Venture capital vital for R&D and growth of Australian economy

28th May 13

Mercedes Ruehl, Australian Financial Review

AVCAL chief executive Dr Katherine Woodthorpe says figures in a new report show the contribution the $2 billion venture capital industry makes to the domestic economy. 

Venture capital-backed companies spend 200 times more on research and development than other companies and are ready to list on the stock exchange in half the time it takes those not backed by venture capital a new report shows.

The report, commissioned by the Australian Private Equity and Venture Capital Association, also shows venture-capital backed companies make up 10 per cent of all business R&D spending in Australia despite accounting for 0.01 per cent of gross domestic product. AVCAL chief executive Katherine Woodthorpe says the figures demonstrate the contribution the $2 billion venture capital industry makes to the domestic economy.

The report includes VC companies that failed.

The 10 largest venture capital-backed companies, including ResMed, Cochlear and Seek, spent $1.4 billion in R&D between 2005 and 2011. But Australia’s venture capital sector is contracting which will affect R&D expenditure, future innovation and productivity.

“The Australian sector is shrinking in line with the global venture capital sector. The key problem is capital, there is not enough to go around,” Dr Woodthorpe said. “This was always hard but it was exacerbated by the global financial crisis.”

She said one of the issues is people don’t necessarily understand the concept and its importance to the economy.

“There’s been bits of narrative and case studies, but never a single comprehensive place to show the stories and the human face of what venture capital means,” Dr Woodthorpe said.

She said research proves venture ­capital-backed products and businesses have produced high economic and social returns per dollar invested. She argues that Australia “can’t rely on digging hills of iron ore and shipping lumps of black fuel over the world forever. We all know that’s not a long-term sustainable future”.

The new economy will be formed from new industries and technologies.

“Venture capital plays a critical role in that innovation to grow our next economy. Without it there would be huge gaps in the innovation pipeline and the huge risk that we actually wouldn’t achieve a sustainable future.”

Global expansion attractive

There are around 500 venture capital-backed companies in Australia, compared with 24,000 in the United States.

Brandon Capital Partners managing director Stephen Thompson said: “The US has comparable statistics and it’s nice to show that although we are a smaller market on a per capita size we [now] have similar stats to show that contribution of venture capital.”

The majority are from the life sciences and technology sectors. But online jobs site Seek is one of the best success stories of the domestic VC sector. In 1999, ­backers invested $2.5 million as part of the company’s first institutional capital raising. Today, Seek is worth more than $3 billion and employs 500 staff.

The trouble, said Southern Cross Venture Partners managing director Bob Christiansen, is that it’s very hard for a company to win backing. Venture capital firms typically take on about 1 per cent of the companies that make them a proposal, he said. “We’ve had 400 proposals in the past year and made four investments,” Mr Christiansen said.

Dr Woodthorpe conceded that another reason available funds have shrunk is because since the financial crisis, VC firms have been unable to exit prior investments in the five to seven-year time frame they’d prefer.

With capital hard to come by, investors will be even more selective about investments, and will look to back companies with a global reach.

That means start-up companies have to be smart about explaining how they will sell to the wider market, even if they’ve proved there is a need for their product.

“Ultimately we want to invest in companies that can be globally competitive, said Starfish Ventures founder Michael Panaccio.

A product that can scale is essential, agrees Mr ­Christiansen.

“We want to know ‘can it grow beyond being an interesting little company’ and that there are no inherent structural barriers to becoming a large company.”

Read the article here.

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