Funds shock as capital ventures offshore

NEWS last week that Paul Bassatt, had set aside $100m to invest in the US and Israel has unsettled the local start-up community.

NEWS last week that the co-founder of one of Australia’s most successful new-economy businesses, Seek’s Paul Bassatt, had set aside $100 million to invest in start-ups in the US and Israel has unsettled the local start-up ­community.

The plan by Bassatt’s Square Peg Capital, one of the better resourced local venture capital funders, has again put the focus on the state of the local financing options for start-ups.

Anecdotes abound of poor local financing options and of ­talented employees and high-growth start-ups leaving Australia for the US or Britain where there is more and better capital and expertise. And now the local funding community is heading overseas?

At a conference on Friday, Matt Barrie, the founder of Freelancer, one of the highest-profile local technology companies, said the local funding scene was ­“terrible’’.

Others are not so sure. Local venture capitalist Mark Carnegie, who has launched a second round of his Carnegie’s Den venture capital pitch contest, says the start-up financing industry has come along in leaps and bounds over the past three years as investors conditioned by years of ordinary financial market returns look to juice up their portfolios by backing fast-growing start-ups.

That has been largely despite government policy, with tax changes in 2009 all but killing off share options as a means for cash-strapped companies to motivate and retain talented staff.

In May, the budget killed off a raft of financing schemes designed to help good ideas grow into businesses, such as the matching funding provided by Innovation Investment Funds and Commercialisation Australia.

But there are a number of funders intent on growing the industry and they might at last be about to get some official ­assistance.

Last week news emerged that the federal government plans to repeal tax laws that discourage start-ups from issuing options to employees, in a move to kickstart enterprise culture in Australia.

Revealing the proposed changes, Liberal MP Tony Smith wrote in The Australian last week: “We know from overseas experience that for a whole range of businesses, employee share ownership boosts productivity, breaks down industrial barriers and ­creates an ownership transition opportunity for long-serving ­employees in many small and ­medium businesses.’’

Adrian O’Shannessy, a partner Greenwoods & Freehills, says the current regime is out of step with Britain and the US — both magnets for start-ups — where employees who receive options are not taxed until they exercise them and sell the shares.

O’Shannessy says it is also a significant cost to businesses and financial backers, which have to find other ways of compensating employees they want to keep.

“Funds otherwise available for research and development of the business are then required to pay people that is just a cost of business,’’ O’Shannessy says.

Observers say the government is now getting back on board with the proposed tax changes to be made as part of a competitiveness agenda to be revealed in coming weeks.

Yasser al Ansary, chief executive of the Australian Private Equity and Venture Capital Association, says it is unlikely schemes like the Innovation Investment Funds or Commercialisation Australia will be revived as part of the competitiveness ­agenda.

The government has already indicated that it will not have a lot of money to throw at start-ups. But it has indicated that it is looking at ways to nurture industries in which Australia has a competitive advantage, such as resources and energy, agriculture and medical research — an approach advocated by the peak body for the country’s biggest companies, the Business Council of Australia.

Some companies — among them Freelancer and the winner and runner-up at the first Carnegie’s Den, Digivizer and Selera Labs, are convinced that hi-tech businesses can be built and run from Australia without having to move the headquarters abroad or sell big chunks of equity to Silicon Valley or London-based funders.

Selera Labs has landed contracts for major companies and government departments from a Wollongong base and wants to stay based there as it expands the business around the world.

Founder Michael Lawler says moving abroad can be a double-edged sword, with talented employees subjected to a battle for talent in places like Silicon Valley.

One of Carnegie’s Den’s aims is to help develop the local innovation industry and keep companies in Australia.

Applications are open for the next two weeks, with eight finalists to be chosen on October 27. They will make their pitch to a panel of experts and a live audience, including potential funders, with the prize including a winner’s cheque, a year of mentoring from MH Carnegie and the chance of a significant investment to commercialise the business.

Carnegie says he is looking for companies with revenue and high growth prospects — rather than just good ideas with no track ­record.