James, Good idea on the tiering of the type of assistance – but as long as the low $ grants and others are done by public servants with MBAs who grant on the value of a good idea (like COMET), rather than its risk profile … I have yet to find an entrepreneur who enjoyed any aspect of the VC process (including those who actually received money).

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i dont see how there would be any competition with the banks or with anyone else in the VC industry if the government comes into the equation… the fact is that the REASON the government needs to come in is because of all the things the banks & other investors ARE NOT DOING… so if they arent doing those things now, then they arent losing anything if the government does them.

if those micro-loans or any other investment instruments were capable of solving the problems that entreprenuers & inventors have had for SO LONG with finding finance, then we wouldnt be having this conversation would we? so there is ZERO argument about the government stealing their business from them.

and since the government will be the one experimenting in a part of the sector that they are too timid to go into properly, then they should be bloody thankful that the government is the one who will figure out how it all works & take those experimental risks that they have been unwilling to take themselves… and then later on, when they show everyone how it can work, then those banks & others can come into that market & take it over from the government with less risk, and then the government will no longer be needed in that part of the investment market anymore

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I have just completed a pre sales capital raise.

I think it is now up to me to prove my idea has legs (I don’t think the government should help with that).

If I do prove it (& we could put some commercial KPI’s around that), that’s when I think there is an opportunity for the government to step in an accelerate the growth of idea if its gaining traction in the market to the power of whatever amount of capital I can also raise.

Before that, before the first sale, before traction with consumers or customers, I think the government is going to get it right less than 5% of the time, in other words it will waste $180 odd Million of that $196 Million.

Great ideas should get converted to commercial reality by the private sector. Why not just focus on taking those great ideas that are actually making it with the consumer or customer to the next level? Surely thats how we get more bang four the $196 million?

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Trevor Rose Reply:
August 24th, 2009 at 9:31 pm

HI roger, i know where you are coming from …but it isnt just a matter of “if your idea is valid/has merit then you should be able to prove it”… for this requires one to begin with the assumption that all people with a valid/meritous concept also have the resources to go about proving it… and thats just not the case in life. there are many people in this world who have a great brain, brilliant talents & skills, but bugger all resources, and they are too busy with the day to day issues of survival to push their ideas ahead… some of us just need that help, and its not any kind of reflection whatsoever about the merits of our ideas or abilities.

i hope i havent misunderstood your point… it just seemed like you were trying to suggest that there is some kind of level playing field out there… which i just dont think is the case.

and just to make a further comment on your 3rd paragraph down… i think that even if you are right and only 5% of the invested money was to be in profitable businesses… lets have a look at that… call it roughly $20M… now, i dont know about you… but from my point of view, if you cant get (in this worst case scenario) $20M worth of good investments to pay for $180M worth of bad ones, then you arent really trying… thats only making $9 for every 1 invested… which isnt impossible at all…

and this IS the WORST case scenario… so lets assume for a minute that as a country we can put in a better effort than that… which i think is actually highly likely (and no that isnt being overly optimistic – we are a much brighter country than has EVER been expressed from potential into reality)… and lets not stop there either… lets remember that there is the potential for a business not just to make money, but to also prevent us having to import the exact same thing if someone overseas does it first… AND lets not stop there, lets look at employment… AND lets look at spin-offs… AND i could go on all night but i wont

Australia needs to step up to the plate & be brilliant… i know we do a lot of stuff really well, but i dont think this is one of those areas & it desperately needs improvement… its not like the government stepping in has to be a permanent thing… but it would at least give us the chance to solve the problem & then the private sector can take over what it is right now ignoring.

with respect to your final paragraph… i think that what you are suggesting is to get the government to invest its money in exactly the area that the finance & VC industry is already servicing… and to my mind that would do exactly what the article was suggesting about stepping on the banks toes by providing loans

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roger Reply:
August 25th, 2009 at 12:34 pm

Hi Trevor,

My only point was to say let’s think about a change and a focus of dinero. To focus it on things that we are pretty sure are going hit pay dirt. That (in my view) is the most responsible use of our tax money. That way companies like say, Boost Juice, who from memory had to wait 3-5 years before they really put the hammer down can do things faster & create thousands of jobs, tax return & prosperity quicker. That way we spend all $196 million on better outcomes that we are 90% confident can drive results & return for Australia. I say this within the context that the previous approach (a bit here, a bit there) hasn’t really changed the game & we’re looking to change the game right?

Focus is key to most enterprises who are successful (& countries). We need to make fewer bets in my mind and actually take the betting out of it as much as possible. Even research companies who make their money out of this game are crap at determining winners from that far back, so I don’t think the government will be any better on pre-revenue companies without an in market success model.

I have only dealt with one VC & two banks. My experience is they are a difficult bunch to deal with (I walked away from the VC who had a soft commitment to a considerable sum in favour of private investors) especially in this climate. Contrary to your thoughts, I don’t think they are doing a good job of accelerating growth of early stage companies that have market results. Instead they are stressing those companies financially & emotionally & often leading to their failure for short term reasons driven by the banks monthly reports, quarterly reviews, bonuses & tight fiscal policy & VC’s requests for rediculous returns so they can offset all the bets they failed on (that is they can’t do their job very well ~ identifying winners ~ so ask you to offset the risk of your own business plus the risk of the fact they are probably not very good at their job & will have massive losses on others).

I get that it’s not a level playing field, but I don’t think you address that by spending on non proven bets.

I also get that I might be wrong, but I would like to see us try something different, even if we fail. The worst we could do is something kind of similar to before…

Cheers

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Trevor Rose Reply:
August 25th, 2009 at 1:05 pm

ah ok, i think we misunderstood each other a bit here… i certainly dont think that VCs or banks are doing a GOOD job in ANY area to be frank… my point was that at least people who are already going are BEING serviced in some way… which is a million billion trillion quadrillion quintillion (you get the idea) times better than those of us who are still just trying just to get to that stage… but since you have already been through where i am, i am sure you know what i mean about the “pre-seed” stage… it sucks sweaty donkey balls… and i dont blame you for walking away from the demands of a VC.

i guess i should have been clearer about that

but the most important thing here is that i think that SOMEONE has to take a risk… because if no one at all is taking risks with the money, then many perfectly valid concepts products & services will be lost to australia… as an inventor, i have already taken a huge risk by investing a significant proportion of my entire LIFE into these projects… and i just find it amazing that my country doesnt want to even risk the tiny amount of money required to help me secure the IP so that i can then have a proper discussion about the money i will then need to get the project off the ground… so it stalls before it begins… and yet, everyone who has the money to invest wants me to see their financial input as being of equal or greater value to the sacrifices i have already made, BEFORE they even know what the idea is, what its earnings potential are, how unique it might be, how much i need or what i need it for… and this does not strike me as very honest or trustworthy behaviour… and then they want me to trust them on top of that!

its just an impossible catch 22 situation that needs to change… and i dont think its going to change until we are willing to take risks, some of which might not pay off… ok there are things that can be done to reduce the risk… but if australia isnt willing to take ANY risks, then it will lose out, big time.

the question should be less about which projects should we fund & which ones not… and more about HOW can we invest in a greater & greater proportion of ALL ideas that have any merit at all… and this should always be our question as a nation if we want to be the most innovative nation on Earth… no other question will get us there… think about it

the answer to the question is likely to have many layers, one of which will be the layer than enables people to have an initial discussion knowing that their IP is secure, even though they probably dont have the money to pursue all that expensive & complicated stuff about patenting

another layer (pervading all layers of the process) will be a system that enables the inventor to know how much of the ownership they are giving up (or debt they are taking on) for help at each stage of the process… and so this means that for an idea with less earning potential, you would need to do more of the process yourself (but then the cost of the process is also likely to be lower for such a proposal), and an idea with greater earning potential has more capacity to give away % ownership to pay for that assistance.

there would be a number of further layers to the process, any one of which can be skipped by someone who is not in need of that part… all the way through to start up… and then a variety of programs to help businesses once they are up & running & out there.

i think australia probably wastes a lot of tax revenue on a lot of stuff that should be paying for itself… and i would rather see 1000 of those things axed to fund this properly.

Interesting challenge. I think we can all agree that the current solution set does not deliver appropriate outcomes for entrepreneurs or investors.

It would probably be correct to say that this is what is driving Senator Carr’s entire investigative, review and reform agenda. Good. It doesn’t work, it’s too subjective. Any objetive investigation of the results would indicate that neither Govt or the VC community are any better than one another at picking winners.

So what to do? Well we want to suggest something heretical and almost counter intuitive. An innovative answer to this problem.

We think there is indeed a role for a bank. In fact Banks are very good at lending money and managing risk and generating good returns!!
Why not harness this to solve the early stage challenge. The example of the Grameen bank and others like it indicate that there are alternative ‘banking’ models; models that lend on the basis of more than financial capital and still manage to get a return.
If we look at what the US are proposing with the GreenBank (http://blog.cogentum.com.au/) we are starting to see examples of how Govt. through the financial system and using a ‘banking template’ can support new entities and deliver value right across the economy and to use your words James, “cross polinate” into delivering enviornmental outcomes.

The danger is to keep doing what doesn’t work, the danger is also developing a solution when an existing model can be tailored to suit. Seems to us that we can be innovative by using what we’ve got in a more creative manner. You talk of super funds, but I suspect that the Futur Fund may well be perfectly suited to manage and deliver the Commercialisation Institute. With a targetted mandate, this could provide Australia with the support to finally deliver the ‘Clever country’ promise.

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The problem that needs to be addressed is the “Valley of Death”. That gap between the research and innovation and viable commercialisation that Australia, in particular, suffers badly from.

The support for innovation is needed right at the point of emergence from universities, garages, the kitchen table…. Not where Angels and VCs are already playing.

Unfortunately, Governments and risk are not happy bedfellows. They are saddled with the problem of spending other people’s money and when it is revealed that they only managed to fund 5-10% of successful projects and “blew” all that money the press and the opposition will have a field day. But sadly they are the bare facts of commercialising innovation. Only 10-12% of new ventures ever get off the ground and only a small fraction of those succeed big time.

So, how do we get sufficient support behind start-ups to give them enough oxygen in a disciplined but not over-bearing way to develop and tune their technology but not so much that they lose focus and “blow” their cash? I am not sure what financial structures have the most success here but what ever they are they must:
• Leave enough incentive for the founders, the passionate people who are going the make the enterprise succeed
• Be only just enough to get them going so that they stay razor focused on the end goal
• Not be burdensome in terms of paperwork or reporting requirements
• Not be onerous in terms of too short repayment or investment return period
• Come with mentoring, coaching, training, networking, facilitation and whatever other useful tangible support can be provided.

Drip-feeding cash based on clear, but flexible milestones, is probably a good thing, particularly in the early days.

Super fund and Future Fund involvement at this stage makes great sense. A tiny portion of those great wells of capital should be put to some good nation building work rather than just supporting the stock market or bankrolling more property development.

As other posters have mentioned, I doubt banks would be troubled by loans for high-risk start-ups. They don’t operate in that space now but Government involvement might give them some comfort such that they might consider entering that market which could only be a good thing.

But what ever happens it must provide value-add, not just money, and it must not be too onerous for the recipients or else they just won’t bother and/or the good candidates will have other more productive things to do than mess about with too many bureaucratic hurdles.

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I am a bit late in this conversation but I would like to point out that the government must have (we hope) had a clear reason for dismantling the Commercial Ready scheme, especially as it started back in the Hawke/Keating days. If there are some metrics that showed it was poor return for taxpayers money then lets see the data. Why are we starting from scratch again…to save money? Two well known ICT VC’s in Sydney have looked at their investment portfolio over an extended period and have shown that for every dollar of Federal monies (be they grants, loans etc) invested in early stage companies, there have been 8-11 dollars of private equity invested. This is hardly middle class welfare, as some have said! When all is said and done, startups need capital – loans or equity or grants. Are we just arguing about the mix of these forms and the admin process they operate in? If so then we are reinventing the wheel. If the previous systems failed then lets learn from the mistakes and move forward – unfortunately I have only heard that they failed and we are restarting. Surely we are better than that?

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Trevor – we ran out of replies.

I would only add that this spend suffers from a lot of scrutiny. From the governments perspective being able to get a ‘beach head’ that shows ROI becuase they have focused in on accelerating more proven market models of innovation with consumer or customer sales, instead of ‘unknowns’, may be just what they need to get things going & avoid any ‘this isn’t working’ issues. I really think they’ve got a tough job and need to focus in on something tangible that can show results.

Cheers

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Trevor Rose Reply:
August 26th, 2009 at 12:52 pm

well… i can personally see what needs to be done, and i can see a great future for australia if it just had the balls to make a confident step forward…

what this most reminds me of is the story about how the CSIRO was actually funding leading edge research at the start of the computer industry… and it had the choice to fund EITHER that project, or seeding rainfall from clouds… and what decision did it make? it decided to abandon computing.

so here is the issue, everyone keeps talking about the problem of trying to “pick a winner”… but the problem is actually thinking that we HAVE TO pick a winner

what we should have done back then was to fund BOTH projects… and if we had, australia would have held a much greater leading role in the computing industry right back from the start… this loss to australia was a loss because we TRIED TO PICK A WINNER, not because we couldnt… we should have funded BOTH

we are too averse to risk

…to use another analogy… my understanding is that when Henry Ford wanted an 8 cylinder engine, the engineers initially told him it was not possible… but he said “i dont want to hear that, go find out how to make it possible”…and they came up with the V8 configuration rather than a straight 8… and in the same way, i dont think that our business people & accountants & economists are being challenged… they hold the purse strings & so no one gets to tell them to shut up & try again until they succeed…

…but this is exactly what we need to do, tell them to go back & keep thinking about it until they come up with MORE money to invest & stop bitching about risk… i mean what a bunch of pussies

honestly, i want to tell those people to grow a set.

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