Submission to the Ralph Review

The Benefits of Venture Capital

Venture capital leads to significant economic growth, innovation, job creation and ultimately has a positive effect on tax revenues. This is illustrated by a survey conducted by Coopers & Lybrand In the four years to 1996 Australian venture capital backed companies performed significantly better than the top 100 Australian companies, as follows.

	Growth By VC Companies	Growth By Top 100 Companies
Staff Levels Sales Profits Exports	20% 42% 59% 27%	2% 6% 7% -

The effect of venture capital on enterprises is the same world-wide. For example, the British Venture Capital Association survey of the results of venture capital based companies over the four years to 1998 showed the following growth results.

	Growth By VC Companies	Growth By Top 100 Companies
Staff Levels Sales Profits Exports Investments	20% 40% 24% 44% 34%	1% 20% - 8% 7%

Other results of the Coopers & Lybrand survey included:

40% of companies surveyed indicated that they would not currently exist if it was not for the funding provided by their venture capitalist; while
a further 47% stated that they would have developed slower without venture capital.

We believe that the considerable growth shown by such companies demonstrates that venture capital investment promotes expansion across a range of areas, including incremental growth in respect of profits, expertise, sales and staff levels. This growth along with the resultant growth in the companies' suppliers results in additional tax revenue.

The Non-Financial Benefits of Venture Capital

Venture capitalists are not passive portfolio investors. They operate as business partners providing management advice and assistance in many ways. By encouraging UK and US venture capital to flow to Australia there will also be a very important transfer of knowledge and experience to Australian companies and the local venture capital managers.

Dr Jeffry A Timmons and Dr Harry J Sapienza interviewed more than 40 entrepreneurs and venture capitalists and surveyed the CEO and the lead investor in 51 venture backed US companies. The results consistently showed that the entrepreneurs valued the non-financial services of their venture capitalist as being even more important than the venture capitalist's contribution as a financier.

The following ratings out of five were given:

sounding board 4.4
business consultant 4.3
financier 3.7

Venture capitalists specialise in making small companies big. It is what they do day after day after day. An entrepreneurial company only has to grow once. Its management will typically include people who are skilled in the day to day aspects of running the business. However, it is normal that management does not have the experience of growing a business from nothing all the way to the stage where it may justify a public listing.

The introduction of foreign venture capital into Australia will be accompanied by the migration of small business expansion know how, due diligence capability, and increased market and technology intelligence and access.

Current Australian venture capital backed companies recognise the non-financial support provided by their venture capitalists:

65% companies credited their venture capitalist with contributing to their performance by acting as a sounding board for ideas
58% advising on corporate strategy and direction;
48% providing financial advice; and
40% by challenging the status quo or providing another option.

Some Australian success stories

Everybody knows of the success stories that have arisen from the US venture capital industry. Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel and Microsoft are a few of the venture capital backed companies that have gone on to be household names.

While Australia has yet to produce a success story of this magnitude (possibly partly due to the lack of significant foreign venture capital) there are $1.7 billion of locally generated funds which have been invested in Australian venture capital backed companies and those funds have produced a lot of Australian success stories.

Below are just three examples of how venture capital has assisted in the growth and prosperity of small Australian enterprises. Further examples can be provided if required.

Energy Development Limited ("EDL") received its first round of venture capital in 1991 when it owned a single 16MW power station just north of Alice Springs. EDL is now listed on the ASX with a market capitalisation of $300M and owns 24 power plants with 262MW of total generating capacity. EDL is currently on the path towards strong international expansion.

Austal Ships Limited ("Austal") received $15M of venture capital in 1994 when it had sales of $40M and only one product line (a 40m fast ferry). Since 1994 sales have increased to $183M and it now produces a range of ferries, customs patrol vessels and other ships as required. Austal now employees 1100 people as compared to 180 back in 1993 and is listed on the ASX with a market capitalisation of approximately $250M and after tax profits in excess of $20M pa.

The IMAX cinema venture began with seed capital. The founding entrepreneur invested his own money establishing the IMAX concept before obtaining $20M in expansion capital in October 1996 from an Australian venture fund. Since then the IMAX brand has gained strong recognition and has raised another $31M from a public float. It is currently intended that additional cinemas be opened in Melbourne, Adelaide, Brisbane and Auckland.

The ones that got away

Unfortunately, not all of the success stories involving small Australian companies and seed capital result in increased profits and jobs in Australia. Due to a lack of funds in Australia, several small Australian companies have been forced to migrate offshore to grow. The loss to Australia in terms of intellectual property, profits and jobs is significant.

Two examples are discussed below:

Hypercom Corporation, now listed on the New York Stock Exchange with a market capitalisation in excess of $300 million, was unable to secure Australian venture capital in the early 1990's and moved offshore.

Hypercom is a world-wide developer, manufacturer and supplier of high performance, comprehensive point-of-sale payment systems and sophisticated enterprise networking products. Annual revenues are now approximately $400 million.

ResMed a healthcare group, which as a small company was based in Sydney, made the Forbes 200 leading small companies in the US in 1997. ResMed, which specialises in the development, manufacture and marketing of medical equipment to assist people with sleep disorders, is listed on the New York Stock Exchange's NASDAQ index.

ResMed was successful in obtaining a limited amount of venture capital support in Australia; however, it found it necessary to move to the US to access the venture capital and IPO markets for its subsequent expansion.

A more fully funded and mature domestic venture capital market can be expected to dramatically reduce the regularity of this experience.