“I don’t think the market is so buoyant with enthusiasm that funds would invest on the promise of venture capital without having seen money back in their pockets from previous venture investments.” This impasse proves that domestic venture is in a state of market failure, says Nick Birrell, venture executive at Innovation Capital, a Sydney-based manager. He says too many profitable deals are going unfunded. As a result, Australian venture is an opportunity lost to institutions and the public. This failure persists in spite of the many discussions he and other managers have held with investors and asset consultants. “They know our story. That’s why it’s a market failure. Something has to break it, and if I knew what it was, I’d be out there doing it.” Woodthorpe believes there is further scope for the Government to lessen the risk of venture investments, thereby making the asset class more appealing to institutions. Its IIF program, which began in 1997, and the subsequent IIF Follow-on Fund, launched in 2009, are now in their final stages and it is not known whether further support will soon be provided. (Carnegie’s first close includes $20 million from the IIF scheme.) However the Government’s emphasis on reducing its fiscal deficit makes any further outlay to the innovation sector seem unlikely.

According to AVCAL, overall venture investment in Australia is 0.5 per cent of GDP, less than half the OECD average, making Australia one of the most underfunded innovation markets in the world. Government support of venture capital dates back to 1982, when it established the Management and Investment Companies (MIC) program to stimulate innovations in high technology, an industry that was booming offshore. It enabled 11 MICs to raise money from private investors, who in turn could claim 100 per cent of their investments as tax deductions, and was a catalyst for growth in domestic venture. The industry’s capital base grew to $353 million until the 1987 crash and subsequent recession halted this advance. Support resumed in 1992, however, under the Pooled Development Fund (PDF) program, which was similar to the MIC scheme but less driven by tax incentives. Throughout the next five years, $155 million was invested in 147 companies, and by 1998 up to 40 venture funds in Australia held $2.7 billion in funds under management. Headline successes from this period were Cochlear, the hearing-implant technology business, and Pharmaxis, a pharmaceutical company that develops treatments for chronic respiratory and autoimmune diseases.

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