix Pty Ltd 20 2.3.9 Xenome Ltd 20 3.0 GOVERNMENT VENTURE CAPITAL ASSISTANCE SCHEMES 3.1 .. Present Policy Towards Venture Capital 21 3.2 Pooled Development Funds (PDF) Program 22 3.3 Innovation Investment Fund (IIF) Program 23 3.4 Building on Information Strengths (BITS) Program 24 3.5 R&D Start Program 26 3.6 Commercialising Emerging Technologies (COMET) Program 28 3.7 State Governments 29

Tables 30, 31 1.0 THE VENTURE CAPITAL INDUSTRY AND GOVERNMENT POLICY 1970 - 2000

To understand the present day venture capital industry in Australia, it is necessary to know something of the Federal Government ’s policy towards venture capital and the growth of the industry from the 1970 onwards.

1.1 Venture Capital in the 1970s Australia’s first venture capital corporation was founded in 1970 with capital of less than $500,000 by a group of private investors, headed by Bill Ferris now chairman of CHAMP Ventures. Within two years a further venture company, Enterprise Management of Australia Corporation was set up with capitalisation of $1 million. Both companies had mixed fortunes and by the early 1980s had decided to sell off their investments. In the late 1970s, one of the pioneers of Australian venture capital, John Grant, formed a venture capital management company with Hambros Bank. This continued under the name of Hambro Grantham until only last year when John Grant retired and it was taken over by Colonial First State Private Equity Ltd. Also during the 1970s, National Australia Bank set up in partnership with Charterhouse of Britain and the AC Goode brokerage house. The partnership, Paternoster Partners, proved unsuccessful and was liquidated within five years or so. It took another 20 years before NAB entered the venture markets again. The Australian Industry Development Corporation (AIDC), owned by the Australian Government, also emerged in the late 1970s. The AIDC invested successfully in the wine and mineral processing sectors and in a number of smaller high technology companies, including Nucleus Ltd (part of which was the forerunner of the now highly successful Cochlear Ltd). However, many other AIDC investments in computer manufacturers, telecommunication suppliers and software developments were not so successful and by the late 1980s the company had pulled back from the venture capital market.

In the mid to late 1970s a number of the State Governments also entered the venture market, most with notable failure. The major state venture organisations were the Victorian Development Corporation, the West Australian Development Authority, the Queensland based Venture Fund, and the South Australia based Enterprise Investments. The success of these funds was highly variable and they were all badly affected by the 1987 stockmarket crash. All, except the Victorian Investment Corporation, were downsized or wound up. The Victorian Investment Corporation later collapsed amidst much scandal and led to the downfall of the Labor State Government of the day. Today State Governments try to promote venture capital in different ways such as by sponsoring technology incubators and encouraging domestic investment in newly emerging technology based companies.

1.2 Venture Capital in the 1980s By the early 1980s it was generally recognised that Australian entrepreneurial and high technology development was being seriously hampered by a severe lack of venture capital. This led the Federal Government in 1981 to establish the Espie Committee, headed by Sir Frank Espie. Its task was to consider and report on the problems facing high technology enterprises in Australia. The committee ’s 1983 report identified the lack of venture capital as the most serious problem facing the growth of the sector. It recommended, among other things, that the Government be the catalyst to developing a local venture capital industry by offering tax incentives to encourage investment in small businesses.

1 1.3 Management and Investment Companies (MIC) Scheme In 1984, acting on the Espie recommendations, the Government established the Management and Investment Companies (MIC) scheme. A strong champion of this move was the then Minister for Industry and Commerce, Senator John Button. The scheme's aim was to promote investment in innovate start-up technology businesses by financial, strategic and administrative assistance to venture capital investors. This was done by the Government issuing a limited number of MIC licenses to companies that could satisfy the Government ’s strict criteria. Over a period of two years licenses were granted to 14 management and investment companies. Between them they raised a total of $400 million over the scheme ’s eight year life and invested in over 150 companies. Among these MICs was First MIC Ltd, managed by Hambro Grantham, which raised $52.4 million; Western Pacific Investment Company Ltd (which later became Advent Ltd and is now KPMG Advent Funds Management Pty Ltd) which raised $29 million; and Continental Venture Capital Ltd which raised $95 million and is still in existence operating in the venture capital market Some of these licensees established parallel funds which effectively leveraged the MIC scheme further by attracting institutional investors.

By the end of 1986 the scheme had achieved moderate success, buoyed by strong growth in the economy. However, the stock market crash of 1987 had a serious negative impact on the MICs, which had only been investing for a short period. A major problem was that, due to the crash, most of the existing investee businesses required additional funding which restricted the capital available for other potential investments. The MIC scheme never recovered from the 1987 crash. Also, in hindsight, the scheme is thought to have been fundamentally flawed due to its structure. The up front tax deduction led to a separation of ownership and control of the funds and the incentive was realised by tax driven investors, regardless of the investment outcomes. Also, there were tight restrictions on how the funds could be invested which almost guaranteed the scheme ’s failure.

1.4 Venture Capital in the 1990s By the start of the 1990s, although there had been a substantial increase in the size of the venture capital market in Australia, due in part to the MIC scheme, the supply of venture capital was still thought to be inadequate by the Government. At that time the Australian venture capital market comprised some 32 different funds with a capital base of $794 million. In spite of the shortcomings of the MIC scheme, several of the MIC companies had invested in a number of what are now profitable companies including Cochlear Ltd and Vision Systems. Also many of the management teams built up then, such as at Advent, Hambro Grantham and Continental Venture Capital, formed the backbone of a new thriving venture capital business of the 1990s and are still key players in the venture capital industry. In 1991, concern about the lack of venture finance led to an investigation of the availability of venture capital by the Government ’s Industry Commission. The commission ’s report noted the lack of start-up capital and made reference to the reluctance of the banks and institutions to lend venture finance and also to the lack of venture capital management skills. The MIC scheme was closed down in 1991 and replaced by the Pooled Development Fund (PDF) scheme. However, this had only a marginal impact in the short term and the lack venture capital remained a source of concern for several more years. A report by the Bureau of Industry Economics, in late 1993, questioned the adequacy of Australia’s venture capital market, particularly for small to medium sized businesses. The report found that the existing venture finance companies were concentrating on later stage investments leaving a large gap in early stage investments for emerging companies.

The availability of venture capital improved from the mid 1990s onwards until, by the end of the century, the industry was very healthy and growing strongly, but with a continuing shortage of early stage/seed funding. The present Government ’s venture capital policy is directed mainly at overcoming this shortage. 2 2.0 CURRENT STATE OF VENTURE CAPITAL IN AUSTRALIA

2.1 CURRENT SIZE OF THE INDUSTRY

2.1.1Industry Surveys There is some disagreement over the exact size of the venture capital industry in Australia at the current time but members of the industry agree that it is growing rapidly and that availability of funds and total funds invested are at the highest levels ever recorded. Polliticon Publications, in association with Pricewaterhouse Coopers, undertake the most reliable surveys of the venture capital industry in Australia. Their latest survey, published in Polliticon ’s annual Venture Capital Guide 2001, estimated that a cumulative total of $7,393 billion of venture capital has been raised in Australia by 120 venture firms by the end of December 2000. Out of this, $3,546 billion has been invested in 1,113 businesses of which 766 are current portfolio companies, while 347 are completed divestments. A further $4,772 billion of raised capital remains to be invested. These figures were based on the responses of 135 venture capital companies listed in the Guide. The survey found that, over the past year, a significant and growing proportion of investment had been in early stage technology related businesses, including internet related enterprises. In fact, the past year has seen the highest levels of investment in early stage technology business investment since the early 1980s when there was strong interest in the high technology manufacturing sector. Following the 1987 stock market crash, interest in technology investment fall away. However since 1998 the highest investment growth area has again been in the high technology sectors. The Guide attributes the rapid growth in the venture capital industry over the past few years, particularly last year, to: • a growing awareness among institutional investors of venture capital as an asset class; • several Government programs to encourage the sector, including the Pooled Development Funds (PDF) Program, the Innovation Investment Funds (IIF) Program, and the Building on Information Technology Strengths (BITS) Program; • a growing number of private investment companies in the sector; • growing interest in technology investment in general; and • the desire of industries and regions to increase economic activity.

Other surveys - there are two other recent surveys providing useful insights into the Australian venture capital industry. Polliticon Publishers, in the September 2000 edition of the Australian Venture Capital Journal, released the results of a survey specifically covering the financial year 1999-2000. Also, the Australian Bureau of Statistics (ABS) recently released the results from its first ever survey of the venture capital industry. This attempted to identify and measure all venture capital companies, funds raised and investments made up to the end of June 2000. Some of the findings from both surveys are set out below. 2.1.2 Australian Venture Capital Journal (AVCJ) Survey 1999-2000 The AVCJ’s survey for the 1999-2000 financial year assessed the cumulative total of the industry in Australia and New Zealand combined, at 30 June 2000, as $8.52 billion. Of this, New Zealand accounted for $794 million (about 9 per cent). The total of $8.52 billion represented an increase of 45.3 per cent, or $2.66 billion, over the $5.86 billion recorded in the AVCJ’s equivalent survey for the previous financial year. It included $5.8 billion for funds under management by public and listed companies, plus a further $2.77 billion of venture capital managed by private and government groups. Investments in Australia, 1999-2000 - the survey also showed that a record $726 million had been invested in Australia during the 1999-2000 financial year, in a record number of 420 investments. 3 A further $265 million had been invested by Australian venture managers in 93 investments in New Zealand, Asia, Europe and the Americas, making a total of $991 million invested for the year. As a further indication of the growing interest in venture capital investments, a total of 135 firms responded to the AVCJ 1999-2000 survey, compared with 96 the previous year. The survey respondants included 86 fund managers and listed firms, up from 55 the previous year, and 49 private investment groups. Capital raised during 1999-2000 - new capital into investment funds increased by over 100 per cent to $1,954 million, compared with the previous year ’s $844.7 million. This new fund raising involved a total of 44 fund managers, compared to 21 in 1999. They following were among the largest fund raisers: • Castle Harlan Australian Mezzanine Partners, the most successful, who raised $520 million for their CHAMP 1 management buy-outs fund, of which $200 million was sourced in Australia; • Deutsche Asset Management who raised $305 million ; • Catalyst Investment Managers who raised $180 million; • Gresham Private Equity who raised $102.5 million; and • Allen & Buckridge who raised $100 million. 2.1.3 Australian Bureau of Statistics Survey The Australian Bureau of Statistic carried out its first ever survey of venture capital companies in 2000. The results of the survey, published in March 2001, showed that investors had committed a cumulative total of $4.9 billion of capital to venture capital funds by 30 June 2000. Of this, $2.6 billion had already been invested and $2.3 billion remained to be invested. It also identified 97 active venture capital managers, who managed 123 investment funds which had made 569 investments at the end of June 2000.

Investments in Australia, 1999-2000 - the survey found that during 1999-2000 the managers had invested $666 million in new projects plus a further $163 million in follow on funding in existing investments, giving a total of $829 million new investment in venture capital projects during the financial year. The funds also sold out from a number of existing investments during year, realising a total of $536 million. Other ABS survey findings The ABS survey looked at several aspects of the industry not covered by the AVCJ surveys. Its findings for some of these issues are set out below: • Structure & Organisation - unlisted companies were found to be the most common organisational structure accounting for almost half the investment vehicles, followed by trusts. Only 18 of the 123 venture capital managers were listed companies. However, by size of assets, trusts were the most favoured type of organisation. • Over half the venture capital companies did not or could not take advantage of government programs. Of the 123 managers, 47 were PDF’s (worth $568 million), seven (worth $91 million) had participated in other Government programs including the IIP and BITS. The other 69 managers had participated in no Government funding programs, but held the bulk of the assets ($2.2 billion),. • The Australian superannuation funds, which provided $1.7 billion of the $4.9 million venture funds raised, were the largest source of funds for venture capital. The second largest source of funds was from overseas investors (excluding superannuation funds) which provided $1,002 billion. Further details are shown in Table 1. • During 1999-2000, the venture capital companies invested $666 million in new projects, plus a further $163 million in follow on investments.

4 • Initial public offers accounted for over 60 per cent of exits from investments during the year. • Management and performance fees were major items of expenditure during the year with management fees charged regardless of the results. • Not surprisingly, the largest number of investee companies were located in NSW (244) and Victoria (171). of the remainder of the 569 76 were in WA, 43 in Queensland, and 13 in South Australia and 22 in other states and territories. • The figures also showed that investment managers usually spent more than one day a month with investee companies .

2.1.4 Comparison of AVCJ and ABS Survey Results Some cross comparisons of the findings of the two surveys are possible because the ABS adopted exactly the same definition of venture capital as the Australian Venture Capital Journal (in fact, the ABS definition was taken from the Venture Capital Guide, 2000 edition). The definition includes the statement that venture capital is “an equity investment in a private company ” and goes on to say “A venture capital investment can have a higher level of risk for the investor than other forms of investment because it is in a private company, and may have little or no security and limited liquidity”.

The ABS survey included investment managers taken from lists of participants in government programs such as the PDF and IIP programs, membership of the Australian Venture Capital Association Ltd (AVCAL) and from the Australian Venture Capital Guide as well as business directories and venture capital journals.

Polliticon Publications, who publish both the AVCJ and the Venture Capital Guide, have undertaken quarterly and annual surveys of the industry in conjunction with Pricewaterhouse Coopers for almost a decade. From an industry perspective, this is the most authoritative survey and the findings are highly regarded by the venture capital industry. In contrast the ABS survey is the first attempt by the bureau at examining the venture capital industry. It is also known that a number of managers declined to provide information to the ABS survey.

Total investments The ABS estimated cumulative total for venture capital funds is $4.9 billion, which is about 30 per cent below the Australian Venture Capital Journal estimate after taking out the New Zealand component. The two surveys also give different totals for the sums invested during financial year 1999-2000 with the AVCJ as $726million and the ABS as $666 million. The reason for the ABS figures falling below the AVCJ figures is almost certainly under reporting by the industry to the ABS survey. This is supported by the respective figures for the total numbers of respondents to the two surveys, which for the AVCJ survey was 135 and for the ABS survey was 97.

5 Sectoral distribution of investments Both surveys published sectoral distributions of investments. There are some differences in their respective sectoral definitions but cross comparisons are valid in seven major sectors. These are shown below with the value of investments in these sectors expressed as percentages of the total amount invested. ABS AVCJ agribusiness 2.4 2.2 construction 9.7 4.0 health/bioscience 7.9 8.2 IT/software 10.9 10 manufacturing 24.9 16.7 mining/resources 6.2 7.6 transportation 0.9 4.4

Bearing in mind that the ABS figures represent investments made over several years and the AVCJ figures are those for last year only, there are strong indications of a shift of investments away from the more traditional sectors of manufacturing and construction. The shift to transportation services presumably reflects the recent growth in logistical services. Overall, the largest investment sector in the AVCJ survey was in business services (17.3 per cent), which was split between several sectors in the ABS survey. The largest investment sector in the ABS survey was manufacturing. Both surveys identified IT/software. as the second largest sector for investment. Full details of the ABS sectoral results are shown in Table 2. Investment by stage of development Both surveys measured the distribution of investments by the stage of development. In their findings shown below, the ABS results are based on the 569 total investments whereas the AVCJ results are based on the 514 investments made during 1999-2000. In both cases the amounts invested at each stage are shown as percentages of the total amount invested. ABS AVCJ investments % value investments % value Seed 122 11.8 82 7.5 Start-up 183 26.6 199 28.0 Expansion 206 42.7 202 44.5 MBO/MBI 58 18.7 17 16.3 Others 9 2.4 14 3.8 Note: MBO is Management Buy Out and MBI is Management Buy In. ‘Other ’ includes turnaround and replacement investments.

These distributions show two key points. First, both surveys emphasise the low level of seed investment funding relative to the total investment funding. Second, they are surprisingly similar overall and give confidence in the validity of the other findings obtained from the ABS survey and described earlier.

2.1.5 Sources of Venture Capital Funds The ABS survey looked at the Australian sources of venture capital and their results are shown in Table 1. It found that Australian superannuation funds are by far the largest investors in venture capital funds, providing nearly half of the funds committed to venture investment by the end of the 1999-2000 financial year. Overseas interests and the banks are the next largest sources of funds. The Australian institutional investors include superannuation and retirement pension funds which have access to very large amounts 6 of capital as a result of Australia’s superannuation and retirement funding policies. However, the institutions have not always been significant providers of venture capital. In 1984, when the MIC scheme was introduced, there was virtually no investment by the major institutions in venture capital. The eighties saw some increase but this was largely destroyed by the 1987 stockmarket crash. However, by the mid 1990s institutional investments began to grow again, mainly due to Government intervention and exhortations from the then very influential Industry Minister, Senator Button. There was also increased involvement by overseas venture companies well used to the risks and benefits of venture capital investment in their home countries. A survey published in the AVCJ November 2000 edition estimated that, at 30 June 2000, thirty Australian institutions had made a total commitment of $4.15 billion to Australian and overseas venture capital. Twenty nine of these institutions had committed $1.93 billion to 133 managers in Australia while 17 institutions had committed $2.22 billion to 59 overseas managers. These figures represent a marked increase on those for a similar survey at 30 June 1999 which identified only 24 institutions with venture capital commitments of $1.2 billion in Australia. It found also that 16 of the institutions expected to commit a further $1.35 billion during 2000-2001, with $566 million earmarked for Australian managers. Examples of leading institutions and their venture capital investment include: • AMP Life Ltd which has committed 1.2 per cent or $517 million of its funds to the venture market in Australia and overseas. Of this $128 million is committed in Australia and $389 million overseas. Its Australian funds are distributed between two managers - AMP Henderson Global Investors Private Capital ($126 million) and Catalyst Investment Managers $2 million). • Government Superannuation Fund which has committed two per cent of its assets or $73.8 million to venture capital investment in Australia. This is spread between nine separate managers including Advent Funds Management ($4,8 million) AMP Henderson Global Investor Private Capital ($15 million), Castle Harlan Australian Mezzanine Partners ($15 million), Catalyst Investment Managers $15 million) and Technology Venture Partners ($4 million). • Australian Retirement Fund has committed 6 per cent or $168.5 million to investment by Australian managers. This includes $98 million to Development Australia Funds; $60.5 million to BCR Asset Management and $5 million to the Advent Management Group.

2.1.6 Conclusions on the Venture Capital Industry From these differing figures it can be seen that it is hard to place an exact figure on the size and investment mix of the venture capital industry. However, the AVCJ survey figures should be taken as the most reliable, given the length of time over which surveys have been undertaken (eight years) and the fact that each company is approached every quarter by the journal to provide figures for the survey. This estimates the total capital raised as $7,393 billion to the end of 2000. This sum is managed by 120 venture firms which have invested $3,546 billion in 1,113 businesses of which 766 are current portfolio companies. A further $4,772 billion of raised capital remains to be invested. It is clear that the industry is expanding rapidly, and, that it likely that there are more venture capital funds available than good investments to be made. This is in sharp contrast to a decade ago when there was a severe shortage of venture funds. There is still a shortage of funds in the seed capital area but this shortfall is being filled by schemes such as the R&D Start and BITS programs plus new funds such as Uniseed Pty Ltd which is being set up by Melbourne and Queensland Universities to provide seed funds for university research commercialisation. The largest Australia sources of venture capital funding, by far, are the superannuation institutions, and, there is no reason for this source to dry up as both political parties support the principle of greater self funding by individuals for their retirement. 7 2.2 AUSTRALIAN VENTURE CAPITAL ORGANISATIONS

This section describes the activities of some of the more prominent venture capital groups together with a list of their investments (investee companies). More details of some of the investee companies are given in section 2.3.

2.2.1Allen & Buckeridge Pty Ltd The company was set up in 1996 by two leading experts on the information industries and venture capital, Roger Allen, former chief executive of the Computer Power Group Ltd, and Roger Buckeridge, who founded one of the original MIC’s, CP Ventures Ltd. In total, the company has raised $220 million, including $100 million in 1999/2000. It manages four separate funds - including the A&B Innovation Investment Fund which is one of the first five IIP funds licensed by the Government under the IIP scheme. The company invests primarily in the information technology, telecommunications, and new media sectors. So far, it has invested $140 million of its total capital, in 25 separate companies and has around $80 million available capital for investment. Investments range between $3 million and $20 million and have been at seed, start up, early expansion, expansion and turnaround stage. It prefers companies which have intellectual property that is globally competitive, differentiated and sustainable or are value added services businesses. Companies must be based in Australia or the Asian region.

Allen and Buckeridge ’s investment portfolio includes: • Aurema - which develops resource management software for large Unix and NT platforms and markets its products in the US, Europe and Asia. It has recently made a major sale to Sun Microsystems. • eBioinformatics - which produces web based systems for the management and analysis of molecular biology and genomic information. The company has moved to the US but retains product technology development in Australia. • eChoice - an online financial services provider and developer of QuickSmart products and financial planning software. • NetStar - a leading Asia Pacific company based in Hong Kong that specialises in end to end network enabled solutions and services, focusing on eNetworks. • Grange Software Pty Ltd - which develops, distributes and supports software for contract administration and management systems and professional services for large scale complex projects. • Redfern Photonics - which was established by the Australian Photonics Cooperative Research Centre (CRC) in 1999in Sydney to commercialise the optical communications components and system technologies developed by the CRC. • Australian Gigahertz Network - which is a provider of broadband internet data services for deployment in selected Asian markets. • Southrocksoftware - which produces online education and training software through its eLearning technology platforms. • Vertical Markets - which was founded by Allen & Buckeridge in 1999 as a B2B platform management and infrastructure company which builds, manages and hosts eCommerce, providing common ecommerce infrastructure and management to facilitate business to business trading communities in the Asia Pacific region. • Wishlist.com.au - an integrated e-commerce platform providing corporate services, gifting and partnering with traditional retail companies.

8 2.2.2 Australian Mezzanine Investments Pty Ltd Australian Mezzanine Investments Pty Ltd (AMIL), now called Castle Harlan Australian Mezzanine Partners (CHAMP), was formed by veteran venture capitalist Bill Ferris and Joe Skrzynski in 1987 to focus on institutional funds management. The company launched its first fund, the AMIT No 1 Trust, in 1988. This was subscribed to by a small number of institutional investors and raised a total of $30 million. It invested in nine companies across a number of Australian and international industry sectors. The company launched its AMIT No 2 Trust in 1993 and raised $50 million. There were 10 investments focussed on internationally competitive companies experiencing export led growth as well as buy outs. The follow-up AMIT No 3 Trust was launched in 1997 and was oversubscribed at $82 million. Investors in the three trusts included the superannuation funds of leading Australian public companies, State and Federal Government authorities, industry superannuation funds and some successful venture capital entrepreneurs reinvesting their profits. For instance, the investor list included BHP Superannuation, Commonwealth Superannuation Scheme Board, Deutsche Asset Management Ltd, the Public Sector Superannuation Board, and the Retail Employees Superannuation Trust. A fourth fund, the AM WIN Innovation Fund, was set up in 1998, after winning one of the first five licenses under the Government ’s Innovation Investment Funds (IIF) Program. It is a joint venture with Walden International Investment Group of San Francisco and raised $42 million. It is dedicated to early stage investments in new technology companies. Walden International, has the ability to bring early stage companies from offshore, such as Australia, into the US product and capital markets and has offices in Hong Kong, Singapore, Taipei, Israel and Sydney. AMWIN’s first investment was in the then fledgling Melbourne based internet search engine company, LookSmart Inc. It listed on the NASDAQ and by November 1999 enjoyed a market capitalisation of $5 billion. AM WIN had invested $2.2 million in LookSmart in March 1998 and sold out in February 2000 for $245 million, showing a gross profit of $242.8 million - more than 105 times its original investment. After returning the original capital to its investors, this left $196 million for distribution. Under the terms of the IIF Guidelines, the Federal Government had invested two thirds of the funds in Looksmart, or about $27.5 million, and took only 10 per cent of the profit at around $19.6 million. Of the remaining $175 million, 80 per cent, or an estimated $140 million, went to private investors in the fund which left AMIL and its partner Walden with around $70 million each, plus $35 million which went to the fund manager. In late 1999, the two founders of AMIL, agreed to sell a 50 per cent interest in their company to the successful New York based private equity firm, Castle Harlan Inc, which specialises in the management buyout business and at that time had completed over $US3 billion of transactions in the US. AMIL is now known as Castle Harlan Australian Mezzanine Partners and the first fund under the new partnership - a $520 million management buyout fund - was launched in 2000. The investors in the fund have come from Castle Harlan ’s existing investors in the US and AMIL’s existing investors in Australia as well as from new institutional investors. A total of $200 million came from Australian investors and the remainder from overseas. The fund’s first investment was the management buyout of bed linen manufacturer, Sheridan Australia Pty Ltd.

9 2.2.3 Australian Bioscience Trust (ABT) ABT is one of the five original Innovation Investment Funds licenced by Federal Government in 1998 and is managed by Melbourne based Rothschild Bioscience Managers. It is a $42.5 million fund and invests in and adds value to high growth companies in innovative biological technologies such as: human and animal therapeutics and diagnostics, eHealth, medical devices and services, agribusiness, food technology, and environmental technology. Rothschild Bioscience Managers developed from the UK based Rothschild Bioscience Unit which has an 18 year record of successful investment in the field. The ABT portfolio includes eBioinformatics, (now renamed Entigen Corporation after a merger with Empatheon Inc and based in California); ExGenix; Pacific Knowledge Systems; Thrombogenix; Examination Services for Psychology, which specialises in the development of novel psychological tests specifically for the internet; Praxis Pharmaceuticals Australia, whichis focussed on developing carbohydrate based, anti-inflammatory drugs; and Pnomics, a Brisbane based anti inflammatory drug design company. Its policy is to invest in and add value to unlisted high growth companies involved in innovative biological applications such as human and animal therapeutics and diagnostics; medical devices and services; agribusiness, food technology; and environmental technology. The ABT team takes an active role in management of portfolio companies, participates at board level, provides multi level strategic advice and support and provides access to specialist scientific and technical advice and introductions to international contacts and corporate collaborators. Its target investment must be predominantly Australian owned and based, have access to world leading technology, with an experienced management streams, significant international market opportunities and potential for a high return on investment. The fund invests in companies at the seed, start up and early expansion stage and typically invests in a syndicate with other funds with commitments of up to $2 million. (Under the IIF guidelines the fund cannot invest more the $4 million in any one investee business). Details of its investments include: • eBioinformatics Holdings Inc - in 1998 a syndicate led by Rothschild Bioscience and including Allen & Buckeridge Pty Ltd invested $2.25 million in the start up company. AST's investment now totals $2.8 million. The company provides access to a comprehensive range of tools and databases designed to enhance the discovery process in genetic research. It is a spin off from the successful ANGIS (Australian National genomic Information Service, established at Sydney University, which has provided bioinformatics services to the research community since 1991. • Examination Services for Psychology (ESP) Ltd - ABT invested $900,000 in ESP in December 1999, together with a syndicate of private investors. The company specialises in the development of novel psychological tests designed specifically for the internet, which can be used in staff recruitment, mental health monitoring and detection of mental illness and for testing for specific age related diseases. • ExGenix Operations Pty Ltd - In January 2000, ABT, together with a syndicate of investors acquired Exgen ix (which was then AM RAD Discovery Technologies) from AM RAD in a cash and scrip deal worth $16 million. AM RAD still retains a 24 per cent interest in the new company. Exgenix is a genomics-driven drug discovery company whose core business is high capacity screening of natural products to identify small molecule leads for development as new therapeutic agents. See section 2.4 for more details. • Pacific Knowledge Systems Pty Ltd - In September 1999, ABT invested $650,000 in the Pacific Knowledge Systems. This was followed by an investment of $2 million by Biotech Capital Ltd in December 2000. The company specialises in the practical application of artificial intelligence in the healthcare sector and is a leading provider of decision support systems to the pathology sector. See section 2.4 for more details. 10 • Praxis Pharmaceuticals Pty Ltd - In October 1999, ABT invested $250,000 in Praxis which is focussing on anti inflammatory drug development. It is developing carbohydrate based compounds to treat inflammation diseases such as psoriasis, ocular inflammation, abdominal and pelvic adhesions and arthritis. • Promics Pty Ltd - In December 1999, ABT invested $750,000 in a syndicate with Start-Up Australia. It plans to invest a further $2.25 million upon satisfactory completion of certain technical milestones. Promics is involved in anti inflammatory drug development, in particular the development of orally bioavailable G protein coupled receptor antagonists that have shown considerable promise in animals models in the treatment of inflammatory diseases such as rheumatoid arthritis. The company ’s patented technology was developed by researchers at the Centre for Drug Design and Development at Queensland University. In March, 2001 Promics was awarded a $1.9 million R&D Start grant over three years to prove the suitability of the new drug in treating rheumatoid arthritis. • Thrombogenix Pty Ltd - the company is developing a new class of anti-clotting drugs as part of a pipeline of products, which originated from research the Australian Centre for Blood Diseases at Monash University. See section 2.4 for more details.

2.2.4 Hambro Grantham Ltd Hambro Grantham was one of the first venture capital management companies to be formed in Australia. It was set up in the late 1970s by one of the pioneers of Australian venture capital, John Grant, in a joint venture between Grantham Capital Ltd and the merchant bank, Hambros Australia Ltd. In 1984 the company won one of the first MIC licenses and established First MIC Ltd which over a period raised $52.4 million from a range of investors including the Commonwealth Bank, ICI Australia, Mitsui, Zurich Insurance, AMP and Alcatel STC. The company was unlisted and made over 20 investments in a range of industries and technologies including membrane technology company, Memtec Ltd; in vitro fertilization company, IVF Australia; and medical diagnostics company, Trace Scientific. In 1987, Hambro Grantham set up a parallel fund, H-G Ventures, to provide equity for later stage investments and management buyouts and raise capital outside the restrictions of the MIC program. It initially raised $10 million and invested in a number of companies including Grace Brothers Home Improvements and Ferntree Computers. By 1996 it had total capital assets of $49 million. The MIC scheme came to end in June 1991 and First MIC was renamed Hambro Grantham Capital Ltd and continued to invest in the technology area. Its new investments included Energy Developments Ltd, Cytosystems Ltd and Vision Systems Ltd. In October 2001 Hambro Grantham Capital exited Vision Systems for a gross profit of $28.8 million, producing a pre tax distributable profit of $21.7 million. By 1993 its capital base had risen to $71 million and it was reporting significant aftertax profits from divestments. The company then established the Hambro Grantham Development Trust as a terminating trust and raised $35 million, primarily from the superannuation funds. The trust provided development capital for businesses with strong growth potential in areas such as healthcare, biotechnology, information technology and environmental sciences. Its first investments included Syrinx Speech Systems Pty Ltd (speech recognition) and INC Communications Pty Ltd (a developer of LAN networks). In 1995 the company set up the H-GV Pooled Development Fund, under the Federal Government ’s PDF Program, and raised $10 million. The fund made its first investment in late 1995 in Blueberry Farms of Australia Ltd. Other later investments included the Cranswick wine group, and Scantech. However, by 2000 this fund was wound down despite an internal rate of return of 80 per cent. The original plan had been to float the fund on the stockmarket.

11 In 1997 the company established the Hambro Grantham Fund 5, another 10 year terminating investment fund with committed capital of $37 million. It invested in established businesses which require capital for growth and investments included PVW Medical Pty Ltd, and Nobby Kitchens Pty Ltd. In February 2000, the Colonial First State Investments Group acquired an initial 50 per cent of Hambro Grantham Ltd with an agreement to acquire the remaining 50 per cent in December 2002. Colonial First also acquired Hambro ’s interests in its five funds. Hambro Grantham was renamed Colonial First State Private Equity. The move by Colonial followed considerable research into the private equity market in Australia. John Grant remained as executive chairman of the company and its funds. During 2001 Colonial First State Private Equity continued to invest in the technology field including $11 million in a joint investment with RMB Ventures Ltd in Endeavour Health Care Ltd. This was part of $40 million raising by the healthcare group. At the end of December 2000, John Grant announced his retirement as executive chairman of Colonial First Private Equity and from all other related executive positions. He remains as a non executive director of H-G Ventures Ltd and of Hambro Grantham Capital Ltd and as a shareholder in both companies. On his retirement Colonial First State accelerated its acquisition of Hambro Grantham Ltd and acquired the remaining 50 per cent of the company. This accelerated move is believed to be due to the subsequent acquisition of Colonial Bank Ltd by the Commonwealth Bank which prefers to have a controlling position in its businesses. Colonial First State Private Equity is now planning to establish a sixth fund which will be a substantial diversified fund, with property and resources its only exclusions. One third of the capital raised will be allocated to early stage developments.

2.2.5 Biotech Capital Ltd The company is a specialised biotechnology Pooled Development Fund established by investment group, Challenger International, last year. It raised $40 million last year and plans to invest in 10 to 20 Australian biotechnology projects and companies ranging from early stage development to initial public offering. * Biotech Capital typically invests between $500,000 and $3 million in each company, with investment focussing on the areas of genomics, proteomics, medical devices, bioinformatics and enabling technologies. The PDF’s first investments include $3 million in Sydney proteomics firm, Proteome Systems Ltd, $2 million in Pacific Knowledge Systems Pty Ltd, which specialises in the application of artificial intelligence to the healthcare sector, and $2 million in Alchemia Pty Ltd. It has now invested 21 per cent of its total capital and is considering a number of other investments. The company ’s investment policy is to invest in enterprises which are developing technology driven medical research for life science and health care applications, particularly those which involve genomics, proteomics, and bioinformatics, as well as developers of medical devices and other medical enabling technologies such as diagnostic kits, filtration technology, sequencing kits and related software. It intends to diversify across 10 to 20 different types of companies to minimise the inherent risk associated with such medical technology companies. A typical investment size is between $500,000 and $3 million and the company will not invest more than 30 per cent of its total funds in any one investee company. It plans to spread its investments from early stage to and including pre IPO and placement opportunities. The aim is to have a broad spectrum of investment maturities ensuring a steady stream of liquidity events as each project reaches listing status. Biotech Capital is managed by Challenger Biotech Management Ltd, a subsidiary of Challenger International and it listed on the ASX last October.

12 2.2.6 Medica Holdings Ltd The Brisbane based company was founded in 1987 and is a registered Pooled Development Fund. It invests in small, leading edge drug discovery companies which have platform technologies of interest to large pharmaceutical companies. Medica ’s stated policy is to spread risk across a numbers of carefully selected investments; focus on platform technologies which are capable of delivering different products for a range of therapeutic needs; and invest in ventures which have the capacity to individually list on the stock market within three to five years and/or be sold in part or full to leading pharmaceutical company. Since its inception Medica has raised $16 million through a public listing (in March 1999) and subsequent rights issue and placements of shares. The latest share placement of over 4 million ordinary shares was made in January 2001 to raise approximately $4.5 million. New subscribers to the fund at that time included Merrill Lynch Growth Fund and other leading Australian institutions. The aim of the raising was to increase the company ’s stake in its three major investments to date. These are start up drug discovery companies detailed below. Alchemia Pty Ltd which is developing and commercialising a unique platform technology for the efficient and cost effective, large scale production of synthetic oligosaccharides. In December 2000 the company entered into a research and manufacturing alliance with Dow Chemical Inc of the US. So far, Medica has invested $5.8 million, including $3.8 million in March 2001, and now holds 18.6 per cent of Alchemia. See section 2.4 for more details. Cytopia Pty Ltd, which is identifying new candidate therapeutics for a range of inflammatory diseases, such as asthma, rheumatoid arthritis and eczema. It has an exclusive, worldwide licence to commercially exploit technology developed by its research director, Dr Andrew Wilks, while he was at the. Medica owns 88 per cent of Cytopia and has invested over $2 million and has committed a further $1 million investment in 2001. See section 2.4 for more details. Xenome Ltd, which is a spin off company based on work at the Institute for Molecular Bioscience at Queensland University on venoms and toxins of Australian aquatic and land creatures, particularly marine cone shell species. It aims to discover new drugs to treat neurological disorders such as pain, stroke, Alzheimer ’s disease and depression. Medica has invested $1.5 million in Xenome and has approximately a 42 per cent stake in the company. See section 2.4 for more details.

2.2.7 Start-up Australia Pty Ltd The company was set up in 1997 by two former business development directors of the Australian Technology Group (ATG) Ltd to invest in bioscience enterprises. It has $55 million under management and was awarded one of the four Innovation Investment Fund (IIF) licenses, announced by the Federal Government in its second round of IIF funding in November 2000. This was for its BioVentures Australia Fund, which will become its main investment vehicle. The company specialises in investing in life science based industries, including human health, food, animal health, agribusiness and the environment. It considers proposals from companies in the seed, start up and expansion stage of business development. In many cases, investments are made at the start up stage to create companies and commercialise technologies which have come from universities and other research institutions. Start-Up invests in ventures which: • have proven technology that provides a competitive advantage in international markets; • have sales of less than $4 million but high growth potential; 13 • have a potential market size of over $300 million with an emphasis preferably on international markets; • have a product/service/technology which must be differentiated from its competitors; • have protection from competitors in the form of patents, regulatory constraints or know how sufficient to prevent or delay competition for several years; • the majority of the companies assets, management and shareholders must be Australia based; • the business plan must have an exit strategy, whether by floating on the stockmarket, trade sale or management buyout; and • have potential for substantial growth over the next three to seven years. The company provides investment funding of up to $4 million and also has an experienced investment team who can assist investee companies with business planning, financial management, capital raising, business alliances, recruitment of key personnel and board members, accessing Government assistance programs, business systems, and protection of intellectual property. Start-up Australia has a number of investments in the biosciences including Alchemia Pty Ltd, FuCell Pty Ltd, Thrombogenix Pty Ltd, Promics Pty Ltd and Technico Pty Ltd. The company also managers the bioscience investments of the Australian Technology Group (ATG) Ltd

2.2.8 Uniseed Pty Ltd The company has been set up jointly by Uniquest and Melbourne Enterprises International, the commercial arms of the University of Queensland and the University of Melbourne. The aim is to facilitate the formation of a family of venture capital funds tailored to meet the special needs of high growth technology start ups that originate from research at Australian universities and research organizations. So far, it has raised $20 million, to invest at the very early pre-seed and seed stage across all technology sectors. It intends to fund spin off companies and start ups originating from research at the two universities as well as associated research organisations. It expects to seed fund 20 to 30 early stage spin offs and start ups a year. It is now seeking parties to work with Uniseed to structure and raise funds for a follow on $60 to $100 million early stage venture fund which will receive preferential access to Uniseed ’s deal flow, and offer co-investment opportunities in this deal flow to other investors. It will also be free to obtain deals from other sources. It is proposed that the follow on fund will invest across all sectors of technology commercialisation. It is envisaged that Uniseed ’s funds will be used for extended R&D to achieve commercial milestones; prototype development; business planning and initial market research; developing commercial relationships and recruiting staff.

14 2.2.9 Australian Technology Group (ATG) Pty Ltd The ATG was set up in 1994 with $30 million start up capital from the Federal Government to invest in early stage development of Australian technology. It was established as an independent, fully commercial body, free from Government restraints with the aim of bridging the funding gap in early stage venture capital. Over the past six years it has been the only equity investor to build a portfolio solely dedicated to early stage technology investments. Its portfolio is concentrated in the medicine, agriculture, information technology and telecommunications and manufacturing sectors. Since the end of 1998, the ATG has been in a passive mode following a directive from the Government that it should cease any further investments pending a possible privatisation. The total investments up to the end of 1998 included 18 early stage companies, eight of which have now been sold. Its ten remaining investments include four in bioscience, three in IT&C and one in manufacturing. The total capital committed was about $25 million. ATG outsourced the management of its bioscience portfolio to Start Up Australia, which also holds an Innovation Investment Fund licence and outsourced the management of its IT investments to Technology Venture Partners. The ATG holds approximately 15 per cent of all the following companies except for Hydrocool, which is 100 per cent owned by ATG. • Alchemia Pty Ltd which is developing and commercialising a unique platform technology for the efficient and cost effective, large scale production of synthetic oligosaccharides. In December 2000 the company entered into a research and manufacturing alliance with Dow Chemical Inc of the US. • Fucell Pty Ltd which is developing human monoclonal antibodies for use in diagnosis and treatment of human diseases. The company was set up in 1989 by a group of research scientists at the Centre for Membrane Science and Technology at the University of NSW. It has developed a new platform technology for the creation of cell lines which produce fully human proteins. • Technico Pty Ltd which has become a leader in potato micorpropagation technology and the production of miniature seed potatoes. Existing potato production methods take four to eight generations to produce commercial quantities whilst Technico technology takes only two generations. The technology is now being commercialised on a global scale. • Hydrocool Pty Ltd has developed a new concept of refrigeration that is now in commercial production in Japan and will be marketed worldwide. • Viator Pty Ltd - which is a web-based global data-base of destination travel products; • inter-touch Pty Ltd - which is a broad band internet connection technology for hotels.

15 2.3 CASE STUDIES - INVESTEE COMPANIES This section provides case studies of several investee companies, that is, companies whose further development is supported by inputs of venture capital funding. Most investee companies receive capital inputs from different sources as they move through the development process towards commercialisation. This means the patterns of ownership can become quite complicated as venture capital groups buy and sell part interests in the investee company.

2.3.1Alchemia Pty Ltd The company, set up in 1995, is developing and commercialising a unique platform technology for the efficient and cost effective, large scale production of synthetic oligosaccharides. These complex carbohydrates play a major role in a number of diseases, including cancer, gastral infections, cardiovascular and immune disorders and transplant rejection. They have potential as therapeutics, diagnostics, vaccines, prophylactics, food additives, nutraceuticals, cosmetics and agrochemicals, as well as applications in combinatorial chemistry/drug discovery. Alchemia is currently involved in a $15.2 million capital raising and investors include: Medica Holdings Ltd, which owns 16.3 percent of the company; the Australian Technology Group which owns about 15 per cent; the CM Capital Investments Innovation Investment Fund which has about 24 per cent; and, Biotech Capital Ltd which has invested $2 million and owns 3.32 per cent. The new Tfunds will be used to expand its research program, hire additional staff and install an in house drug development system. The company plans its next fund raising offshore prior to a US listing on the NASDAQ. The company was awarded a $1.9 million R&D Start grant from the Federal Government in October 1998 to further develop the technology. Alchemia is investigating two key applications of the technology: • large scale synthesis of specific oligosaccharides; and • combinatorial chemistry opportunities, both in the generation of large and diverse oligosaccharide libraries, and in the generation of carbohybrid libraries such as aminoglycosides and carbomimetics. The technology is compatible with present automated chemical synthesizers and has the potential to revolution oligosaccharide synthesis and make available for the first time a wide variety of low cost oligosaccharides for pharmaceutical development. In December 2000, Alchemia entered into a long term, multi million dollar research and manufacturing alliance with the US Dow Chemical Company to develop manufacturing capabilities for carbohydrate based pharmaceuticals and nutraceuticals based on Alchemia’s technology. Alchemia will receive a considerable up front payment for exclusivity, as well as milestone and process improvement payments from Dow. The two companies will also share profits generated by the alliance.

2.3.2 Cytopia Pty Ltd The company is identifying new candidate therapeutics for a range of inflammatory diseases, such as asthma, rheumatoid arthritis and eczema. It has an exclusive, worldwide licence to commercially exploit technology developed by its research director, Dr Andrew Wilks, while he was at the Ludwig Institute for Cancer Research. Licensed patents give Cytopia the sole right to commercially exploit several genes and proteins, known as JAK kinases, which play a crucial role in the inflammatory process. Cytopia has developed tests which allow the high throughput screening of chemical collections for their ability to inhibit JAK kinases. Several pharmaceutical companies have already expressed interest in partnering with Cytopia in the drug discovery program.

16 The company ’s research is structured into three core groups: Technology Development Group - which aims to provide Cytopia with a broad platform of new proprietary drug discovery targets for immune diseases. Gene screening models are being used to identify new molecular targets and biochemical and cell based assays are then developed based on their function; Drug Discovery Group - which is involved in high throughput assays for its initial targets - the JAK kinase family. Virtual screening is also underway using the company ’s proprietary computer-based models. The group has also commenced a structural biology and a natural product screening program; and Drug Development Group - which is responsible for ADM E-toxicology studies and the establishment of alliances to carry out human clinical testing. The company is co-located with the Mutation Research Centre at St Vincent ’s Hospital in Melbourne and has first right of refusal to commercialise intellectual property developed through collaborative projects. Medica Holdings Ltd owns 88 per cent of Cytopia and has invested over $2 million and committed a further $1 million investment in 2001.

2.3.3 ExGenix Operations Pty Ltd The company was formed in January 2000 based on the assets of the former AM RAD Discovery Technologies and AM RAD still retains a 24 per cent interest in the new company. Exgenix is a genomics-driven drug discovery company whose core business is high capacity screening of natural products to identify small molecule leads for development as new therapeutic agents. This draws upon the biota of biodiverse regions in Australia and South East Asia, from which the company has generated extensive libraries of natural product extracts of microbial plant and marine macroorganism origin which have potential as new drugs. A proportion of ExGenix ’s drug discovery program is conducted in collaboration with international pharmaceutical industry partners, and involves it in the development of screens based on therapeutic targets defined within these collaborations. Current pharmaceutical partners include Chiron Corporation, Aventis Australia Pty Ltd, Chugai Pharmaceutical Co Ltd and AM RAD Operations Pty Ltd. Early in 2000, the company signed a $15 million contract with Aventis Pharma to supply test samples of native plant stock for screening for antibacterial properties. The company ’s genomics capability stems from its role a leader and commercial partner in the CRC for Discovery of Genes for Common Human Diseasesand from a series of collaborative agreements in particular with the Menzies Centre for Population Health Research in Hobart and the Walter and Eliza Hall Institute in Melbourne. 2.3.4 Pacific Knowledge Systems Pty Ltd The company specialises in the practical application of artificial intelligence in the healthcare sector and is a leading provider of decision support systems to the pathology sector. The company ’s lead product enables pathologists and doctors to interpret diagnostic tests more quickly and accurately than with conventional methods, improving quality and effectiveness of health care. It also provides tools for medical experts to capture, update and maintain their medical knowledge base and provides this information to end users in a format that can be customised to meet individual needs. These tools eliminate the need for many of the currently used individual expert consultations. The company ’s current clients include Mayne Nickless Laboratories, St Vincent ’s Pathology and General Pathology Laboratories in Perth. The original start up company was founded by Professor Paul Compton of the School of Computer Science and Engineering at the University of New South Wales and Dr Leslie Lazarus from the Garvan Institute of Medical Research. In September 1999, ABT invested $650,000 in the company which was followed by an investment of $2 million by Biotech Capital Ltd in December 2000.

17 2.3.5 Proteome Systems Ltd The company, established in 1999, focuses on new drug discovery, discoveries in agbiotechnology and the development of novel proteomics technology and informatics. It grew out of work at Macquarie University ’s Centre for Analytical Biotechnology and was set up to develop and commercialise a range of products to support high throughput protein analysis and to pioneer the commercial applications of proteomics to discovery. In September 2000, the company announced it had successful completed a private capital raising of $16.3 million, which involved the Queensland Investment Corporation and BioTech Capital Ltd (see later entry) as well as funds from high net worth individuals. In December 2000, it was awarded a $3.3 million R&D Start grant by the Federal Government to help support a $12 million initiative by the company to develop three instruments for preparation of protein samples for analysis by mass spectrometry. One, the Xcise, involves removing samples from an array, treating them and then returning them to a mass spectrometer; another, the Chemical Printer, uses Proteome Systems technology for microdispensing fluids on a protein array, followed by analysis in a mass spectrometry, and the third, the PiezoLC, employs a miniaturised chromatography system for preparing protein samples for mass spectrometry. The instruments will allow quality screening in proteome based research for drug discovery and agricultural biotechnology products. The company, which has over 60 employees based in Sydney and Boston, has developed agreements and alliances with a number of national and international research institutes and companies including DowAgroSciences, Shimadzu Corporation, Sigma Aldritch, Genbio in Geneva, as well as CSIRO and the CRC for Eye Research and Technology. It has a multi year joint research agreement in proteomics with DowAgroSciences. The goal is to identify new enzymes and novel pathways in the biosynthesis of plant products. The company is also collaborating with Gradipore Ltd to develop and manufacture two dimensional gel technologies for the worldwide proteomics market.

2.3.6 Redfern Broadband Networks Redfern Broadband Networks (RBN) is a wholly owned subsidiary of Redfern Photonics Pty Ltd which is the commercialisation arm of the Australian Photonics Cooperative Research Centre. RBN was set up in May 1999 to manufacture broadband photonic networking products. It is located in a newly built, state-of-the-art facility at the Australian Technology Park in Sydney alongside the Photonics CRC, which financed its initial development. The company has established a lead in the convergence of photonics engineering, data networking and system level software. Before being spun off into a separate company, RBN was part of the Photonics Research Laboratory at Melbourne University which was formed in 1990 by Professor Rod Tucker and is a world leading research group in the design and simulation of photonic networks. RBN continues to maintain a strong link with the laboratory. The company ’s flagship development is the RBN Gigawave Photonic Wavelength Management System for metropolitan and regional area networks which provides the foundation for the company ’s photonic networking equipment. This includes optical terminal multiplexers, optical add/drop multiplexers, optical switching multiplexers and optical cross connect products and provides for opportunities for product development over the next five years. The CEO of RBN is Peter Davies, formerly managing director of JNA Technologies, an Australian telecommunications and networking company purchased by Lucent technologies. In November 2000, the company raised US$28 million from US and Australian investors. The Australian investors, which included Allen & Buckeridge, Macquarie Technology Funds Management and the management of the company, provided US$6.5 million. The US based Optical Capital Group (OCG), Chase H&Q and other US investors provided

18 US$21 .5 million. The company now has over 30 staff and expects to grow to 60 in the first half of this year. Background - Redfern Photonics was established in 1999 as the commercial incubator company for Australian Photonics Pty Ltd which, in turn, is the technology transfer company and manger of the Australian Photonics Cooperative Research Centre. Since its establishment, Redfern Photonics has spun off a number of companies including Redfern Broadband Networks. Other spin off companies include Redfern Interlink, Redfern Optical Components, Redfern Integrated Optics, Redfern Polymer Optics, Nufem, and Indx. Redfern Photonics is 62 per cent owned by Australian Photonics Pty Ltd and 10 per cent by a range of Australian investors and venture capital companies, including Allen & Buckeridge The remaining 28 percent is held in the staff option pool and by trustees for the CRC staff. In early 2000, it raised $7 million from the Australian Stock Exchange ’s (ASX) Enterprise Market program, a business introduction service which drew in private sector investors from a wide range of areas. ASX abandoned this program in early 2000 on the grounds that it was no longer appropriate for the ASX to be involved in this end of the market. It said there were now greatly increased opportunities for start up companies to gain funds from the venture capital market and only a limited number of deals available. It added that start up companies now often went directly to the stockmarket for funds.

2.3.7 Technico Pty Ltd Technico Pty Ltd is based on research undertaken by two plant scientists in the late 1980s aimed at producing seed potatoes from tissue culture. Their work resulted in the TECHNITUBER micropropagation process which has significantly reduced the time taken to produce commercial quantities of seed potatoes from 5 years to 2 years, and, has substantially increased the productivity of potato plantlets by up to 20 times. In 1990, the Horticultural Research and Development Corporation provided seed funding for the project which, by 1994, had reached the stage where the two scientists were able to negotiate an exclusive licence for the production of crisping varieties of potatoes with the US snack food company, Frito-Lay. Technico ’s present managing director has said that the agreement with Frito-Lay provided critical endorsement for the technology that helped launch the company into other deals and provided access to funding for further development and commercialisation. Technico Pty Ltd was established in 1995 with start-up funding from the Australian Technology Group (ATG). This enabled the company to start exploiting the technology in other potato market segments. Over the next five years the company obtained further funding from other sources including Gresham Rabo Management Ltd, Nomuraa/JAFCO Investment (Asia) Pty Ltd, Plant Heritage Pty Ltd and other minority shareholders. These extra funds enabled the company to accelerate the research and global commercialisation of its technology with field production programs in the United States, Thailand and China. It now has production facilities in Australia, China, the United States, Mexico and India, with the Indian facility being the largest seed potato plantlet production facility in the world. The company is undertaking further extensive R&D to maximise the quality and yield of crops and to enhance the field production technology. In 2000 it was awarded a $2.25 million R&D Start grant to help scale up the technology and start an aggressive commercialisation drive. Technico is now the world ’s leading potato industry supply chain services company, supplying both early generation seed and commercial potatoes to major global processors. It is continuing to expand with further TECHNITUBER production facilities scheduled for construction in Europe, the United States and South America by 2002.

19 2.3.8 Thrombogenix Pty Ltd The company is developing a new class of anti-clotting drugs as part of a pipeline of products, which originated from research the Australian Centre for Blood Diseases at Monash University. These are called ERA inhibited and they work by inhibiting an agent that activates the blood clotting process. It has created a library of novel compounds which are being tested and developed to prevent and treat heart attack and stroke. Two compounds, in particular, have been identified as particularly promising and the company is aiming for the first trails of the compounds within the next 18 months. The company was funded with $11.2 million from private investors and from four venture capitalists, Rothschild Bioscience, Macquarie Technology Funds Management, Momentum Funds Management and the Australian Technology Group, as well as the Thorney Group (a division of Pratt Industries) and Macquarie PRISM. In 1999, Thrombogenix received a $1 million R&D Start grant to further develop the research.

2.3.9 Xenome Ltd The company is a spin off company from work at the Institute for Molecular Bioscience at Queensland University on venoms and toxins of Australian aquatic and land creatures, particularly marine cone shell species. Peptide molecules isolated from cone shells have been shown to have potential for the treatment of pain, such as intractable cancer pain, and potentially other neurological disorders, such as stroke, Alzheimer ’s disease and depression. The company has an exclusive licence to this collection of molecules, known as contoxins, which inhibit proteins, known as ion channels. This inhibition is known to control certain types of pain. One promising molecule is being commercially developed in collaboration with AM RAD and human clinical trials are underway. Xenome also has several other lead molecules under development. One a novel inhibitor of the noradrenaline transporter, a key target in the treatment of central nervous systems (CNS) disorders such as depression; another an inhibitor of the alpha-1 -adrenoreceptor, with therapeutic potential for the treatment of urinary incontinence caused by disorders such as benign prostatic hyperplasia. In December 2000, Xenome was awarded a $1.6 million R&D Start grant which will be used to accelerate the development of these compounds. Medica has invested $1.5 million in Xenome and has approximately a 46 per cent stake in the company.

20 3.0 GOVERNMENT VENTURE CAPITAL ASSISTANCE SCHEMES

3.1 Present Policy Towards Venture Capital The availability of venture capital was improving when present Government came into power in March 1996 and it focused its attention mainly on the continuing problem of the shortage of seed funds for innovative, start-up companies. It retained the PDF Program and considered several new measures to free up equity finance for small to medium enterprises (SME). Towards the end of 1996 it made changes to the tax legislation to make it easier for the banks to take equity in SME and, over the next five years, introduced several initiatives aimed at facilitating the availability of venture finance for emerging, innovative companies. The Government has no specific policy for venture capital. Instead, the policy is embraced within the policies for economic growth and innovation and, in effect, is defined by the following range of initiatives for fostering the commercialisation of innovative products and processes: Pooled Development Fund (PDF) Program, which replaced the MIC scheme, was officially announced in the Federal Government ’s 1992 Economic Statement. Its aim was to encourage long term equity investment and provide patient equity capital for growth oriented, small to medium sized Australian businesses. Innovation Investment Funds (IIP) Program which was introduced in 1997 to boost venture capital. It aims primarily to encourage early stage investment in small to medium sized innovative enterprises. The Federal Government initially allocated $130 million to the program at the ratio of two dollars for every one dollar of capital generated by the private sector with the funds channelled through licenced venture capital fund managers. The first five fund managers were selected in December 1997. A further four IIP managers were announced in November 2000 and an extra $90 million committed to the program. R&D Start Scheme which was introduced in 1997 to increase funds available to small to medium sized research based companies. This has funding of $710 million over the five years from July 1997 to June 2002, with a further $327 million in the three years to June 2006. It is managed by the Industry Research and Development Board which is expected to make grants totalling $190 million in 2000/01. COMET program which was launched in November 1999 to provide assistance aimed at increasing the commercialisation of innovative products, processes and services by providing individuals, early stage growth firms and spin off companies with commercialisation assistance. It has funding of $30 million over three years. BITS Program which is another source of Federal Government venture capital assistance. It was launched in July 1999 and has funding of $158 million over 5 years. It aims to build the strength and competitiveness of the Australian IT sector, including fostering stronger commercialisation linkages with R&D organisations, and the creation of clusters of innovative IT&T businesses. A major element of the program is the provision of $76 million to establish ten Business Incubators to assist IT&T small to medium enterprises in each mainland State and Territory.

Each of these initiatives is described in more detail in the following sections.

21 3.2 Pooled Development Funds (PDF) Program The program was set up by the Federal Government in mid 1992 to encourage long term equity investment and provide patient equity capital for growth oriented, small to medium sized Australian businesses. Following a number of substantial changes to the scheme aimed at making it more attractive to investors, interest in the program has grown substantially. Over 100 PDFs are now registered with the PDF Board. At the end of June 2000 the cumulative capital raised by the PDFs was $476 million. The cumulative investment was $309 million invested in 286 investee companies. This was a substantial increase over the $216 million invested by 184 companies at June 30 1999. Fifty two per cent of the investments made by the PDFs during 1999/2000 were in the service sector with a further 30 per cent in the manufacturing sector. The program is overseen by a six member PDF Registration Board, chaired by Mr Michael Astley, consultant to SA law firm, Finlaysons. It registers funds and monitors their activities to ensure compliance with the PDF guidelines. A company can apply to the board for registration as a PDF at any time. It must have an investment plan approved by the board which is used to assess its suitability for registration and to monitor its operation. Any variation in this plan must be notified to the board. The program provides a downstream tax incentive for investment in registered PDFs. Once registered, PDFs pay only 15 per cent tax on income from their investments in small to medium sized enterprises instead of the normal company tax rate of 36 per cent. Income from other sources or in larger companies is concessional^ taxed at 25 per cent. Investors can elect to receive their dividends either as tax exempt or as franked dividends. Any capital gain on the sale of shares in PDFs is also tax exempt. However, losses incurred on investments are not deductible. Other major features of the program are that PDFs: • must invest in firms that will establish a new business, substantially expand production/ supply capacity, or expand/develop markets; • must not invest in another PDF, or companies primarily engaged in retail operations or property development; • must not invest in companies whose total assets exceed $50 million; • must not invest more than 30 per cent of their capital in any one business (the board can approve investments of over 30 per cent in special cases); • must invest in at least 10 per cent of the investee businesses ’ paid up capital (the board can approve investments of less than 10 per cent); • must only invest in newly issued ordinary shares or other kinds of newly issued shares approved by the PDF board - this is flexible as the board can allow a PDF to buy preowned shares as a supplement to other PDF shareholdings in an investee business; • must invest at least 65 per cent of their raised capital within five years; and • must not allow any investor, other than a bank or life office, to hold an interest greater than 30 per cent in itself.

Amendments passed by Federal Parliament in June 2000 allow superannuation funds to acquire 100 per cent of a PDF and also allow share buy backs and returns of capital by PDFs. For PDF case studies, see Hambro Grantham’s H-GV Pooled Development Fund (2.2.4) ; the Biotech Capital Ltd specialised biotechnology Pooled Development Fund (2.2.5) ; and, Medica Holdings (2.2.6).

22 3.3 Innovation InvestmentFund (IIP) Program The program was established in 1997 to boost the availability of early stage venture capital for small, technology based companies. The Federal Government initially allocated $130 million to the first round of the program which licensed the first five IIP fund managers. A further $90.7 million was allocated for the second round of funding in 2000 which resulted in a further four IIP fund managers being licenced. In the first round in December 1997 the five managers contributed an extra $65 million on the basis of an extra dollar for every two dollars provided by the Government. Under the second round the fund managers are providing $72.7 million, against the Government ’s $90.7 million, almost a one for one ratio. This brings to a total of $358 million that has been made available through the program for early stage venture capital development under the two rounds of the program. The program aims to encourage the development of small, new technology based companies, which are commercialising research and development and to develop a self sustaining early stage, technology based venture capital industry. It also aims to develop fund managers with experience in the early stage venture capital industry and to establish in the medium term a revolving or self funding program. Under the program the fund managers are responsible for identifying, assessing and investing in businesses which are commercialising R&D. Investments are expected to be long term, at least four to six years, and fond managers are expected to provide advice and management assistance to investee businesses. The funds will be wound up after ten years with capital returned to the Government. The program is administered by the Industry Research and Development Board through its Funds Management Committee.

Basic features of the program: • licenced funds may be a unit trust, company or other structure approved by the board and must have a minimum committed private capital of $10 million; • at least 30 per cent of committed private capital must come from persons not associated with the licensed fund managers and capital cannot be raised in the form of debt; • the funds must be wound up after 10 years (with an option to extend if necessary to wind up final investments); • proceeds from the sale of investments will not be available for reinvestment but will be distributed on a set basis to the Federal Government, private investors and fund managers. The amounts contributed by investors (including the Government) will be returned on a pro rata basis. Investors will then be paid an amount as interest, calculated at a rate equal to the 10 year bond rate. Out of any remaining profit the Government will receive 10 per cent, and the remaining 90 per cent will be shared between the private investors and the fund managers on an 80:20 basis; • investee businesses must be seed, start up or early expansion stage engaged in the commercialisation of R&D; • investee businesses must have an average annual revenue over the previous two years of income of less than $4 million, and revenue in either year of not more than $5 million. They must also have net tangible assets of less than $5 million; • not more than $4 million or 10 per cent of a licenced fund’s committed capital must be invested in any single investee business, and co-investment with other licenced funds is limited to a total of $8 million from all funds; • licenced funds must invest 60 per cent of their funds within five years; and • management fees should be around 3 per cent per annum and any changes to personnel or the structure of the fund manager must be approved by the board.

23 Fund Managers - the first five fund managers selected in December 1997 were: • Allen & Buckeridge Pty Ltd, which established the A&B Innovation Fund, which together with the A&B Venture Fund 1, has raised $86 million from major institutions and superannuation funds. The funds have been invested in a number of emerging information technology and communications companies; • AM WIN Management Pty Ltd, a partnership between Castle Harlan Australian Mezzanine Investments and Walden International Group of San Francisco. It was allocated $27.5 million by the Federal Government and raised further funds to form a $42 million fund. This has invested in a broad range of technology based companies; • CM Capital Investment, formerly Coates Myer & Co Ltd, which set up a $41.25 million fund and has invested in a broad range of technology based companies; • Momentum Funds Management Pty Ltd, which has established a $30 million and has invested in a broad range of enterprises; and • Rothschild Bioscience Managers Ltd, which has set up a $42.5 million fund and invests exclusively in bioscience projects.

Four new IIF managers were announced in November 2000: • Nanyang Ventures, which plans a $50 million fund with $25 million provided by the Government and the remainder from institutional investors, St George Bank and Queensland Investment Corporation;

• Start-Up Australia, a specialist early stage biotechnology fund which manages the bioscience investments of the Australian Technology group and has established a second fund, BioVentures Australia, which will become its main investment vehicle; • Newport CDIB Fund Management Pty Ltd, a joint venture between Newport Capital Group Pty Ltd and China Development Industrial Bank of Taipei. Funds are being raised from Australian and overseas investors and the fund will target investments in IT, e-commerce, internet, telecommunications and related technology sectors; and • Foundation Management (WA) which is being setup by an experienced management team in Perth and will invest in companies in WA, SA and the Northern Territory.

3.4 Building on Information Strengths (BITS) Program BITS is a $158 million program established in July 1999 with funds from the sale of the second tranche of Telstra. It aims to build the strength and competitiveness of the Australian IT sector, including fostering stronger commercialisation linkages with R&D organisations, and the creation of clusters of innovative IT&T businesses. The program includes $40 million to establish advanced networks and test beds; $40 million for developing Tasmania as an Intelligent Island; and, $78 million to establish ten Business Incubators to assist IT&T small to medium enterprises in each mainland State and Territory, particularly in regional areas. The aim is to stimulate the formation of clusters of innovative IT businesses and also provide financial support and business skills development, marketing services and generally act as mentors. The names of the ten successful Information technology and communications incubators were announced in April 2000 and they have already started to raise funds and make investments. The ten incubators include: Australian Distributed Incubator (ADI) Pty Ltd, which received $7 million over five years under the program and is dedicated to helping IT&C start-up companies rapidly develop commercial skills and business systems necessary to attract private investors, strategic partners and customers. It does this through delivering six month structures

24 business programs to start ups. Members of the ADI consortium include Ernst & Young, Emerge Cooperative Multimedia Centre (set up five years ago under the Federal Government ’s Cooperative Multimedia scheme), Babcock and Brown and Grayhair.com Pty Ltd. ADI has already increased its available capital to $20 million with commitments of $13 million by a number of high net worth individuals. The incubator is now moving to establish a significant venture capital fund of between $30 and $100 million that will appeal to institutional investors. The incubator has already made three investments. ePark, which won funding of $5 million, is focused on helping and developing eBusiness companies fast track the process of turning ideas into businesses. Clients receive global services and expert advice from the founders of ePark - Deloitte Touche Tohmatsu and Allen & Buckeridge Pty Ltd. It has built up a family of providers of specialist services needed by start up eBusiness companies, including web hosting facilitators, advertising agencies, marketing specialists, lawyers, web design companies and trading banks and overseas dot.com incubators. It is raising between $10 and $20 million for its ePark #1 Fund, an unlisted Pooled Development Fund, and is aiming to attract significant co ­ investment from other venture capital firms and high wealth net individuals. It has offices in Sydney and Melbourne

Bluefire Group, located in Sydney, has funding of $6 million. It is a fully integrated technology incubator providing a range of services including technology services such as network integration, connectivity, web development, web design and internet marketing; professional services including legal, accountancy, recruitment, marketing services, access to entrepreneurial and managerial talent and to assistance with capital raising. It has developed a network encompassing Australasia, Europe and the US. IBM has selected Bluefire as its first series Partner for its Net Generation initiative to help Australian internet and traditional companies build sustainable ebusinesses through advice, partnerships and technology infrastructure. Bluefire has already participated in a financing round for Sandwich.dot.com a company which allows customers to create their own gourmet sandwiches on screen whilst tracking kilojoule and fat content. Epicorp Ltd, the ACT based incubator which won $8 million under the program, is raising further seed capital for its Epicorp Seed Fund. It plans to make investments up to $450,000 in innovative local IT companies. Members of the incubator include the CSIRO, Anutech Pty Ltd, the University of Canberra, ANU and the Canberra Business Centre. SA-BITS Pty Ltd, which won $10 million, is based at the Playford Centre in Adelaide. Other members of the incubator include the Business Centre, run by the SA State Government, and Ngapartji Cooperative Multimedia Centre. It is negotiating with potential private co-investors and plans to make investments ranging from $50,000 to $450,000. It plans to leverage The Playford Centre ’s experience in seed investing and channel the partners ’ deal flow to the SA-BITS Investment Board. InQbator, which won $9.5 million, is based at a technology precinct on the Gold Coast in Queensland. It is providing facilities with high performance IT infrastructure for starts ups entering the incubator as well as management support, mentoring and business development services. It also is focussing on bringing Australian and overseas venture capital providers and strategic business firms to incubator firms early in their development, to enhance their prospects for growth and success. The incubator is owned and operated by Timsco Pty Ltd, which has developed a range of alliances and partnerships, including AM WIN Investment Fund, managed by Castle Marion Mezzanine Investments, the IIF, CM Capital Investments, Bond, Griffith and Queensland Universities, QUT, Boeing Australia and Powertel consortium, venture company and IIF manager, Nanyang Management, Sun Microsystems and Grant Samuel Technology Fund. Start up companies entering the incubator must provide equity to the shareholders in Timsco in return for services and facilities provided. InQbator is currently raising $15 million for a seed capital fund from high net worth individuals and some institutions. It expects to invest an average of $400,000 in early stage IT companies. It plans to host up to 15 companies in its purpose built facility. 25 Items Pty Ltd, whichwon $7.3 million is based in Sydney and is providing physical and virtual incubation facilities. During incubation it provides a tailored mix of business services and capital to startups. It takes a hands on management role and graduates its client firms within 12 to 24 months, securing follow on investment, trade sale or sufficient sales generation. Member of the incubator consortium include Ipluis Development Pty Ltd, Lateral Concepts International Pty Ltd and Software Engineering Australia. ITCINT Pty Ltd, won $5 million and is based in Darwin. Its aim is to improve the rate of commercialisation of IT&C ideas and R&D in the Northern Territory. It opened in January 2001 and its aim is to develop and graduate start up firms by providing service s and seed funding to the point where the start up is attractive to outside investors. Consortium members include the Northern Territory University, Darwin International Technology and eNITy 1 Ltd. It also has developed a number of close alliances including with KPMG, DMR Consulting, Deloitte Touche Tohmatsu, Clayton Utz, Westpac WWbanking. , Ernst & Young, Hewlett Packard, Tsinghua University and the Australian Venture Capital Association. The Northern Territory has provided a further $2.5 million of funding. ITCINT plans to take a 40 per cent stake in incubator companies. Information City Victoria, which won $8 million is based in two sites in Melbourne and in Ballarat. Key organisations involved in the incubator include Ericsson Australia, Photonics REDCentre, a division of Australian Photonics Pty Ltd, the University of Ballarat, and the Information City Melbourne Incubator, a joint centre between Melbourne IT and Joint Technology Parks. It is focusing on providing incubator facilities for startups in the areas of software development, ecommerce applications, photonics and dot.corns. It will provide venture capital to startups in the very early stages of development, in the form of unsecured non interest bearing loans repayable when revenue flows generated. EiR Pty Ltd, which won $10 million and is based in Perth, is providing seed capital, management expertise, accommodation and mentoring to start up IT&C companies. It provides funds management and has established an EiR Seed Incubation Fund to invest in seed and start up IT&C companies. It plans to make investments in the $50,000 to $450,000 range over a two year period. It provides incubation facilities either at the Technology Park at Bentley, near Curtin University of at e-Cerrtral in East Perth. Both facilities are at the centre of a cluster of IT&C companies. Members of the incubator consortium include Imago, SEA and Zernike and it also has strong support from the WA Government.

Other incubators include IT Catalyst, also based in NSW, which received $7.37 million; Perth Ideas Centre of Technology, based in WA which received $10 million; and ITCINT Pty Ltd , based in the Northern Territory, which received $5 million plus a further $2.5 million from the NT University.

3.5 R&D Start Program The program provides grants and concessional loans to support research, development and commercialisation by Australian firms. It has provided substantial funding for the commercialisation of a large number of technology based projects by small to medium sized companies. The program is overseen by the Industry Research and Development Board and is administered by Auslndustry within the Department of Industry, Science and Resources. The Federal Government ’s Innovation Action Plan extended funding for the program to $535 million over the next five years to June 2006. This is in addition to the $419 million already committed to the program. It is expected that the I R&D Board will make grants totalling $190 million in 2000/01 Assistance of up to $15 million is available, though funding typically ranges between $50,000 and $5 million. Funding is provided to companies for R&D projects and for commercialisation. The program aims to:

26 • increase the number of private sector R&D projects undertaken with high commercial potential; • foster innovation in Australian businesses; • increase commercialisation of the outcomes of R&D projects; and • foster collaborative R&D and related activities both within industry and between industry and research institutions.

Projects must involve R&D, but can also include related product development and market research activities. They must also have clearly defined commercial potential. The program comprises: • Core Start, for companies with turnovers under $50 million a year; • Start Plus, for companies with turnovers over $50 million a year; • Start Premium, providing additional repayable assistance to high quality projects; • Start Graduate, to help companies with turnovers under $50 million employ a graduate on an R&D project, undertaken in collaboration with a research institution; and • Concessional Loans, for small companies with less than 100 employees to undertake early commercialisation of a technological innovation.

Core Start & Start Plus The two programs provide grants, on a competitive basis, for R&D projects carried out in Australia over a period of up to three years. Grants of up to a maximum of $15 million are available, although the more usual grant amount is between $50,000 and $100,000. Core Start provides grants of up to 50 per cent of R&D project cost for smaller companies with turnovers of less than $50 million a year, while Start Plus provides funding of 20 per cent of eligible project costs for companies with turnovers of over $50 million a year. Projects must aim to produce products, processes or services which have a clearly defined commercial potential. Applicants must also demonstrate that projects would not go ahead satisfactorily without Start support and that they can meet their share of the project costs. Applications for funding are assessed by the Industry Research and Development Board against a range of merit criteria including: management capability, commercial potential, technical strengths and national benefits. Start Premium The program provides further repayable assistance to high quality projects already funded under Core or Start Plus to a maximum of 56.25 per cent of eligible project costs. For larger companies which receive a grant of 20 per cent of project costs, an additional 36.25 per cent of costs is available. All the Start funding is repayable to the Government and applicants must provide a repayment plan as part of their application. Start Graduate Grants are available, on a competitive basis, for companies to engage a graduate on a specific R&D project. Projects must be undertaken in collaboration with a research institution and can be for up to two years. Fifty per cent of project costs are payable up to a maximum grant of $100,000. Projects must be designed to improve the company ’s performance through the adoption of appropriate technology or methodology and/or the development of new or improved products, processes, systems or services. Applicants must also demonstrate that projects would not go ahead satisfactorily without Start support and that they can meet their share of the project costs.

27 Concessional Loans Loans of up to 50 per cent of the eligible project costs are available to small companies with fewer than 100 employees to finance the early stages of commercialisation of innovative products. The aim is to fill the funding gap between research and commercialisation and facilitate the commercialisation of innovations by small firms. Loans are made for up to three years and the loans must be repaid in the following three years. Interest begins to accrue three years from the date of the loan agreement and is calculated daily at 40 per cent of the Commonwealth Bank Index Rate. Firms must provide at least 50 per cent of the project costs and only projects which have a good chance of commercial success will be supported.

R&D Start Scheme Grants Grants are awarded continuously. In 1999/00 a total of $177 million was awarded to 219 projects under the program. Typical grants include: • $4.8 million to BresaGen Ltd to find a cure through cell therapy for Parkinson ’s disease and other bone marrow disorders; • $3.14 million to Gradipore Ltd for further development of its large scale Gradiflow blood purification system; • $3.2 million to Micromedical Industries Ltd for development of its artificial heart; • $3.75 million to Novogen Ltd for development of an anti inflammatory drug with potential to treat topical skin damage; • $225milliontoTechnico Pty Ltd for wDrk on micropropagation of potato tubers (see237); • $3.3 million to Proteome Systems Pty Ltd to help support a $12 million initiative by the company to develop instruments for preparation of protein samples for analysis by mass spectrometry (see 2.3.5); • $1.6 million to Xenome Ltd for work on molecules with therapeutic potential (see 2.3.9).

3.6 Commercialising Emerging Technologies (COMET) Program The program, launched in November 1999, aims to increase the commercialisation of innovative products, processes and services by providing individuals, early stage growth firms and spin off companies commercialisation assistance. It had initial funding of $30 million over three years. An additional $40 million has been provided by the Federal Government ’s 2001 Innovation Action Plan. The program provides assistance of two types: Tailored Support Package for commercialisation, with the Government providing up to 80 per cent of the cost of a range of activities including strategic and business planning, market research, establishing a sound management team, development of an intellectual property strategy, and working prototype and proven technology development. Successful applicants can receive assistance over two years. A Business Advisor, from the private sector, is appointed to develop and implement the tailored assistance plan. In the majority of cases assistance of $20,000 to $50,000 is provided. There is a cap of $100,000 for exceptional applicants. Management Skills Development Assistance is provided for management skills training courses. Up to half of the cost of the course is available to a maximum of $5,000. Applicants can be individuals, early growth stage companies or spin off companies. There is $250 application fee and entries are judged on a merit basis. The program is run by Auslndustry. In its first 12 months of operation funding of $14.7 million was provided to 270 businesses. Around 70 per cent of these businesses have sought venture capital and 12 have completed the COMET program and raised $250,000. Other outcomes of the program have included distribution agreements, strategic alliances, licensing agreements and manufacturing agreements. Businesses in the program cover a wide area including information technology, health, manufacturing, and agriculture.

28 3.7 State Governments Since the failure of several state venture capital schemes in the late 1980s, the State Governments have withdrawn from providing any direct venture capital assistance. Now they rely on Federal Government programs and provide assistance by helping start-up companies to find possible sources of venture finance. They also help businesses to make themselves ready for external investment. The Queensland Government is the only State Government that is providing any direct seed capital funds to help start up companies. Queensland The Queensland Government has set up the Innovation Start-Up Scheme, as part of its Innovation Strategy, to provide seed capital to bridge the gap between research and commercialisation. The aim is to assist highly innovative early stage companies to commercialise emerging technology products and services. Assistance is provided through a competitive grants program, for which the first round was held in late 2000. The pilot program has funding of $750,000 for 2000/01. Further funds will be available in later years. Successful applicants are eligible for two types of assistance: • business feasibility workshop assistance - which helps applicants assess the feasibility of establishing their business, including technology assessment, market research and information on attracting venture capital. • tailored assistance for business development - this includes assistance in establishing a business including costs of product or prototype development, intellectual property advice and protection, the use of private sector consultants and the direct costs for employing a management team or project staff.

The successful applicants for the second round of grants were announced recently and are listed below to illustrate the range of technologies being supported. All grants are between $70,000 and $75,000: • AIMS (Australian Institute of Marine Science) - development of a test to identify shellfish toxins; • Poly Optics Pty Ltd - a disposable optic fibre lighting system for use in medicine; • ABC Electrics Pty Ltd - a control unit for the electronics industry; • Raytech Technologies - an advanced battery charging technology; • Mr Peter Cassidy - a new drug development technology; • Impediment Ltd - a new diagnostic machine for the medical industry; • HCV Enterprises Pty Ltd - a wireless communications module for remote access; • Head Start technologies Ltd - ozone generating equipment for water-air management.

The Queensland Government has also established a new Queensland biotechnology innovation fund, Biostart, to provide early stage funding for emerging biotechnology businesses. It will leverage off funds provided by the Federal Government for biotechnology. The fund is due to get underway in 2001.

29 TABLE 1

SOURCE OF FUNDS OF INVESTMENT COMPANIES (30 JUNE 2000)

Source Investments Total commitments Unused commitments No Smillion Smillion

Banks 19 340 111 General govt. 6 120 61 Public enterprises 10 125 62 Private enterprises 29 358 136 Superannuation 49 1,733 850 Life insurance 9 183 91 Trusts 12 88 38 Funds of funds 18 314 141 Other 56 418 75 Not stated 18 199 0

Total / 3,877 1,564

30 TABLE 2

INVESTMENT BY ACTIVITY (JUNE 2000)

Investee Companies Value of Investment Activity No % share Smillion % share

Materials 88 15.5 271 11.9 Software 59 10.4 228 10.0 capital goods 27 4.7 217 9.5 commercial 16 2.8 150 6.6 Internet 59 10.4 208 9.1 IT sevices 29 5.1 158 6.9 Electronics 46 8.1 140 6.2 Biotechnology20 3.5 104 4.6 Utilities 8 1.4 100 4.4 Food, beverages32 5.6 99 4.4 Healthcare 16 2.8 76 3.3 Automobiles 7 1.2 68 3.0 Household goodsi 7 1.2 59 2.6 Consumer goods15 2.6 52 2.3 Retailing 25 4.4 46 2.0 Media 19 3.3 45 2.0 Pharmaceuticals16 2.8 44 1.9 Real estate 7 1.2 39 1.7 Leisure 10 1.8 33 1.4 Transportation 8 1.4 33 1.4 Energy 15 2.6 - 33 1.4 Financials 17 3.5 28 1.1 Other 18 3.2 49 2.2

Total 569 100 2,279 100

TABLE 3

INITIAL INVESTMENT STAGE

Investee companies Current value Stage No % share Smillion % share Seed 122 214 269 11.8 Early 183 32.2 612 26 6 Expansion 169 29 7 761 33.4 Turn-about 9 1.6 54 2.4 Late 28 4.9 157 6.9 LBO/MBO/MBI 58 10 2 426 18.7

Total 569 100 2,279 100