Super charging start-up investments

Over a trillion dollars are sitting in Australia's superannuation funds; yet the nation's innovation, startup and small business sectors are struggling to find funding. Should some of our retirement nest egg be invested in new and high-growth businesses?

This is the question many in the investment community are asking as investment in local venture capital industry has been moribund since before the global financial crisis (GFC) and there are few other local funding options apart from high interest bank loans secured against the founders' property assets.

Last month, Sydney's BigCommerce raised $20 million in funding from US investors and many other Australian tech start-ups are finding they have to head offshore to find capital. The truth is that most of them decide to stay offshore afterwards.

This dearth of funding for innovative businesses becomes painfully obvious when only one Australian company, CSL Limited, can make it onto the top 100 of Forbes Magazine's list of the world most innovative companies and shows just how Australia is punching under its weight in the innovation stakes.

Another effect this funding shortage has on Australia's economy is the proportion of medium sized companies being less than quarter of that of most of advanced economies. We have a highly concentrated corporate sector and a much higher proportion of microbusinesses when compared to similar countries. This indicates how local businesses struggle in the transition from being small operations into medium sized employers. 

Barry Westlake of the Australian Institute for Innovation points out that the 2010 OECD SMEs, Entrepreneurship and Innovation survey showed the composition of Australia's business community is more like that of Greece, Italy or Mexico than the UK, US or even New Zealand.

“The banking and investment community finds it difficult to invest in early stage and high-growth businesses,” says Barry. Part of this reason is because of poor management skills in the SME sectors and the banks' lack of understanding of the risk profile of fast growth businesses.

So how could some of Australia's massive pool of superannuation savings be allocated to support the start up and high growth business community?

Phil Morle of Sydney start-up incubator Pollenizer says "introducing a startup category to Australian super fund portfolios would both be a powerful new opportunity for the funds and a powerful catalyst for the Australian startup ecosystem."

There are problems with superannuation funds investing in the startup community warns Susan Thorp, Professor of Finance and Superannuation at the University of Techology, Sydney, “Superannuation funds have to ensure that they satisfy the sole purpose test – that is to provide retirement benefits to members. Entrepreneurship and economic development are fine aims, but they are not the primary duty of trustees” 

Professor Thorp has seen some investment in these areas, “when it comes to alternative asset classes like infrastructure and private equity, funds have been able to diversify into these areas where the trustees can make a good case, although they are not at this time large components of most portfolios.”

It's possible the start-up sector could learn something from the mining industry. JORC, the Australasian Joint Ore Reserves Committee, provides a framework for reporting ore reserves in the exploration industry and may be a model for managing risk for startup investors.

“Many people think Australia's mining industry is big just because we dig a lot of stuff out of the ground” says Gordon Noble, Director of Advocacy and Policy Strategy at the Association of Superannuation Funds of Australia, “that overlooks the work done since the Poseidon bust of forty years ago to build confidence in the sector.”

Building confidence in the start up, high growth and innovation sectors will be the key to getting investment into these areas. If trustees, regulators and investors have confidence these areas are a suitable investment then funds will be allocated to them. It's a matter of building the case that the sector can meet the statutory obligations of the superannuation industry.

In a time when Australians are concerned about the performance of superannuation funds there's a good argument that innovative companies and high growth startup should be part of an investment portfolio. It's up to the industry to put forward an investment model that works for trustees and investors.