This article is the fourth in our Australia Day series. Over the past few weeks, we’ve taken a close look at the proposed R&D tax incentive reforms, considered our track record as a nation of innovators and whether our legislation is aligned with the needs of the private sector. Today, it’s all about Commercualistaion Australia. How is the new initiative coming together and how does it compare?
Also in this series…
Would you like to be CEO of Commercialisation Australia?
UPDATE: Commercialisation Australia board members were announced on 9 Feb.
You might be wondering what’s going on with Commercialisation Australia since the program was officially launched in December.
Last week, we received a tip-off that the job ads have been posted and the recruitment scouts have been dispatched to find a new CEO to replace interim boss Tricia Berman. If anyone is able to find a copy (or screengrab) of these advertisements, we’re keen to know what skills the suitable applicant is expected to possess.
This is because the CEO role for Commercialisation Australia is not a post that will be easy to fill.
Critics are likely to predict that the position will go to a ‘seasoned’ bureaucrat or university academic, rather than a private sector ‘mover and shaper’ (please note my deliberate use of ‘p’ and not ‘k’). The expectation would hardly be unjustified given the raft of ‘panel’ and ‘board’ positions recently allocated to ‘wonks’ and ‘boffins’ in the commercialisation space, arguably at the expense of experienced private sector professionals.
Yet this CEO role is a complex one that straddles public policy, economic and commercial deliverables.
Measuring the impact of Commercialisation Australia
There is a reasonable justification that the outcomes of the program be measurable — able to improve the ability of successful grant recipients to commercialise their innovations at least. There is no set of goals or outcomes available on the Commercialisation Australia currently, other than this vague statement of purpose:
“Commercialisation Australia aims to build the capacity of, and opportunities for, Australia’s talented researchers, entrepreneurs and innovative firms to convert ideas into commercial ventures, creating high skill jobs and increasing our global competitiveness. It achieves this by offering a range of tailored assistance.”
In other words, it must improve the potential of applicants to become sustainable and high-growth global businesses (to also paraphrase the eerily similar COMET goals) and deliver tangible outcomes, such as the number of jobs created, the amount of industry investment sourced and the impact of these companies on export and GDP.
However, in terms of tangible measurements, is that really enough?
It is worth referencing COMET, which underwent repeated evaluations. Such rigour is generally not present with respect to most government funded innovation initiatives. For example, up to 30 June 2007, 1,351 organisations had participated in COMET, generating:
- 603 capital raisings
- 415 alliances
- 143 licenses
- 580 other partnership agreements
- 417 innovations taken through to the production stage
In fact, over $400 million in capital was raised by the companies that participated in the COMET program up to 2007. As observed by the Innovation Australia Board, the program achieved leverage of 6:1 in relation to investment funds to companies compared to Commonwealth funding. Wow!
You can’t evaluate goals that you can’t measure, right? I personally do not envy the imminent Commercialisation Australia appointee, as the historical context has already developed benchmarks. And the new Commercialisation Australia CEO will be expected to deliver similar (if not better results) with half the financial resources (more on that below).
Who will be among Commercialisation Australia’s Magnificent Seven?
Our ‘secret-squirrels’ have also revealed to Anthill that the seven board positions, appointed to analyse and approve Commercialisation Australia funding applications, have been filled and that an announcement is imminent. (UPDATE: board announced here.)
No one knows who will be among this ‘magnicifent seven’ other than those appointed or involved in the decision.
It is a complete mystery to external observers how these important functionaries were selected. Was there some sort of process behind closed doors? Were they vetted? Were the decisions political? Or vaguely political, chosen in the same fashion as a US High Court Judge, to perform the role yet still be ‘on-side’ with the powers that be?
While it is unclear how this board will operate at a functional level, it is obvious that the choice of these ‘decision-makers’ will be critical to the program’s success. We can only assume that it will be populated to reflect a range of industry backgrounds.
But just imagine how hard the job of the ‘biotech guy/gal’ on the board is likely to be – assessing a range of applications from the diverse and complex biotech sector.
We can only hope (once again) that the seven appointees will not purely be extracted from the halls of academia. In the Anthill offices, we are currently running a ‘book’ on the likely number of private sector appointees. We’ll let you know which lucky Anthill employee picked the ratio of experienced business builders to public sector board members.
Who is taking Commercialisation Australia applications?
Applications for Commercialisation Australia grants are now open.
As it currently stands, applications for funding are now being received and processed by ‘interim’ case managers. These case managers have largely been recruited from the ranks of the COMET program. Indeed, most, if not all of the 10 to 12 former COMET advisers (the program was wound-up in December) have been signed up to perform the function of case managers in the short-term.
The role of the ‘case manager’ in the Comercialisation Australia process is to help applicants through the approval process, give them advice and, if appropriate, recommend them for future rounds of funding. No permanent case managers have yet been appointed. The expectation is that a tender process will be announced soon, to appoint a possible 30 (given the volume of applications the program is likely to attract).
Unlike COMET, case managers won’t receive ‘success fees’ or have a financial interest in the applicant’s future success or failure. This is probably a good thing.
The relationship between the ‘policy wonks’ (i.e. public servants running the show) and the ‘schmoozing’ COMET advisers was always ‘complex’. The two different perspectives — one intent on risk-minisation for policy/political reasons, the other driven by the ‘risk and reward’ dynamic of commercial investment — was always going to cause tension. (And don’t get me started on the friction inherent in ‘pre-deal’ business valuations!)
Another positive about this structure is that much of the ‘intellectual capital’ acquired by the COMET advisers can be passed to the new program. While there is no way of determining which COMET advisers actually ‘delivered the goods’ during their tenure, government evaluations do suggest that the program delivered positive demomstrable outcomes (as above).
We hope that if there were any ‘less-than-effective’ folk among the 10 to 12 COMET advisers, they won’t score an official appointment when the case manager positions are formally announced.
What grants are now available for innovators?
The word on the street is that around 30 funding applications have already been received and are being processed by the case managers. The program is budgeting $20m for the first six months and then $35m for the next six months and, according to the NSW DSRD Commercialisation Australia briefing on 20 January, it expects to approve 200 grants of varying values in the first year of operation.
Funding is available to support innovators in three ways.
- Skills and Knowledge ($50k-$200k)
- Proof of Concept ($50k-$250k)
- Early Stage Commercialisation ($250k-$200m)
However, if I take the $55m allocated for the first year and divide that by the successful 200 applications anticipated, something doesn’t add up. I’m assuming that someone has their figures wrong, and I’m hoping it’s not the policy advisers.
Putting a dollar value on skills
The first set of funding options are designed to assist innovators acquire ‘Skills and Knowledge’. This has got to be a good thing, given the often apt stereotype of the commercially clueless inventor or academic and his/her equally flawed counterpart, the market focussed entrepreneur with little or no technical skill.
We’ve said it before as ‘voyeurs’ and commentators; most people when developing a new product or service become fixated on one of two things – the technology (the solution) or the market (the brand). Melbourne University’s Peter Cebon made this same observation after an in-depth analysis of eleven cases of high-technology innovation in Australia. (Measured Success: Innovation management in Australia.)
Unfortunately, most people are naturally geared to put more effort into one aspect, generally at the expense of the other. We’re hoping that this aspect of Commercialisation Australia will help address this natural conflict.
The ‘Skills and Knowledge’ funding options range from $50k (or less) to pay for expertise, such as market research and analysis, business planning and intellectual property management (like the grants once available under the defunct COMET program), and up to $200k over two years to assist with the recruitment of experienced executives on a dollar for dollar basis. For example, if an innovator wishes to employ a $200k executive, he/she can apply for up to $100k to assist with the financial burden of employing this ‘heavy-hitter’.
I don’t think that there is a successful entrepreneur in business (and many unsuccessful entrepreneurs out of it) who would not go back and make ‘that strategic appointment’, to cover off a commercial weakness, if given half the chance.
How does the ‘Proof of Concept’ grant compare?
The second set of funding options, the “Proof of Concept” grant, is all about testing the “commercial viability of a new product, process or service”. It offers $50k to $250k also on a dollar for dollar basis. Grant recipents will need to able to demonstrate how they will co-fund the balance in cash, not ‘in kind’.
The language associated with funding option has me intrigued… in a good way.
Unlike COMET and, indeed, Commercial Ready, the emphasis of this commercialisation grant appears to have shifted away from “Can you prove it works?” in favour of “Can you prove it is commercially viable?”
This is an important distinction (and something apparently lost on the framers of the proposed R&D tax concession reforms). As I have said in other posts in this Australia Day series (call it a theme), it’s not the R&D you do that’s important. It’s what you do with the R&D that counts.
This grant option appears to recognise this distinction.
Further, it might not be the only good news to be derived from this new approach.
Talking to one of our ‘deep-throat’ contacts within the machine, another subtle shift is apparently taking place, a change that perhaps can be attributed to the removal of the ‘fee component’, once associated with COMET advisers. This second shift involves a move away from “Are you legitimate enough?” to “Do you really need it?”
A criticism repeatedly levelled at COMET (and, indeed, Commercial Ready) was that it favoured established enterprises. It’s not hard to see how this informal preference might well have come about with respect to the COMET program, subtly and unintentionally influenced by the complex relationship between COMET advisers (seeking a return) and their ‘masters’ in the public service, who benefit from safer bets.
This is a good thing, as it favours smaller companies. It also addresses a real need – the lack of available funding to organisations stuck in what is known as the ‘Valley of Death‘ in the innovation cycle. Funding for companies in this position is an area of market failure and, therefore, something appropriate for a government to seek to address.
Government support has been notoriously absent from this ‘Valley of Death’, especially since the demise of Commercial Ready and its predecessors (BIF, R&D Start, etc.). This is an area that innovators and commentors, including Anthill, have been desparately hopeful that Commercialisation Australia would address.
Indeed, we’ll be crossing our fingers (but won’t be holding our breathes).
What about the big ticket stuff?
Of course, no analysis of Commercialisation Australia can be complete without a description of the third set of funding options, the “Early Stage Commercialisation” grant.
This funding option ranges from $250k to $2m and is available to support activities that will help a new product, process or service be taken to market.
Once again, word on the street is that the emphasis of this grant will be on commercialsation activities and not R&D (as the name suggests). And applicants must be able to prove that they ‘really need it’.
The latter element, a clear need, echoes the proposed reforms to the proposed R&D tax reforms, which seem designed to prohibit organisations that would have conducted the R&D anyway. In an earlier post, I explained why this approach has the potential to be problematic in the context of R&D tax reform.
However, this hard-line strategy might not be such a bad development in the context of a commercialisation grant. Unfortunately, only time will tell. Much like Treasury’s stance on the R&D tax changes, what sometimes looks like a positive development on the surface reveals unexpected negative implications down the track.
The ‘repayable’ Early Stage Commercialisation grant
Grants acquired through this third funding option are repayable. Of course, the meaning and implications of this term have many innovators in a flap.
Over at the Commercial Climate’s Blog you can find a more thorough analysis of the language than what I am able to offer here. However, the main concern (or point of confusion) is that, if things go wrong, innovators will lose half the investment (the innovator’s contribution) and, if things go right, innovators will be required to return the cash, possibly removing any hope of a return on the innovator’s initial contribution.
However, as pointed out by mobile telephone innovator Michael Stone of Amethon Solutions, as a comment in a separate analysis provided by iPitch:
“Only Early Stage Commercialisation grants are repayable and repayment starts once you have generated $100k in accumulated revenue from the product. The repayment rate is 5% of revenue and if you have not repaid the grant in 10 years, it is written off. If the company is financially unable to repay under these conditions, other arrangements can be negotiated i.e. you will not be sent broke to repay the grant.”
We’re heavily in favour of repayable grants, so long as they are managed in line with commercial terms that don’t severely adversely effect the grant recipient. It might make more sense to have the repayable element returned from profit, rather than revenue, as a company generating $100k in revenue could easily be operating at a loss. However, a repayment schedule based on profit could always be exploited by the innovator, allowing him/her to consistently reinvest and, therefore, avoid posting a profit in the first 10 years.
Once again, only time will tell whether this aspect proves a stroke of genius, a pure political play or an unintentional bureacratic blunder.
How does Commercialisation Australia rate?
There is much to be optimistic about when considering Commercialisation Australia’s three tier grant structure. And most innovators have waited a long time to see any positive news come from the Venturous Australia recommendations of 2008. For that, most pundits are grateful.
But there’s one itch that I must scratch.
Commercial Ready funded 524 projects for a total value of $498m with FY2008-09 expenditure of $107m. As mentioned above, the Commercialisation Australia program is budgeting $20m for the first 6 months and then $35m for the next 6 months. That’s $55 million; or approximately half that provided by Commercial Ready in its last year.
If it’s intention is to spend $196.1 million over the 4 years to 2013, this means that the allocated funds will need to fall even further until 2014, when funding will pick up to $82 million a year thereafter.
Yet, despite all this, it is expected to do the same job and take over from the COMET program.
I think that many will agree that Commercial Ready had many flaws. COMET also had its critics.
But a federal government and its appointed Minister responsible for innovation can not justifiably halve the resources allocated by its predecessors to early-stage innovation and then hope to maintain its credibility as a government that claims to support innovation.
This development is especially hard to swallow when you consider that the same Minister responsible for this portfolio has already allocated $3.4b to support the Australian car industry from 2011 to 2020.
So, would you like to be CEO of Commercialisation Australia? I once worked for an employer that didn’t believe in the goals of the company. You can imagine how that worked out.