Australia pledges A$350m to domestic VCs

The Australian government has committed an additional A$350 million to its innovation fund, which will be invested on a matching basis in domestic venture funds.

The Treasury Department of the Australian government has announced plans to invest A$350 million (€271 million; $362 million) through the Innovation Investment Fund (IIF) into Australian venture capital funds, according to a government statement.

The new funding round in IIF will be invested alongside an equal amount of private capital. Whatever amount the government commits, the venture capital fund has to raise from the private sector to match, according to Katherine Woodthorpe, chief executive of Australian Private Equity & Venture Capital Association (AVCAL).

The additional funding goes along with some favourable tax changes for venture capital firms. Gains and losses will be treated on the capital side rather than the income side, according to John Dyson, investment principal and Starfish Ventures.

The funding is part of the Australian government’s Venture Australia plan, recently announced as part of the Government’s Industry and Innovation Statement. The government will begin receiving applications at the end of this year, and the $350 million will be committed over a period of several years, Woodthorpe said.

“We want to provide the environment to encourage and support Australia’s entrepreneurial talent in the Asian Century,” deputy prime minister Wayne Swan said in the statement.

An AVCAL statement said the funding will be a “great boost” to Australia’s domestic venture investing, especially given the additional private capital to be invested simultaneously.

More than anything, the government’s additional commitment is a “positive endorsement” of venture capital in Australia, according to Dyson. 

“It’s a bigger pool of capital in a market where it’s increasingly difficult to raise funds,” Dyson told Private Equity International.

Starfish Ventures is currently participating in the government’s IIF program, he said, and the firm would consider doing so again. In a co-investment with the IIF, the government invests a matching amount of capital with a venture capital firm, but gives up the returns from its commitment, effectively providing the successful venture firm with a “super-return”, according to Dyson. The IIF is content only with getting its original capital back from the investment.

If the government's base capital is returned, it will be recycled back into the IIF and recommitted to other venture capital funds, the statement said. The idea is to make the IIF self-sustaining, Dyson explained.

Officials are also hopeful that the program will begin to attract international investment as well, according to its statement.