Is Australia missing out on the tech revolution?

The dotcom crash is 14 years past and the tech revolution is in full swing, but lack of funding and government support for tech start ups means many of Australia's best tech ideas are being developed and set up overseas. We ask our hot topics panel - OneVentures' CEO, Michelle Deaker, Frontier Advisors' CEO, Damian Moloney and the Fund Executives Institute's CEO, Kate Mills - if government and institutional investors should play a bigger role to ensure Australia's tech industry future.

Dr Michelle Deaker

CEO, OneVentures

The majority of large super funds do not (or can not) take on the work involved to directly invest in tech start ups. Are mainstream Australian superannuants with an appetite for risk missing out by not having access to this option and If so what are the solutions?

Most Australian superannuation funds only have a small interest in the venture capital asset class which covers start-ups to growth companies most of which are held offshore because they access the tech startup scene via VCs offshore. Australian super has also consolidated since the GFC so investments they write need to start around $50M with some not even considering investments under $150M. Unfortunately, this puts most venture funds outside their mandates. The solution is multi-faceted. We need quality managers with new business models proving they can deliver consistent above average returns for their investors. Secondly, we need policies that allow superannuants to select Australian innovation for their portfolio as well as a system to allow funds to write smaller cheques and have it managed at a reduced cost. The pool could be managed by an outsourced provider to allocate with each super fund sharing the service fee. Thirdly would be to provide more support for the fee structures in the early years of an innovation fund or to give a line of credit for this so that the impact on a super fund's fee ratio (the MER) is removed. Venture funds usually return capital net of fees, meaning we pay the fees back before we share in profits, so the problem is at the start of fund life where fees are called ahead of placing investments and not the end. And finally, there needs to be more clarity around SMSFs investing where their owners are sophisticated investors. We believe that if just 0.01% was allocated from our super pool, it would be enough to kickstart the Australian Innovation Economy.

Because of lack of funding, many start ups are leaving Australia or being funded by overseas investors. Should the government play a bigger role (other than just giving tax breaks ) to grow the tech industry in Australia. If so, how?

First of all, there is nothing wrong with Australian innovation companies being funded by offshore capital. It is great for the economy. What is bad for the economy is that often the company moves offshore, potentially re-domiciling. This moves Australian innovation, expertise and jobs offshore. The government had a very good programme called the Innovation Investment Fund (IIF). Importantly, this capital was not a grant and had to be returned with the government maintaining private capital to invest 1:1 by taking a lower proportioned return after receiving their money back. OneVentures' IIF fund saw $20M of government funding translate into 9 companies, with a further (approx.) $100M of private capital pouring into these companies thus stimulating the economy with companies and workers using this working capital to pay tax to the government. The programme in my mind, is a no brainer and a big win for government.

Damian Moloney

CEO, Frontier Advisors Pty Ltd

The majority of large super funds do not (or can not) take on the work involved to directly invest in tech start ups. Are mainstream Australian superannuants with an appetite for risk missing out by not having access to this option and If so what are the solutions?

The key hurdles to our super clients investing in early stage tech venture funds include the poor historical performance (including by venture funds raised after the dotcom bust), the inability to appropriately scale-up exposure and, importantly, the high fees associated with venture capital (and private equity funds more generally). For those funds that have an appetite for the returns/risk from early stage tech, the relatively more appealing option is to target proven US-based venture funds with a track record of partnering with successful entrepreneurs. The difference in performance of US and Australian tech venture over the last two or three years continues to support this strategy, particularly when accounting for the fees to access this space.

Because of lack of funding, many start ups are leaving Australia or being funded by overseas investors. Should the government play a bigger role (other than just giving tax breaks ) to grow the tech industry in Australia. If so, how?

It would seem to depend on whether the government sees home-grown technological innovation as being an area of competitive advantage for the country, and/or a necessary component to meeting its broader economic and social goals. As suggested by the AFR article, high-net-worth investors, self-managed super funds and other non-super capital are more active in this space and appear to be better aligned with supporting domestic tech start-ups relative to institutional super funds. They have far fewer fee, capacity and competitive constraints, so any government support may well be best directed to those investor segments.

Kate Mills

CEO, Financial Executives Institute

The majority of large super funds do not (or can not) take on the work involved to directly invest in tech start ups. Are mainstream Australian superannuants with an appetite for risk missing out by not having access to this option and If so what are the solutions?

There's a lot of smoke and mirrors in the technology start-up industry, remember there is only one Facebook and the majority of technology start-ups fail. It's a high-risk industry that would make up a tiny part of a super fund's portfolio were they to invest direct. The better result is that super funds invest through venture capital funds focused in this area-although the problem there is that domestically venture capital funds are too small to be able to invest the size of cheques that super funds want to write to achieve economies of scale. One potential answer is for the government to reform crowd-funding to allow equity investors so that those investors with the risk appetite can gain access directly to start-ups.

Because of lack of funding, many start ups are leaving Australia or being funded by overseas investors. Should the government play a bigger role (other than just giving tax breaks ) to grow the tech industry in Australia. If so, how?

I share the general aversion to the government picking winners however there are a few things that the government could do. 1. Reform crowd-funding rules as above. 2. Reform the tax treatment around employee share options to make it easier for companies to offer options. 3. Facilitate the development of innovation hubs where researchers, scientists, technologists, innovators and funders can mix easily. 4. Reduce red tape and work to reduce the high costs for companies in Australia. The latter is the least sexy but would probably have the most impact for all companies-including tech start-ups.

A few of our favourite articles on the Tech boom:

14 Nov 2014 - Venture glass half full as superannuation funds shun start-ups
Article by Joanne Gray in the Financial Review

19 Feb 2014 - The Australian tech start-up brain drain: Why are our founders heading overseas?
Article by Rose Powell in startup smart

19 Jun 2013 - Tech's second boom: What's different this time?
Article by Bryan Martin in Elite Daily

29 Mar 2013 - Why The Tech Revolution Is The Industrial Revolution Of Our Time
Article by Paul Hudson in PandoDaily