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Welcoming the Abolition of Commercialisation Australia
The Abbott Government has handed down the budget that they have been conditioning us for since the turn of the year. Joe Hockey has implemented many of the recommendations by the Commission of Audit and abolished several grant programs in the hope of simplifying the Australian grant system while simultaneously putting the boot into the ‘Age of Entitlement’. One of programs given the last rites was Commercialisation Australia.
I have mixed feelings about this as I advise, and have advised, several technology companies that have devoted effort and expense into this process. I sincerely hope that the Federal Government are able to transition current applicants into new programs so their time is not entirely wasted. I also implore the government that business owners that are creating valuable intellectual property for the benefit of the country should not be considered ‘Entitled’. However, I am glad that the government has finally used the bullet that has it has been threatening to use for the past nine months so every stakeholder from company through to investor has clarity around the program and its demise.
Commercialisation Australia has effectively been on gardening leave since the change of government. No new grants have been issued in 2014 with around $20M only issued since July 1. I won’t delve into moral or legal issues around this inaction as founders were led to believe that the program was still active with some committing up to six months to complete an application for a grant that in effect was not available. This should be considered unacceptable by anyone with a modicum of business sense and/or sanity.
My focus is on why founders should in fact be relieved that Commercialisation Australia is no longer there to muddy the waters of their enterprise. For me there were enough issues with the program that would give me second thoughts if I were a tech founder:
Time needed allocated by founders
It was recommended that a single person manage the application process from within the company. On a good run, this person will have to allocate 60 hours to adequately complete a POC or Early Stage Commercialisation Grant. Anecdotally, this could be double. This time could be spent on finding investors, commercializing the technology, finding customers, securing the supply chain or one of many other things that a founder could be doing to create long term value in the company.
Opportunity cost of completing the application
From commencement of the Stage 1 application through to contract agreement and the first tranche of funding was 6-8 months. Given the application process is relatively rigid in terms of projects, spending and outcomes, a company may be hemmed in and unavailable to capitalize on opportunities that arise. Especially opportunities around generating sustainable revenues quickly.
Invalidation of companies with revenue
Rightly or wrongly, one of the key criteria for the grant was for the company to be pre-revenue. It is understandable why this criteria is in place as the grant is meant to facilitate to commercialization. However, as the process takes six months plus you are in a position where you need to fund the costs of the project, plus a valley of death until the project commences. In many cases the cost of this would be comparable to the amount sought in the grant.
Requirement to recruit locally
Only 10% of the project funding by CA was able go to overseas recruiting. With POC grants maxing out at $500K, only $50K can go overseas. It is understandable that the government wants to create local jobs but many of the programming jobs required have now been commoditized. A company should be reticent to get a grant for $200K to fund the employment of two programmers locally when it can probably get the same job done for $50K overseas. The creation of jobs should be on highly skilled labour and commodity roles should be completed for the lowest price possible. This creates a false project budget as the government/investors financing a project that could be considerably cheaper.
Format of projects
The format of the grant creates the need to generate suitable projects that ideally fit the merit criteria in order to win the grant. Often, the ideal project is not sought as it would make the application less competitive or worse still invalidate it. The projects were meant to create a new benchmark that allows the company to pass to revenue but the reality is the market situation is too fluid and dynamic for these projects to have any significant validity.
Limits investors
Personally, a big issue (which is a big plus in many people’s eyes) is that it provides leverage to investors. This is not an issue by itself but investors were progressively seeking projects that were CA co-funded. I know of several who would only invest exclusively if CA were involved. There are many technology companies that are seeking capital, were not eligible for CA and therefore these investors would not consider them for investment. CA’s abolition creates a level playing field.
For the issues above I think that the abolition of Commercialisation Australia will prove to enhance the prospects of startups and technology companies over the long term. If a project cannot be funded through investors alone either the project (no matter its scope) doesn’t have enough merit, the valuation is incorrectly priced, the team doesn’t have the ability to present their case properly, or the investors don’t believe in the ability of the team, or the distribution of their deal is limited.
Instead of funding a limited amount of projects, initiatives like the R&D Tax Incentive and trade missions through AusTrade scratch the surface of what government can do. A total review of the way Employee Share Schemes are handled and taxed would also create value by incentivizing people to participate in innovative projects without penalizing them unnecessarily.
Government is also in the position to facilitate project generation and creation as well as set up apparatus to ensure an unlimited number of entrepreneurs can use resources to facilitate the launch of their business, technology based or otherwise. It has been announced that $485 million over five years will be allocated to establish an entrepreneurs infrastructure program and this is a step in the right direction though we need to see some further detail before we crack the champagne open.
