Budget 2014: Startup industry looks to budget for government investment in innovation

Strengthened government investment in innovation and tax policy changes to support that innovation are two outcomes a number of startup industry figures are looking for when the federal government’s budget is released on Tuesday night.

However, one change they hoped would arrive in the budget now won’t go ahead, with the Australian Financial Review reporting that the government has put planned changes to employee share schemes on hold because it was at odds with the budget’s “tough love” message.

Blue Chilli head of marketing Alan Jones says he is frustrated by the move.

“[The delayed changes] would allow startups to attract employees and over the long term retain key employees,’’ he says.

“It wouldn’t be out of step with the tough love message.”

RSM Bird Cameron director Con Paoliello says the budget should recognise that the economy is no longer being driven by the manufacturing or services sectors, and should invest in incentives, infrastructure and innovation.

He wants to see tax incentives for investors that would help get startups off the ground.

“Investors rely on private investors or public resources to make the initial investment before they can access R&D tax breaks,’’ he says.

“In Australia if a person invests in a startup company they don’t gain access to any tax benefits, which makes finding private capital difficult.

“RSM Bird Cameron believes the federal budget should address this and consider options such as expanding the proposed exploration development tax incentive to non-resource startup companies or providing investors with a capital gains tax exemption upon sale of a startup company.”

Cost cutting has been a bit of a theme in the lead up to the budget, but Australian Private Equity and Venture Capital Association chief executive Yasser El-Ansary says it’s only one part of the solution and government should also look to encourage more businesses to invest in innovation.

“If we can unlock the growth potential of businesses, you’ll see that translate into more tax revenue flowing through to the federal budget,’’ he says.

“When you look at our global competiveness position, Australia currently ranks number 15 in the group of 34 OECD countries [based on the World Economic Forum’s Global Competitiveness Index], and in order for us to lift our productivity and economic growth we are going to have to invest more in innovation.”

It’s a view also held by OneVentures managing director and CEO Dr Michelle Deaker.

“Government funding programs foster the broader investment community and the IIF [Innovation Investment Fund] model where the government matches private investor capital, sharing risk and taking a low capped return, encouraging capital from institutions and high net worth individuals to the venture capital asset class.

“The multiplier effect of the government support is clearly visible when you look at OneVentures’ Innovation Fund through the additional capital realised into our companies via co-investment and syndication.

“In the medium to long term, the quantum of new jobs in potentially new, emerging industries generated through this program for the economy represents a strong case for government support.”

Dr Deaker says she expects the government will be looking at developing the Innovation Investment Fund even further, despite the National Commission of Audit recommending the fund should be abolished.

The idea raised by the National Commission of Audit that funding startups should be left to the private sector is one that should be ignored by the government when considering budget policy, according to Australian Institute for Innovation chief executive Paul Cheever.

“The fundamental flaw in this opinion is that it presumes a process of capital allocation that is irrational and non-evidence based, and therefore which itself offends the principles of economic management of an efficient market framework,’’ he says.

“The reality is that almost every startup, in the absence of overwhelming evidence (repeat paying customers already present), is rationally seen by both investors and advisers as an alchemist’s offer to turn lead into gold.”

This piece originally appeared at StartupSmart.