THE entrepreneurial environment in Australia can be improved with the introduction of a publicly supported venture capital (VC) fund, according to the Institute of Public Accountants (IPA).

In its 2016-17 pre-Budget submission, the IPA has recommended the Federal Government introduce the VC fund by either providing a significant proportion of funds to assist VC managers to attract other institutional investors to publicly supported VC funds, or by becoming an institutional investor in a range of individual VC funds. 

“This level of support by government to small business equity finance will improve small business innovation and entrepreneurialism,” said IPA chief executive officer, Andrew Conway.

“This critically needed support will also be a driver to identify and overcome hurdles to successful and profitable investment.

“Many young firms face funding problems, particularly in uncertain technological or new knowledge environments because of their unattractiveness to bank lenders.

“It is a lost opportunity to the Australian economy when innovative firms with high commercial potential are constrained by the absence of external finance.

“Any government with a strong commitment to economic growth via research and development and investment which facilitates greater enterprise and innovation activity must ensure that early-stage venture capital finance remains available to high potential, young firms.

“Otherwise, we risk a reduction in new commercialisation opportunities stemming from national investments in science and technology,” Mr Conway said.

IPA pre-Budget submission: http://bit.ly/1PVGJX7

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LEGISLATION was introduced to Federal Parliament in its final sitting for 2015 that aims to to provide a framework for crowd-sourced equity funding  – a case of the government playing market catch-up. But other elements in the package take a lead in helping to create alternative funding markets to traditional property-equity banking sources.

The legislation will allow unlisted public companies with less than $5 million in assets and less than $5 million in annual turnover to raise up to $5 million in funds in any 12 month period.  The Federal Government believes its framework has advantages over current crowd funding schemes in competitive countries, such as the US. 

The fact that the Small Business Minister and Assistant Treasurer, Kelly O’Dwyer, has had to describe the process more completely as crowd-sourced equity funding (CSEF) is an indicator of the chase the legislators are engaged in to equip and foster this market with a framework that, up until now, has lagged behind countries such as the US and the UK.

Until this legislation passes, crowd funding rules in Australia do not allow companies to deliver equity for investment – so far it has been limited to products and services in exchange for small investment tranches.

Many Australian start-ups have been flummoxed by the existing rules and some have sought to register for funding through other jurisdictions. The delay has been explained as ‘protecting’ small investors.

“Today’s announcement is a key priority of the Turnbull Government’s National Innovation and Science Agenda,” Ms O’Dwyer said.

“CSEF or crowd funding is an emerging way for start-ups and early stage businesses to access the funding and investors they need, while maintaining adequate protections for retail investors who share in the risks and successes of these businesses.

“Following extensive consultation, the legislation will allow unlisted public companies with less than $5 million in assets and less than $5 million in annual turnover to raise up to $5 million in funds in any 12 month period,” the Minister said. 

“Companies that become an unlisted company in order to access crowd-sourced equity funding will receive a holiday of up to five years from some reporting and governance requirements.

“The Turnbull Government recognises the need to allow investors to make informed decisions and companies raising funds through crowd funding will be required to release an offer document.

“While investors will be able to invest an unlimited sum in crowdfunding, there will be a cap of $10,000 per issuer per 12-month period to ensure that mum and dad investors are not exposed to excessive risks.

“Australia’s CSEF model is competitive globally with the issuer cap of $5 million each year higher than the US and New Zealand cap, and the investor cap of $10,000 per issuance higher than the average in New Zealand and the UK.

“Intermediaries will play an important gatekeeper role and will need to conduct checks on companies before listing their offer. Intermediaries will be required to hold an Australian Financial Services Licence, providing issuers and investors with confidence in the integrity of the intermediary.

“Ongoing responsibility for issuing licenses for intermediaries and monitoring the operation of the crowd-sourced equity funding framework will sit with ASIC.

“Regulations to support the framework for crowd-sourced equity funding will be released for consultation shortly. The government will also consult on options to facilitate crowd-sourced debt funding in 2016,” Ms O’Dwyer said.

www.industry.gov.au

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EXTRA >>

THE chronic, historical dearth of financial support for ‘next technology’ entrepreneurs in Australia will finally be answered by private equity firms.

That is the view of Dropbox Australia country manager Charlie Wood, who said private equity firms will be pivotal to the survival of Australia’s next generation of technology start-ups – providing funding, business strategy and connections – in his keynote speech at the recent AMMA Private Equity Spring Conference.

AMMA, founded in 2008, is a private equity accounting firm network that is best known for its primary support of disruptive music platform Guvera, raising $90 million in capital for the Australian start-up that is gearing for an IPO this year. 

Mr Wood said Australia had no shortage of entrepreneurs with good ideas, but there was a gap between having a good idea and turning that into a successful company.

“In my experience as someone who has run two different start-ups in the enterprise social media space, I have found that there has been a lack of support available in Australia for entrepreneurs to drive their ideas forward,” Mr Wood said.

“This support would come in the form of introductions to major domestic and international contacts, suggestions for business strategy, funding questions and the ability to help these ideas turn into sustainable companies.

“This space is where local private equity firms can bridge the gap.  Instead of entrepreneurs reaching out to Silicon Valley, which is already inundated with people looking for help, they can build a successful start-up with the support of a private equity firm who not only raises capital but also takes a role in driving the company forward.”

AMMA Private Equity sources and manages investment opportunities in the technology and mobile sectors.  Its key investments include music stream service Guvera, app development company AMMA Apps Investments, and sports portal Sportkix.

AMMA Private Equity CEO Paul Jansz said Australian technology start-ups, with the right support from private equity firms, had enormous potential to achieve growth, success and returns.

“One of the key issues that entrepreneurs struggle with is understanding where and how to fund their million-dollar idea, and that’s where we come into the picture,” Mr Janz said.

“In return, we are able to access some of the world’s most exciting pre-IPO investment opportunities and offer them to clients of our global accounting firm network.  When you think about how technology touches our daily lives, from how we find information to how communicate with each other, you realise how innovative and limitless the tech space is. 

“Australia has already proven its ability to contribute to the mobile and technology sectors, and with the right support from private equity firms there’s no doubt our next generation of tech start-ups can bolster our position as a global player.”

Representatives from more than 100 accountancy firms across Australia and Asia attended the annual AMMA Private Equity Spring Conference in early September at Hayman Island, Queensland.

The conference also heard updates on AMMA’s key technology and mobile investments.

Mr Wood said there were key similarities between Dropbox and Guvera that provided a strong foundation for future success.

“Cloud platforms like Dropbox and Guvera have the ability to understand how their customers use their services,” Mr Wood said. “This facilitates real time feedback into how the offerings should evolve and how to better serve customers, both existing and new.  This is an incredibly powerful part of the growth strategy of a SaaS platform.

“Both technology platforms have also been effective in developing key channels and partners that have helped to drive scalable distribution.  For example, Xero’s partnership with Dropbox and Lenovo and Brightstar’s partnership with Guvera.

“At the end of the day, apart from funding and business strategy, a successful start-up needs to have scarcity and scale.  Every product needs a point of differentiation and the ability to drive significant user numbers.”

www.ammaequity.com

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EXTRA >> CONFUSION over what is driving the current behaviour of the Australian dollar has prompted Morgans Financial to issue a review of economic factors at play – and predict the ‘Aussie’ will settle at about  US70cents by year end.

According to Morgans research, often investors look at the wrong signals and must grasp the reality that surges in capital investment – such as what Australia experienced in the early stages of the mining boom – can act to drive both interest and exchange rates up or down, depending on stages of a cycle. 

“Over the last year, we have seen the Australian dollar fall and interest rates fall at the same time,” Morgans research director, Roger Leaning reported.

“Many people are used to the idea that falling interest rates lead to a falling exchange rate. Fewer people are used to the idea that surges in capital investment drive both interest and exchange rates up and down at the same time.

“Commodity price stimulated investment is a good example of how investment affects interest and exchange rates particularly in Australia,” he said.

“Back in 1998, commodity prices were at the end of a cycle of long term decline and low levels of mining investment in Australia leading to  low long term Australian interest rates relative to US 10 year bonds and a low Australian dollar exchange rate.

“However, cycles come and go and the low commodity prices of the late 90s turned into a multi-year commodity price boom.”

Mr Leaning said this had an unusual, but logical effect.

“By 2010 record high commodity prices attracted record high Australian investment, which in turn led to long term Australian interest rates increasing to a level 2.5 percent higher than US 10 year bonds and a substantial rise in the value of the Australian dollar,” he said.

“Since 2010, the cycle has rolled over again. A big investment in mining has led to global increases in commodity supply and downward pressure on prices.

“The subsequent decline in mining investment means that long term Australian rates are now falling relative to the US,” Mr Leaning said. “In February 2015, Australian 10 year bond yields were just 0.5 percent higher than US 10 year bonds.

“So it is no great surprise that the Australian dollar is depreciating. Indeed by the end of this year (2015), we forecast Australian cash rates to be 2 percent or lower (currently 2.25%) and expect the Australian dollar to bottom around US$0.70.  

“And then, yet another investment cycle will slowly emerge …”

* Morgans Financial Ltd is an industry expert member of Queensland Leaders, the organisation fostering and mentoring the state’s next generation of leading companies.

www.morgans.com.au

www.queenslandleaders.com.au

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