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.