Since becoming Australia’s prime minister in 2015, Malcolm Turnbull has highlighted a number of areas in which his country is lagging behind the rest of the world – particularly regional competitors such as Singapore and Hong Kong – when it comes to incentivising and commercialising innovation.
GCV Analytics data shows that Australia reported 12 corporate-backed deals in 2016, up from 8 in 2015. Compared with Canada, the UK and Israel, however, Australia still has some way to go. Canada had 48 corporate-backed deals in 2016, up from 45 in 2015; Israel had 52 such deals in 2016, up from 32 in 2015; and the UK recorded 85 in 2016, up from 70 in 2015.
Historical data shows the total number of deals since 2011 is 42, with investments in the IT, services and media sectors dominating in recent years.
Turning to fund launches, Australia-based insurance firm Insurance Australia Group (IAG) formed a corporate venturing fund in February last year to operate through its IAG Ventures innovation unit. IAG Ventures was created in 2014 and interacts with startups to create new insurance models that operate as joint ventures, but the new fund will seek to make strategic investments. It will prioritise growth-stage companies as opposed to early-stage startups, and will aim to fund businesses that could help create new delivery models for insurance, including big data and telematics technology developers.
Australia-based financial services firm AMP on the other hand shut down its venturing vehicle AMP New Ventures in January after a strategic review. Paul Sainsbury, AMP’s chief customer officer, told staff in an email seen by Australian Financial Review that a review conducted by AMP had concluded the firm would prioritise investment that was core to business performance.
The move followed several months of strife for AMP, which wrote down the value of its life insurance unit by A$668m ($500) last October. Several senior executives left the company the following month, while Sainsbury came on board to head its customer and wealth solutions activities.
Australia-based telecoms company Telstra was the most active corporate investor with 13 deals, surpassing both Singapore-based telecoms business Singtel’s venturing fund Innov8 and Australia-based financial services firm Westpac, which each had three deals. The bubble graph shows Telstra’s investments from 2011 to date, with most of the deals in the IT sector.
Government initiatives
Turnbull’s government is not the first to commit extra resources to strengthening the innovation ecosystem, but it does appear to have approached these issues with gusto. The measures the Liberal-National coalition has introduced over the past 18 months include improved tax incentives for early-stage investment, increased funding for collaboration between business and universities, and the establishment of new national accelerator and venture-funding programs.
However, the fact that Australia slipped from 17th to 19th position in the 2016 Global Innovation Index – a ranking of innovation capabilities in 128 economies – suggests Turnbull and the rest of the coalition face a considerable challenge in making the nation’s relatively risk-averse investment culture more dynamic.
Paul Cheever, an investment consultant and former head of the Australian Institute for Innovation, a state-backed think-tank set up in 2010 which closed last August after coming to the end of its funding, said: “Over the past couple of years there has been a huge rise in the number of accelerators and incubators, and now both the state and the federal government have started to get behind them with some money. But one of the flaws we have in the whole discussion – and this is driven by the marketplace – is that everyone says: ‘We need money.’ ”
Cheever said that while capital was required to commercialise and innovate, “from a system point of view it is capability that really counts – so I am a bit concerned that generally, the federal government does not really understand capability”.
He added: “For example, I think that the technology transfer offices within our universities have some really great people when you put them together. But our planning tends to be more around how to put money out, rather than how to bring people together and how to mobilise capability.”
Tax policies
Tax incentives for venture capital investors are nothing new in Australia, but the Early Stage Venture Capital Limited Partnerships (ESVCLP) and Venture Capital Limited Partnerships (VCLP) regimes, which were introduced in 2002, have both been updated by the Turnbull government.
Under the ESVCLP scheme, new early-stage venture capital funds with between A$10m and A$200m benefit from flow-through tax treatment, a tax offset for investments made by limited partners and an income and capital gains tax exemption on disposal.
The fund upper limit was raised to A$200m from its previous A$100m in July 2016, and a 10% non-refundable carry-forward tax offset on contributions was introduced. At the same time, the government removed the divestiture requirement that had been enforced when the value of an investee exceeded A$250m.
The VCLP regime is similar, although there is no requirement to focus on early-stage investment and there is no upper limit on fund size.
Australia also introduced new incentives for direct investment in innovative early-stage companies in July 2016. Eligible investments benefit from a 20% non-refundable carry-forward tax offset on investment, capped at A$200,000 a year, as well as a 10-year capital gains tax exemption for investments held for at least 12 months.
Companies seeking investment can self-assess as “innovative” against a range of criteria set out by tax authorities or by receiving a determination from the Australian Tax Office. The incentives are based on the UK government’s Seed Enterprise Investment Scheme (SEIS), which was launched in 2012 to promote small and early-stage businesses and entrepreneurship in the UK. SEIS raised more than the equivalent of A$500m for almost 2,900 companies in its first two years.
Research and development
Australian businesses can claim a tax offset for research and development activities under the R&D tax incentive. Firms with annual turnover of less than A$20m can claim a 43.5% refundable tax offset. Larger companies benefit from a 38.5% non-refundable tax offset.
When Turnbull took office in 2015, he identified partnerships between business and researchers as a key area for improvement. At the time, he said: “One of the things we do not do well at all is the collaboration between primary research, typically in universities, and business. We are actually the second worst in the Organisation for Economic Cooperation and Development, so it is a very important priority to make a change to that.”
At the end of 2015, the coalition launched the National Innovation and Science Agenda (Nisa), a framework for Australian innovation policy consisting of initiatives worth A$1.1bn over four years.
Focusing on four key pillars – culture and capital, collaboration, talent and skills, and government as an exemplar – Nisa is intended to incentivise investment in early-stage innovative businesses and increase engagement among businesses, universities and the research sector. To this latter end, the Nisa has implemented the following policies.
• Investment of A$1.5bn over the next 10 years to fund the National Collaborative Research Infrastructure Strategy, which drives collaboration involving 35,000 researchers, government and industry to deliver practical outcomes.
• Fast-tracking of collaborations under the Australian Research Council Linkage Projects scheme, which provides project funding of A$50,000 to A$300,000 a year for two to five years.
• An Innovation Connections program to help small and medium-sized businesses team up with researchers, with matched grants available.
• The expansion of the On program, Australia’s national science and technology accelerator, run by the Commonwealth Scientific and Industrial Research Organisation (CSIRO), an Australian government corporate entity that carries out scientific research.
These new measures complement the industry growth centres set up by Turnbull’s predecessor Tony Abbott in 2014. The not-for-profit growth centres also promote collaboration between business and researchers, but are organised into six sectors – advanced manufacturing, cybersecurity, food and agribusiness, pharmaceuticals, mining, and oil and gas. As well as aiming to create more productive partnerships between researchers and industry, the growth centres are intended to identify and remove unnecessary red tape, improve access to international markets and boost workforce skill levels.
Government venture investment
Australia’s Innovation Investment Fund was scrapped in 2014 following years of criticism for underperformance and a general lack of impact. In an influential report published shortly before the fund was closed down, the Commission of Audit said: “This body provides direct subsidies to Australia’s venture capital industry. In the same way other industry-specific assistance is recommended for abolition to avoid distorting resource decisions across the economy, so should this assistance to the venture capital sector.”
Under the Turnbull government, however, a new fund – with similar tax incentives – has been set up as part of CSIRO.
The A$200m CSIRO Innovation Fund was launched last December to bring to market early-stage innovations from CSIRO, universities and other publicly-funded research organisations.
The fund is being run by veteran venture capitalist Bill Bartee, formerly of investment firm Blackbird Ventures. The fund, which operates as an ESVCLP, will benefit from A$70m of government money over its initial 10 years plus A$30m in revenue from CSIRO’s wireless LAN program. A further A$100m will be sought from private investors.
Also in December, Australia set up a A$500m Biomedical Translation Fund, which will benefit from A$250m of government funding matched by the private sector. The fund will promote the growth of Australian biomedical innovations and is being run by three private sector fund managers – Brandon Capital Partners, OneVentures Management and BioScience Managers.
Cheever said Australia’s federal-backed funds could benefit from having a broader governance structure, higher levels of stakeholder engagement and a less bureaucratic approach. “I get the feeling that with organisations like Nesta in the UK, say, they have a lot more engagement and freedom of movement,” he explained.
Nesta is a foundation that supports practical projects promoting innovation benefiting the public, targeting areas such as skills, entrepreneurship and cities.
Cheever added: “This is the freedom for the CEO of a growth centre which has decent federal funding for operations to go out and make things happen. So, for example, at certain times, he needs to be able to go back to the federal department and say: ‘We need to put money in here – this is the inflection point.’ ”
As for government venturing abroad, the Future Fund, the sovereign wealth fund of Australia, has made several investments in US-based startups recently. The Future Fund led a $45m series C round for Bitglass, a data protection technology producer, in January this year. Singtel Innov8, the corporate venturing subsidiary of telecoms firm Singtel, Norwest Venture Partners, New Enterprise Associates and other unnamed backers returned for the round.
The Future Fund also contributed to a $41m series D round raised by Fugue, a US-based developer of software to manage cloud infrastructure, which featured Maryland Venture Fund, an early-stage vehicle owned by the US state of Maryland.
Nicole Idar Lee contributed to this report.