Australian budget squeeze endangers VC funding

Tony Abbott’s government could slash the A$350m granted to venture capital funds last year.

Venture capitalists in Australia could receive less backing from the government this year as budgetary pressure forces the government to pull back on funding, according to Yasser El-Ansary, chief executive of the Australian Private Equity and Venture Capital Association (AVCAL).

“There is a risk at the moment mostly because the government is under immense pressure to return the budget to surplus over the medium term and therefore the government may be tempted to look at short-term saving measures,” he told Private Equity International.  

Moreover, as venture capital firms have failed to outperform in recent years, the industry is at an increased risk of losing the funding.

“The performance of venture capital over the past few years has obviously not been as strong as many would have hoped, but that has to be taken in context against the backdrop around the world, which is a venture capital industry that is tough in many jurisdictions – particularly as there has been a significant flight away from risk towards safer investments.”

As a result, AVCAL has submitted a pre-budget proposal to the government as it gears up to determine the 2014-2015 budget, highlighting the need to maintain the A$350 million (€226 million; $305 million) of funding that was granted to the Innovation Investment Fund (IIF) last year.

“We believe the government should commit to a new A$350 million investment round commencing this year. That would be an appropriate platform since the government is under significant pressure from a budgetary point of view,” El-Ansary added.

“We recognise the government is not awash with money but at the same time we think it is really important that we view expenditure commitments like the IIF as less about an expense and more of a capital investment decision.”

In February 2013, the Australian government pledged A$350 million to the IIF, a government vehicle that invests in Australia’s venture capital funds. The fund aims to support and co-invest with venture capital managers and government support is matched by private investment in dollar terms.

“It plays a really important role in helping spur activity and create momentum within the venture capital sector, to go out and proactively go out and look for opportunities and back start-ups and innovative companies to realise their full potential,” El-Ansary added.