Entrepreneurial Bank

Craig Walter

Preliminary

The proposal for an Entrepreneurial Bank stems from personal experience of being unable to bridge the gap between Research and Development and capitalisation of a project that involved $55,000 of public funds, personal equity and years of wasted development. This project involved a brilliant translation technology of commercial and social significance (e.g. indigenous language development, education cities, trade, etc), but currently remains in limbo.

The project was assessed and approved for investment by the SA Playford Centre but subsequent conditions required a completed project that included dictionary development (correct at the time, but there were also issues with the intellectual property rights – later changed after we backed out).

Investigation has revealed that many other innovations have met a similar fate. Venture capitalists are often unprepared to back innovations which are not already market ready.

Innovators and budding entrepreneurs are often forced to turn to overseas sources for backing. If successful, this can result in manufacturing and industry being lost to Australia, with the transfer of intellectual property rights and the ‘lion’s share’ of profits moving overseas.

Overseas companies and individuals are aggressively seeking new ideas over the Internet, while similar Australian initiatives are weak. Moreover there are more than a few scam operators amongst these contenders, and in the USA alone it is estimated that over $US90,000,000 per annum has been scammed from people hopeful with ideas.

Ideas and innovations concerning environmental protection and social betterment, and innovations of civil value, have little chance of seeing the light of day as they do not represent an immediate return to private capital. Even though an extensive range of programs are available in theory for innovators and entrepreneurs, as cited in a communication by former premier Mike Rann, there is compelling evidence of lost opportunities and wastage of effort.

Our traditional manufacturing base is facing a challenge from globalisation, making the need to diversify and encourage innovation across a broad range of technical and social domains essential. Politicians and other leaders use the cry of innovation as one way to garner public support for education funding (always on the public’s mind), but such high sounding rhetoric is often far removed from supporting the entrepreneurial framework required.

Australia requires state and/or national business support for funding as a springboard to set innovation in motion, due to specific demographics unlike (say) the USA or China that have powerful inertia of their own. One need only turn to countries like Sweden to see how innovation is embraced, despite their lack of physical resources and their small population. A real collaboration between Government (society) and industry is required.

Many years has elapsed since my proposed project first appeared, and in the meantime innovation programs like InnovateSA have lost funding. Does this indicate that only lip-service is being given to this vital issue and that we are resigning ourselves only to being the world’s ‘mining pit’? Even worse, advocates for innovation and bold proposals have sometimes been denounced by government representatives as unrealistic dreamers.

Information provided by a Program Nova (SA) executive is encouraging and startling. Around 400 inquiries were made to Program Nova in its final year of operation, after it had succeeded in bringing $28.4 million dollars into the SA economy over a time-span of three years. The funding statistics for 20 high potential start-ups are: 9 had no funding, 5 used their own funds (one was able to get a bank loan), 3 won grants (such as AusIndustry, Grape and Wine Industry), and 3 sold equity to business angels’. According to Greg Macpherson (formerly with Nova), ‘those that couldn’t get any funding went nowhere’. Equity capital was unable to fill the gap because the start-ups could not demonstrate a completed product or portray people using it. A senior executive of Playford Capital also mentioned to me that only one percent of innovations make it to market. Regrettably, it seems Program Nova was truncated at precisely the wrong time – just as one company was about to secure a $10 million export deal!

Discussions with marketing companies have indicated that, by and large, innovators are being thwarted by the lack of funding, rather than by issues relating to the merit and value of their inventions. And although former premier Rann’s letter suggests that equity capital is the answer, the data from various development programmes reveals that only 7% of business developments use equity capital, indicating that government is on the wrong track.

Broad Proposal

An Entrepreneurial Bank’s (EB) role would be to provide funding with an emphasis on those start-up innovators and inventors whose ideas have been impartially assessed by an expert panel as having merit. Its role should not exclude providing funding for new ideas created by established businesses. It is envisaged as an Australia-wide enterprise with a central base.

Initially the EB would reflect a collaborative arrangement between the government and venture capitalists. The EB would become self-sustaining as successful businesses paid ‘dividends’ back to the EB. And importantly the EB would be an icon, sending a signal to local innovators and our community and potential investors about a mind shift towards an entrepreneurial culture.

The EB may be thought of as an innovation in its own right, and paves the way for greater innovation and overcoming the barriers to development. The call for ‘Innovate or Perish’ in newspaper articles is not answered under current Programs to the extent it should be or could be. Pools of static capital are not being utilized for commercial and social advancement.

One of Australia’s previous strengths was the extended investment of resources in enterprises by government until the tertiary stage of development occurred. A possible financial configuration of an EB would embrace some combination of the following:

• Use of part of the interest returned to the Reserve Bank;
• Government subsidy (initial stages);
• Private sector sponsorship;
• Levy enterprises or inventions are funded by the EB in due course;
• A national Innovation and Inventors Lottery;
• Overseas investors;
• Venture capitalists;
• Donations;
• Environmental Innovations funding;
• Use of static capital (eg, superannuation funds);
• Self-investment;
• Shareholding;
• Consultancy;
• Revenue from gambling machines;
• Use of Innovation think tanks.

Summary

An EB will bring together many varied stakeholders and provide returns in tune with their needs. The basis of the EB entails many different ‘investors’ with a wide cross section of involvement. An EB would develop a steady income stream outside of any return for its investment, e.g. it would be able to write off failed projects without impacting its future. This would require pools of investments which return dividends/interests to the EB. It would operate within this investment stream – paying people and providing grants without expecting a return. Any return would be a bonus. Thus the EB would not be in the game of trying to directly pick winners. If interest rates are (say) 2%, then to start a seed program the EB would need $1 billion invested to bring $20 million.

The bank could be structured as a charitable trust so that super funds and banks could invest up to one billion dollars and get a tax write off over (say) 5 years. Once the EB possesses the money, it is invested back with banks and fund managers so that they don’t have a larger negative cash flow.

The formation of an Entrepreneurial Bank is about ushering in greater vitality in innovation and industrial development in Australia and has global implications. It is about collaboration between government and enterprises until innovation is self sufficient. It is also about collaboration between public and private entities, and will receive support from the public as it perceives the long-term benefits to society, the environment, industry, and employment.

The EB proposal requires a definitive case study, including a phase wise program for its establishment. It possibly could be developed along the lines of a foundation. Suggestions are invited for potential funding support in order to develop the concept. An internet web site could be created as a promotional tool for garnering support.

Craig Walter is an ERA member living in SA, and is convenor of the South Australian Venture Capital Board