Sydney's loss is Silicon Valley's gain as Australians shun risk

[SYDNEY] For the cost of a Sydney home, Paul Evans would be able to market an electric car engine that could help put Aussie innovation back on the map. In risk-averse Australia, most investors would prefer to buy a house.

The entrepreneur has been shunned by local venture capital funds in attempts to raise A$3 million (S$3.14 million) for a product that's been a decade in the works, despite what he describes as strong interest from some global carmakers. Now, after a series of fruitless investor meetings, he's heading down the inevitable path: straight to the US.

"The private sector just won't step up," said Mr Evans, 51, managing director of Sydney-based Evans Electric, which he co-founded with former Thales SA executive Bruno Lambla.

"We've been pushed to the point where we're going to Silicon Valley to raise funds," Mr Evans said.

"To me, that's an unfortunate outcome because it's a long way from here and we don't really want to move there." It's an all too familiar choice Down Under. Policy makers are pushing local firms and entrepreneurs to be innovative as they seek new drivers of economic growth amid the dying days of a mining investment boom.

But local investors aren't playing ball: in the past five years, Australian venture capital funding for industrial firms amounted to just US$218 million, data compiled by Bloomberg show. US peers raised about US$15 billion in the same period.

That's a gaping chasm for Australian Prime Minister Malcolm Turnbull, who made innovation a flagship policy ahead of an election last year that returned him to power with a razor-thin majority.

After offering incentives for early-stage investors and tax breaks on venture capital investment, even he had to acknowledge that Australians were a tough crowd.

"My life's experience has taught me that there is little reward without risk," said Mr Turnbull, who himself has an entrepreneurial background, in a speech.

"As you well know, the quality of Australian research is world-class, yet our ability to commercialise and apply it has been an ongoing challenge," he told a gathering of scientists and researchers in October.

Mr Turnbull has his work cut out. Australia slipped to 19th place on the 2016 Global Innovation Index, from a ranking of 17th the previous year, and was outdone in the Asia-Pacific region by Singapore, South Korea, Hong Kong, Japan and New Zealand. The venture capital industry Down Under is still recovering from the global financial crisis, with investment activity about half of 2009 levels, Organisation for Economic Co-operation and Development data show.

While venture capital funding has picked up in Australia in recent years, investment for any promising local innovation has been scarce for a decade, said Yasser El-Ansary, chief executive officer of the Australian Private Equity & Venture Capital Association.

"The barrier is the difference in market size when compared with the likes of the US," Mr El-Ansary said.

"To attract venture capital investment here in Australia, the business needs to be able to demonstrate it can compete and win in regional and global markets."

Warning Shot

Australia's reliance on mining exports, building and consumption can sustain its economy for only so long: third-quarter growth data fired a warning shot last month as gross domestic product fell 0.5 per cent, the first decline in more than five years. If local brainpower isn't harnessed and matched with capital, an innovation drought will continue to drag on productivity and wages growth.

Australians must strengthen their "collective ability to innovate" to maintain the growth in living standards they've enjoyed for the past two decades, Reserve Bank of Australia Governor Philip Lowe said in a 2014 speech on productivity and innovation, when he was deputy.

Even so, local investors told Mr Evans the return on his product won't be fast enough and he is based too far from potential customers. Mr Evans, whose background combines electronics and motor sports, says the engine is getting interest from overseas because its small size allows it to sit inside a wheel and it doesn't use expensive rare earth metals.

"If you can pack a lightweight motor inside the wheel, then that simplifies your drivetrain," said Peter Pudney, an associate research professor at the University of South Australia in Adelaide who has built solar and electric cars.

"Stability becomes a bit easier if you have direct control of the wheel."

While Bloomberg wasn't able to confirm the overseas interest in the product, Mr Evans's experience isn't an isolated case.

In 2014, Australia's then-industry minister accused the local venture capital industry of expecting "government will just pick up the tab and investors can sit back and sort of get something when it's a sure bet."

A year later, famed computer designer and investor Gordon Bell described Australian investors as "greedy" and "nasty" when it came to backing local ideas.

One of the most high-profile local companies to seek funding offshore recently was Sydney-based software firm Atlassian Corp, which listed in the US at the end of 2015 and now has a market capitalisation approaching US$6 billion.

Despite its small population on a continent rich in minerals and agriculture, Australia has a strong tradition of invention: black-box flight recorders, the electronic pacemaker and Wi-Fi technology to name a few. Yet most of these products were commercialised offshore, depriving Australia's economy of high-paying jobs and the government of company tax revenue.

In 2017, the need for innovation is an urgent one, with Australia's aging population and commodity prices well down on the mining boom's peak, warned veteran independent economist Saul Eslake.

"Historically, Australia has not been a particularly innovative nation other than in a few areas where we have a comparative advantage" like agriculture and mining, he said.

"Unless we lift the rate of productivity growth, we could well be facing the slowest growth in average Australian incomes since the 1930s."

BLOOMBERG