Israel offers Australia New Opportunities for Venture Capital Investment
Jun 30, 2015 | Glen Falkenstein
The Australian recently reported on important developments in Australia’s economic relationship with Israel, namely with regard to venture capital investment and future prospects for technological innovation:
“Retiring Telstra chief executive David Thodey plans to join billionaire James Packer in working with the Paul Bassat-led venture capital firm, Square Peg Capital, to pursue more investments in Israel.”
“The company intends to spend $US150 million ($193m) over the next three to five years in venture and growth-stage online and technology companies.”
“Mr Packer, who has bought a property in Tel Aviv and divides his time between the Israeli capital and the US, said he was keen to do more with Mr Bassat and Square Peg in the Israeli tech scene.”
“Mr Packer told The Australian from Tel Aviv. “I am in Israel meeting new people and Paul (Bassat) is certainly someone I want to do more with, but we are just wetting our feet here.”
Federal MP Wyatt Roy, who recently travelled to Israel to meet with local start-ups, is in favour of establishing a new “innovation ecosystem” in Australia, reforming how we commercialize our research and replicating the Israeli model of venture capital investment. Roy will be leading an Entrepreneurs Trade Mission to Israel (organised by the Australia Israel Chamber of Commerce) this coming October centred on “engagement between Israeli and Australian companies, focusing on the key sectors of technological advancement and innovation.”
The venture capital industry in Israel has successfully encouraged over decades the investment of millions in multiple technological start-ups, in return for the investors retaining substantial equity in each of the growing ventures. Central among Israel’s reforms in this area was the adoption of a broad crowd-sourced equity funding (CSEF) model, with local companies such as OurCrowd sourcing and vetting potential opportunities for investors who can then choose to make numerous small to large-scale investments.
The 2014 report by the now dissolved Parliamentary Corporations and Markets Advisory Committee (CAMAC) recommended reforms in Australia to facilitate corporate fundraising for smaller companies or start-ups through these types of small equity investments via online facilitators such as OurCrowd. The report outlines a number of countries with legislative provisions facilitating CSEF, including New Zealand, though the reforms envisaged in the report have not been fully implemented in Australia.
The New Zealand government, having implemented the legislation, noted the potential for more efficient procurement of risk capital for small businesses through these internet-based marketplaces, rather than focusing on the more traditional public or private offerings historically utilized by Australian firms. A European Union Consultation Paper on crowdfunding concluded “… it appears crowdfunding may respond to the needs of many small start-ups that do not manage to access bank finance, venture capital… better access to finance for small businesses would promote entrepreneurship and ultimately contribute to growth and job creation.”
Lack of effective CSEF provisions locally has stoked fears of an ongoing brain-drain as Australian entrepreneurs look elsewhere for funding. Many young entrepreneurs have moved to overseas markets to secure funding for tech start-ups, finding a general lack of sufficient equity in Australia.
Despite this, our regulatory system has not stopped companies like OurCrowd investing in Australia, with CEO John Medved, who travelled to Australia this year, recently announcing the platform’s second local investment in medical technology group Global Kinetics Corp. Medved commented, “Australia and Israel face very similar challenges when it comes to start-up investment, although our appetite for risk is totally different… the more paths in you can offer investors, the more money your start-ups can get at.”
Our existing legislation limits the possibility for the kind of investment and growth which has allowed Israel’s high-tech sector and other innovation ecosystems to flourish. The types of reforms recommended by CAMAC to create a regulated structure for CSEF would facilitate the presence of OurCrowd style intermediaries and contribute to a stronger culture of investment in Australia.
I visited Israel in January and was fortunate enough to meet with locals who have developed and funded successful projects entirely through crowdfunding. Israel has a distinct culture of investment and established support-base for venture capitalism. In the 1990’s the government matched investments by venture capitalists, doubling the equity through generous tax incentives for foreign investors in an effort to enliven the high-tech empire that now exists in Tel Aviv and its surrounds, known widely as ‘Silicon Wadi.’ In March, internet giant Alibaba announced it would invest tens of millions of dollars in JVP, an Israeli venture capital firm.
OurCrowd is only one company that has successfully invested millions in multiple start-ups, while Australian entrepreneurs are increasingly keen to partner with like-minded countries and institutions to increase capital investment and fuel a vibrant culture of wide-ranging crowd-sourced funding.
Israel’s advancements in this area hold huge implications for its multilateral relations, worldwide technological/communications industries and the respective economies of those involved, including Australia. There are many opportunities to reform our venture capital industry and it’s to our benefit to work with stakeholders who’ve done it before.