Tuesday, November 30th, 2010
Self Managed Super Funds (SMSF) may be a missing piece to the innovation puzzle in Australia.

One of the problems facing many Australian start-ups and early stage companies is a lack of access to the funds they need to commercialise their technologies. If sufficient funds cannot be raised locally, these companies have two choices: go overseas (typically the USA) or manage with the very limited resources available to them – and accept a greatly increased likelihood of failure. Either result is a lost opportunity for Australia to capitalise on its educated and innovative workforce and to generate new jobs.

Start-ups and early stage companies struggle to raise debt finance and are too small to warrant the attention of large equity investors, such as fund managers and other institutional investors. That leaves Venture Capital firms, Business Angels and the three Fs – Friends, Families and Fans – as the main source of funds for these companies. Whilst these funding sources are invaluable, they are not sufficient to adequately capitalize the many innovative companies established by Australian entrepreneurs. This is particularly true in the post-GFC environment, in which VC activity is greatly diminished.

Self Managed Super Funds (SMSF) may, however, be well-placed to take advantage of the investment opportunity offered by start-ups and early stage companies and to bridge this ‘funding gap’.

“Whilst there are significant risks involved in investing in start-ups and early stage companies, the upside potential is substantial and may provide a better exposure to high-risk, high-return assets than alternatives such as derivatives, art, fine wine and fast cars,” says James Claridge at Alchemy Equities.

Claridge goes on to outline the scenario where, for example, an SMSF with over $5M in assets allocates 2% of its investment portfolio to start-ups and early stage companies - a total exposure of $100,000. An SMSF of this size would qualify as a ‘sophisticated investor’ and might be able to invest, say, $10,000 in each of 10 companies without compromising the ability of those companies to raise additional funds from retail investors under the 20/12 rule (without a prospectus, companies are not allowed to raise funds from more than 20 retail investors in any 12 month period).

By co-investing with VCs, Angels, Governments (e.g. through Commercialisation Australia grants) or other investors, for example through the Australian Small Scale Offerings Board (ASSOB), SMSFs might be able to outsource their due diligence to some extent, and at the same time reduce their exposure to companies that are not well structured or that do not have compelling business propositions or high growth potential.

The worst case scenario would be if all 10 companies failed, in which case the SMSF would have lost about 0.2% p.a. from its annual rate of return, assuming a ten year investment period and that all other assets earned 10% p.a. over that period.

However, a more likely outcome is that at least one of the companies goes on to become a success story and a few others put in solid performances. In this scenario, the investment in start-ups and early stage companies has the potential to significantly enhance the investment performance of the SMSF, perhaps by as much as an additional 0.5% p.a. return over the ten year investment period. Further, where the members of the SMSF can bring additional benefits to the investee companies through their knowledge and contacts, there may be an opportunity for them to ‘nurture their investments’, thus increasing the likelihood of successful outcomes and further enhancing their investment returns. Of course, Trustees would need to make sure that such investments are compatible with the SMSF’s liabilities, cashflow requirements and risk appetite.

According to data provided by the ATO, as of March 2010 there were over 400,000 SMSFs, with total assets of over $400 Billion. Of these, approximately 6,000 SMSFs (1.5% of the total) have assets in excess of $5M each. If each one of these SMSFs were to invest $10,000 in each of 10 start-ups and early stage companies, for a total of $100,000, that would represent approximately $600M of investment in Australian innovation – a welcome boost to an important sector of the economy that is currently underfunded.

“If the Government were genuinely interested in fully capitalizing on the benefits of Australian innovation, it could offer some tax relief for SMSFs that invest in start-ups and early stage companies – this would make the proposition even more attractive,” says Liszka.

SMSFs – are they the missing piece to the innovation puzzle?


Writer – James Claridge is a Capital Raising Consultant with Alchemy Equities – a company which facilitites equity capital raising for business development and expansion. Please contact http://www.alchemyequities.com.au/ for further information and contact details.

Contact Profile

Self Managed Super Funds

Alchemy Equities – a company which facilitites equity capital raising for business development and expansion. Please contact http://www.alchemyequities.com.au/ for further information.
James Claridge
P: 1300 308 882
M: +61 2 9994 8976
W: www.alchemyequities.com.au/


super,superannuation,super funds,self managed super,start-up companies,early stage companies



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