State-backed fund faces chop after pumping millions into failed medical company

Breakthrough Victoria, a private investment company established by the state government at the height of the COVID crisis to help rebuild the Victorian economy, last year pumped taxpayer funds at the rate of $2 million per month into a company on the brink of insolvency.

The full details of Breakthrough Victoria’s $39.25 million investment in Seer Medical, a medtech company now in administration, and two proposed rescue packages that would result in the government becoming either a major shareholder or outright owner of a rebooted company, are revealed in a report to creditors.

As state treasurer, Tim Pallas announced the formation of Breakthrough Victoria in the November 2020 budget.Credit: Gus McCubbing

The development comes as Breakthrough Victoria, a publicly funded, venture capital play launched with the stated purpose of investing $2 billion in innovative research and start-ups and supporting 15,700 jobs over 10 years, is under mounting pressure to convince the Allan government’s public service review it should continue to be funded.

The review, led by former top bureaucrat Helen Silver, in addition to reducing the public service, has been asked to prune Victoria’s more than 300 state agencies, authorities and companies that have contributed to a doubling of the size and cost of government since Labor was first elected in 2014.

Two sources familiar with Silver’s review but unauthorised to discuss it publicly confirmed that Breakthrough Victoria, chaired by former Victorian premier John Brumby, is near the top of her to-do list. The Allan government, when asked to comment on the future of Breakthrough Victoria, defended the organisation’s performance but provided no assurance it would continue.

“Breakthrough Victoria is in-scope for the Silver review, but we will not pre-determine recommendations to government,” a government spokesperson said.

Experienced venture capital figures Paul Bassat and Adir Shiffman said Breakthrough Victoria should be wound up.

“I am incredibly passionate about the need for Victoria and Australia more broadly to become a more dynamic and innovative economy,” said Bassat, a founding partner of venture capital pioneer Square Peg. “In that context, I am supportive of thoughtful policy by governments that further that goal.

“To date, there isn’t much evidence that Breakthrough Victoria will move the dial in a significant way, and there is a good argument for the funding to be redirected towards polices that more effectively achieve that outcome.”

Shiffman, a tech investor and start-up founder, said that rather than using taxpayer money to take equity stakes in start-ups, the government should provide interest-free loans to help companies access the existing research and development tax incentive, as well as office premises for early-stage ventures and payroll tax relief for more established ones.

Business figure Paul Bassat says Breakthrough Victoria should be wound up.Credit: Nicole Reed

“Picking winners with a relatively undefined mandate using a whole variety of different mechanisms is probably the worst structure I have ever seen,” Shiffman said.

David Burt, the director of entrepreneurship at the University of NSW, urged the Victorian government to retain Breakthrough Victoria. He cited its recent $10 million investment in Quantum Brilliance, a company that specialises in the design of quantum devices used in supercomputing, to shift its manufacturing operations from Stuttgart, Germany to Victoria.

“Australia is in a global competition to attract manufacturing operations of the next generation of important technology companies,” Burt said. “Whether it is equity or debt or a grant, there is a role for government capital to keep technology development in Australia.

“Breakthrough Victoria is doing good work, it is doing it in the right way.”

David Burt from the UNSW says Breakthrough Victoria has been a success and should be retained.

Breakthrough Victoria’s troubled investment in Seer Medical, a Melbourne-based company that developed technology to enable people living with epilepsy to better monitor their health from home, is forensically examined in a 172-page administrator’s report provided to creditors last week.

The report, prepared by Pitcher Partners insolvency expert Lindsay Bainbridge, reveals that on July 4, 2022, Breakthrough Victoria made an investment of $30 million into Seer Medical in the form of an unsecured, convertible note to help the medtech company increase its Australian workforce and expand its operations in the US and UK.

Tech investor Adir Shiffman says there are better ways to support start-ups.

Under the terms of the investment, the company would remain based in Victoria, the funds would be repaid to Breakthrough Victoria by September 2025 and in the event of a capital raise, Breakthrough Victoria would be able to convert its debt into company shares at a discounted rate.

The injection of taxpayer funds, although welcomed at the time by Seer Medical co-founder and former University of Melbourne researcher Dean Freestone, coincided with an abrupt collapse in the company’s finances and governance.

By the end of June 2023, expenses had ballooned, the company had posted trading losses of $30 million and there was material doubt about it being an ongoing concern.

An exodus of directors, failed capital raising and a voluntary product recall meant that by July last year, Seer Medical was burning cash at the rate of $2 million a month. It liquidated its operations in Germany and the UK, ceased its US operations and reduced its workforce from a peak of 270 people to just 30 staff.

Freestone stood down as a director and lodged an unfair dismissal claim against the company and separate unconscionable conduct claim against Breakthrough Victoria. Both of those matters are before the courts. The company estimated that without further intervention, it would have run out of money in October.

Instead, Breakthrough Victoria stepped in with more taxpayer funds.

Dean Freestone, one of the co-founders of Seer Medical, in 2021.

“Notwithstanding the poor financial performance of the company after July 2024, BV [Breakthrough Victoria] continued to invest in the company executing a convertible note agreement in July 2024 with the company receiving the following subsequent payments: $2m on 29 July 2024; $2m on 26 August 2024; and $2m on 17 September 2024,” Bainbridge reported.

When Seer Medical was placed into administration, Breakthrough Victoria was the company’s largest secured and unsecured creditor, with total claims for $39.25 million.

According to Bainbridge, Breakthrough Victoria’s best prospect of seeing some of that money again is to convert $25.7 million of its debt into equity and become a major shareholder of a new company to be controlled by Cadwell Industries, a US-based neurodiagnostic equipment manager.

Under a second proposed corporate rescue, Breakthrough Victoria would take control of a rebooted company, in partnership with TriCap Consulting Pte Ltd, a Singaporean biotech investor. Both of these options will be put to a meeting of Seer Medical creditors on Tuesday.

Breakthrough Victoria defended its ongoing support for Seer Medical.

“In Victoria alone, Seer Medical saw well over 6000 patients who otherwise would have directly cost the Victorian healthcare system over $90 million,” the government spokesperson said.

“As a patient investor, BV focus on investments with long-term potential that generate sustainable returns over time. BV’s actions supporting other investors and the independent shareholder group helped retain this potentially life-changing technology.”

Since then-treasurer Tim Pallas announced Breakthrough Victoria in the November 2020 budget and the organisation launched in 2021, it has directly invested more than $300 million in 33 companies, established co-funding agreements with seven Victorian universities and amassed more than $1 billion in co-investments. Its investment timeframe was last year expanded from 10 to 15 years.

Although Seer Medical is an example of an investment that has gone belly up, Breakthrough Victoria has also picked some notable winners. These include Xefco, a Geelong-based start-up that manufactures sustainable textiles, and Navi Medical Technologies, a Melbourne start-up that has approval from the US-based Food and Drug Administration for technology that will improve care for critically ill newborns.

It is also a funder of funds, and is currently in discussions with established funds managers to expand its indirect investments in the start-up sector. Breakthrough Victoria projects that more than 1900 jobs will be created by its portfolio companies.

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