Independent Econometric Analysis of the Innovation Investment Fund

1 Jan 2011. In 2010 Professor Gordon Murray and his colleagues Professor Marc Cowling and Dr Weixi Liu were contracted by the Department to undertake an econometric analysis of the Innovation Investment Fund (IIF) program. Professor Murray is an international expert in Entrepreneurship and Venture Capital and along with Professor Cowling (an experienced econometrician) has undertaken reviews into entrepreneurship, innovation systems and financing for early stage firms for the UK government and European governments.

Click here to view the report
Click here to view the Econometric Assessment

The report concludes:

An analysis of the firms funded by the IIF programme indicates that the programme is well focused and has provided material and relevant support to a significant number of early-stage enterprises from Australia’s science base. IIF supported portfolio firms are more likely to be early-stage investments, to be in receipt of follow-on finance, and to achieve a successful exit than comparator firms outside the IIF programme. However these supported firms are also more likely to fail than comparator firms in part because the programme focuses on genuinely early-stage and therefore risky firms.

The programme has raised substantial finance for young and new knowledge based firms that would not have been available in the absence of this scheme. None the less, the VC funds supported have largely made modest returns which would not by itself attract long term private investment interest in Australia’s high technology entrepreneurs.

The IIF Programme while important is unlikely to engender by itself a viable and flourishing VC industry in Australia. Thus, the objectives imposed on the programme are overly ambitious and do not reflect fully the highly challenging environment for early-stage VC investment across the developed world.

Background:

The Australian Commonwealth Government began the Innovation Investment Fund (IIF) in 1997 in order to help channel equity investments to younger and smaller ‘new knowledge-based’ firms. This programme was designed to promote and support the
development of young enterprises in the Australian economy and further to help in the parallel development and establishment of a formal Venture Capital (VC) industry. The underlying rationale for intervention was that capital constrained firms, particularly those at the start-up and early stages of their lifecycle, were constrained from maximising their innovative potential because of a lack of risk finance for
growth. Accordingly, job creation and productivity growth were lower than should be expected from such firms. This situation was a direct cost to the Australian economy.

An early evaluation of the IIF programme in 2005 found that this basic rationale for intervention was supported.

This current 2010 assessment has found that the rationale for the three rounds of financing for the IIF programme remains valid. There are identifiable benefits to both the commercial development of targeted firms and to the early stage (or ‘classic’) venture capital market in general from having this form of public/private (‘hybrid’) support in place. The evidence shows that the IIF programme has been critical in
channelling additional equity capital to pre-start (seed and pre-seed) and start-up firms.

The IIF programme has accurately addressed market gaps in the provision of smaller amounts of equity capital to genuinely early stage and high risk young businesses primarily in new technology sectors. This is a very challenging segment of the capital market for investors. As a consequence, it remains largely unattractive to private sector, institutional providers of venture capital.

Government is perforce obliged to be the investor of last resort in order to protect and enhance the economy’s innovative infrastructure. This limited supply of early stage ‘classic’ venture capital to high potential but also highly uncertain and speculative new enterprises remains an international not just an Australian problem.

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