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Joint Select Committee on Trade and Investment Growth
Australia’s future in research and innovation

GILLIGAN, Mr Danny, Cofounder and Managing Director, Reinventure

Committee met at 08 :58

CHAIR ( Mr O'Dowd ): I declare open this public hearing of the Joint Select Committee on Trade and Investment Growth. I would like to thank everyone for being here today—the panel members and, of course, you too, Danny. Is it the wish of the committee that the media be permitted to cover today's proceedings on the condition that cameras neither film or take photographs of the private papers or laptops of committee members, the secretariat and the witnesses? There being no objection, it is so ordered. I now call upon the representative from Reinventure.

Mr Gilligan : Thank you. I am wearing three hats today, I guess, to be of use to the committee. One is as cofounder of Reinventure, which is a venture capital business formed in partnership with Westpac Banking Corporation. It invests in early-stage technology companies, particularly in the emerging area of financial services technology. I am also a founding director of Stone & Chalk, which is the leading fintech hub in Australia. It houses some 65-odd start-ups in the city of Sydney. I am also the cofounder of Data Republic, which is a venture in the emerging space of big data and open data. I am happy to wear any of those hats as might serve the committee today.

CHAIR: These hearings are formal proceedings of the parliament. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. I invite you now to make a five-minute opening statement before I open to questions from the committee.

Mr Gilligan : As I mentioned earlier, I can bring a few perspectives to the committee today. One is as a venture capitalist—someone who is in the privileged position of being able to work across the entire entrepreneurial ecosystem and to support entrepreneurs on their journey to build interesting companies for the next generation. We have formed that venture capital function in partnership with Westpac Banking Corporation. The other side of the work we are doing is trying to help existing companies navigate the disruption that is impacting upon their industries as technology continues to pervade the way their industries are transformed today. So I can provide perspectives particularly upon how that is starting to reshape the economy and how it has reshaped previous sectors I have been involved in before—particularly telecommunications and media.

I have also been heavily involved in promoting and developing the start-up ecosystem from the ground up. We have been primarily responsible for driving the development of the fintech ecosystem in Australia, both through the establishment of Stone & Chalk, which is the largest fintech hub in Australia, and the establishment of the fintech association, which is the first national association to pull together financial services technology start-ups across the country. My cofounder, Simon Cant, was recently appointed to the fintech task force under the federal Treasurer to help determine or support changes to policy settings in regulatory frameworks to support innovation in the emerging area of financial services technology.

Lastly, we have been pioneering the open data movement through a venture I have cofounded called Data Republic. That business is a business that promotes or builds a trust framework to enable companies to exchange data with each other and to support an open data movement that is privacy compliant, secure and well governed. We think this is particularly important as the data industry evolves to create a highly functioning governance structure, as the shift towards data-driven economies is going to be perhaps one of the most significant transitions that is going to take place in most economies around the world, we think, over the next 10 or 15 years.

CHAIR: You were obviously a start-up company yourself—how long back?

Mr Gilligan : Reinventure has been going for about two years. It has a $50 million fund. We are hopeful to close a second fund somewhere in the order of around $100 million in the next few months. We aim to be continual, persistent investors in the start-up ecosystem over the next five to seven years at least. The strategy is designed to create an evergreen renewal program for Westpac to participate in and support emerging technology companies while they are transitioning their own business through digital technologies.

CHAIR: I am interested to know: when you first started two years ago, did you go to a banking institution or did you have your own finances involved in your start-up or did you have family or friends? How did that work back then?

Mr Gilligan : We did go to a bank. We went and asked for $50 million and they said yes.

CHAIR: That is good.

Mr Gilligan : We pitched the idea for Reinventure to Westpac. That process took about seven months. My partner and I funded ourselves through that period of time. Really, like most entrepreneurs, you generally just start with an idea. The art of entrepreneurship is borrowing things that you do not own from people who do not value them as much as you do. That is essentially what entrepreneurs do.

CHAIR: You must be a good negotiator. What was the first reaction from the banks?

Mr Gilligan : Actually, Westpac was not the only organisation that we pitched to, but they were the only ones who actually understood the issue. It is a very difficult conversation to say to a financial services institution, 'You're going to be disrupted. Your natural instincts to respond to it are going to fail. And one of the strategies you should deploy is to hand over control of money to invest in start-ups to somebody to determine completely, discretionarily, independently.' That is a very difficult decision for any company to make. Our venture fund with Westpac is the only one of its kind in Australia and one of the few in the world that operates this way.

CHAIR: There are obviously going to be a lot of questions from our committee. It is very interesting how you got it off the ground. There must be a lot of other skills out there for people like yourself who are not quite as efficient in putting in case or a business plan to the banks. We were hearing quite a lot from start-up businesses that they cannot get past first base. Can we talk about the usual problems that they have?

Mr Gilligan : Yes, I see that a lot. We see maybe 200 companies a year come to us for funding, and we fund maybe four in a year.

Senator BULLOCK: We heard from the other 196 yesterday!

Mr Gilligan : Right, yes. It is interesting. There is a challenge with a lot of small businesses or ideas. A lot of people have ideas for companies. That is not the same thing as a company. So a lot of people who seek funding seek it too early, and they are just not fit to be funded in any capacity, whether it be by a bank, a VC, angel investors et cetera. In some respects there is a lack of maturity or a lack of evolution of understanding of entrepreneurship and what it means. People think, 'I have an idea, I should get VC funding.' That is not how it works. The second thing is, even if people do build a product or an idea, it might be a good business but it does not mean that it is venture capital backable. The distinction I want to create there is that the way that the economic for venture capital portfolios work is we tend to work at the high-risk end of the start-up spectrum, which means we are looking for things that are going to be true game changers. We take a lot of risk in our portfolio, and about half of the things that we invest in will fail completely. To make the economics of that fund work, the other half have to make absolutely stellar returns. What that means is that just backing a good business that is going to give you two or three times your return is not suitable for venture economics.

So there are a lot of people who have good businesses but who will never be candidates for venture capital funding. We see that a lot as well. There are other forms of finance, particularly from high-net-worths, family offices or angel investors, who are better suited to funding those kinds of businesses. A lot of the problems that happen in ventures who pitch to us involve a lack of understanding of what kind of business they are, what stage they are at on their journey, and what is the appropriate source of capital for them as a company. We do a lot of that educating in that process.

CHAIR: So you are there to help and guide those people who do not know the format?

Mr Gilligan : Naturally we give advice to people when they pitch, if we are not going to invest, about why not. We give suggestions as to what is the next best path. The interesting thing for me about the age that we live in is that we live in the most transparent era in history. You can learn how to become a venture capitalist from the best venture capitalist in the world, because they blog prolifically—they share openly their investment strategies, their experiences et cetera. The same is true for entrepreneurship. In this day and age, every entrepreneur has the capacity to learn and to know about what kind of business they are, what is the smartest strategy and how to choose the best investor for their business. This is a little bit what I mean by saying that there is, in some respects, a lack of maturity on behalf of the emerging ecosystem in Australia and understanding those dynamics.

Senator WANG: It is interesting that you said that half of the investment you made completely failed and you relied on the other half to make up for the loss and even to make a profit. It reminds me of some statistics I have seen in the past about Hollywood making movies: one out of 10 movies actually makes money and the other nine lose money, but, because of that one movie, the whole film industry in Hollywood can actually make a profit. I think that reflects the nature of the business—a higher risk potentially means a higher return. How would you describe whether it is difficult for a normal business person or an ordinary mum or dad to be a venture capitalist? It seems to me that you do need to have a substantial sum of money so that you can sustain the loss and be lucky enough to actually get a project that is money-making.

Mr Gilligan : If you are referring to crowdfunding—

Senator WANG: Yes.

Mr Gilligan : and whether ordinary citizens can participate in this economy, I think it is challenging. It is certainly challenging and at that high-risk end of the spectrum. The challenge comes from portfolio exposure. To your point before, there is a real power lord of VC. Within the VC community, only one or two VCs will make all the returns in industry and the rest will probably lose capital. Within the portfolios of those VCs, only one or two companies will return all the returns of the fund. Generally speaking, there is only a handful of great companies that will emerge every year and that number rarely changes. It is not like in one year we have none and the next year we have 15; generally two or three or five great companies emerge each year. If you are not an investor in those great companies, you are almost guaranteed to lose money across your portfolio. How you get exposure to the good deals is one of the challenges for the people participating at the lower end.

One of my concerns about one of the risks I see around crowdfunding is that the kinds of ventures that pursue crowdfunding are the ones that could not attract institutional capital and, therefore, is there a risk of negative selection bias in terms of the availability to those companies? I personally think crowdfunding is better directed to what I talked about before: the good businesses that would deliver a two to three times return. There is a much lower risk of failure, but a much lower likelihood of a major outcome. That is where there is an interesting funding gap criteria, and that really comes down to the filtering process of the crowdfunding platforms and how they present that to ordinary investors.

Senator WANG: What would you say to the trainee institutions—universities et cetera—if, let's say, a kid or a teenager wants to be an venture capitalist one day? What sort of training or learning experience should the kid have for them to be successful?

Mr Gilligan : There is no direct path to venture capital. I got here by accident. I did not grow up wanting to be a venture capitalist. It was not something that I desired. As an entrepreneur, you are generally motivated to pursue things that you see are broken and you think you can fix. With my partner and I having spent a lot of years working with big companies in industries that were being disrupted and seeing how they were responding to that challenge, we felt the model of corporate venture capital that existed in this market was broken and we thought we had an idea about how to do it in a good way, in a high-functioning way. That is what motivated us to create the Reinventure model and then pitch that into Westpac. There are a lot of sayings in relation to VC. One is: 'This is the last job you'll ever have, not the first,' as in you need to accumulate a lot of different life skills to gain the pattern of recognition and the scar tissue that you need to be able to advise companies through this generally very emotionally challenging journey. The second one is: 'It takes $50 million to train a VC,' as in you need to make $50 million of mistakes and to have learnt from those mistakes before you can start being a good VC. That is a challenging apprenticeship for anyone to take on.

Senator WANG: Not many people have $50 million to spend.

Mr Gilligan : Generally, it is other people's money, but if you lose $50 million of other people's money you often do not get another shot at it.

Senator WANG: I imagine you talked to other banks in your early days. What is the typical explanation they gave to you to explain that they did not want to back your business plan?

Mr Gilligan : It was not so much the banks. I spoke to other major Australian industrial companies, particularly in retail sectors. My observation is that generally there is a low level of understanding of the true nature of disruption amongst Australian boards and executives. That translates through to the strategies that they deploy to address what is happening in the changing nature of the economy through technology.

We were very fortunate to meet someone who is very progressive in their thinking in Brian Hartzer, the CEO of Westpac. But we almost had an impossible product to sell, because you are basically telling someone, 'This is inevitably going to happen to you and all of your natural instincts to address it are going to be wrong.' That is a very hard proposition to sell to someone who is running a major company.

Senator BULLOCK: Firstly, we had personal cloud insurance here yesterday, which is in your hub and is very excited about the opportunity that affords.

Mr Gilligan : That is fantastic.

Senator BULLOCK: Her idea did seem to be in the quite early stages of development as to where it was all going to head. I am not sure how it fits with some of the things you were saying earlier about it being well advanced. Nevertheless, she has not attracted your funding.

I wonder if I can first ask a very indiscreet question? You get your funds from Westpac and you are encouraging entrepreneurs in fintech. Somebody has a very good idea and you say, 'Westpac would really benefit from that idea. That would give them a competitive edge.' So you pitch to the entrepreneur that they should sell their idea to Westpac. Are you conflicted?

Mr Gilligan : No. The way we have structured our venture fund is that it is an ESVCLP set up under the Venture Capital Act, which is actually a beautiful piece of legislation and a beautiful vehicle for us because it forces Westpac to be a limited partner. That means that Westpac has absolutely no control over the day-to-day operations of our fund. My partner and I have full discretion in what we do. Our incentives are also purely financial, so we only get a return—

Senator BULLOCK: So if the ANZ pitched you a better deal, you would go to the ANZ?

Mr Gilligan : You will see in due course across our portfolio a number of relationships with other banks. It is about what is in the best interests of the venture. Our sole motivation is about backing winning ventures and helping them win. If that means relationships with other banks, then that is what is required.

Senator BULLOCK: Fair enough.

Mr Gilligan : Our independence allows us to do that.

Senator BULLOCK: Most of the horses do not run a place but, when they do, you expect stellar returns. If I am the bloke with the idea and I have seen that idea come to fruition—there it is; it is going gangbusters—what is the relationship then between the person with the idea and the person who is the provider of the capital? The bloke with the idea is going to say, 'Gee, this is my idea, and these people over here are looking for stellar returns.' Is that relationship able to be maintained in a cordial manner, or do the people with the successful ideas resent providing the stellar returns to people who did nothing more than stump up the cash?

Mr Gilligan : It is a completely mutually symbiotic relationship in the sense that the idea cannot come to fruition without the capital, and capital, without an idea, is useless.

Senator BULLOCK: That is an objective argument. I imagine when people devote their lives to developing an idea, they might have a few subjectives!

Mr Gilligan : The subjective view, from our perspective, is that we view investing in our ventures generally on a five-to-seven year horizon. That is how long we expect to be partnered. We view it like a marriage, and we view the choice of entrepreneurs that we back and the relationships that we build to be just like that. From the moment we make an investment we are completely shoulder to shoulder with our entrepreneurs in helping them with every step of the journey. I am sure if you spoke to any of them, they would articulate that same perspective.

Senator BULLOCK: So it works?

Mr Gilligan : It works. There is another saying in VC which is, 'When things are going well, the entrepreneurs are in charge of the company. When things aren't going well, the investors are in charge of the company.' There is some truth to that, but it is a very, very delicate balance in terms of that relationship. Ultimately, we back entrepreneurs and their judgement and we support them to the hilt. But there are times when you need that objective viewpoint and you can see that things need to change. Our job is to encourage entrepreneurs to think differently about the challenges they are facing.

Senator BULLOCK: I said somewhat flippantly earlier that yesterday we heard from the other 196! There are lots and lots of people out there who are convinced that they have a good idea and who are saying that there is no money available. You splashed out $50 million, which, on the one hand, is a lot of money, but, on the other hand, is a drop in the ocean, and you have another $100 million coming, which is nice. But there is a lot of demand out there from people with good ideas—not the slow and steady, just-go-down-to-your-bank-and-apply-for-a-business-loan people but people who need money to develop an idea that is not currently profitable. How can that demand be met? I am only talking about genuine demand and not the people who want to touch the bank for a quid.

Mr Gilligan : This comes back to my earlier point. There is absolutely no lack of funding for great companies. We have a number of companies in our portfolio who are raising money at the moment, and there is an oversupply of capital trying to get into those companies into the next round. Great companies will get funded in a heartbeat. This is the challenge I was articulating—

Senator BULLOCK: Is that through organisations like yours? I know, for example, superannuation funds would say: we have lots of money to invest but not the opportunities. But the opportunities that they are looking for, because of their scale, means they are not going to interview a bloke with an idea. They need—

Mr Gilligan : A vehicle—correct.

Senator BULLOCK: a portfolio. So there may be money out there, but it may not be targeted properly.

Mr Gilligan : Correct. There probably are not enough venture capital vehicles in the Australian market. I know there have been a lot that have been announced in the last year, and there looks like there has been a huge inflow of capital. But from what I understand a number of those funds have not yet been completed or closed, so that money is not yet available to be deployed into the market. I think generally speaking there is a shortage of venture capital in this market, and I think the super funds are only now just starting to look at participating again as they are seeing emerging new managers who they think are worth backing. But the ability of great companies to raise capital is undiminished. I think the challenge for a number of entrepreneurs is that they are seeking the wrong capital for their business, and that effort can seem frustrating and like a waste of time.

Senator BULLOCK: Should there be more emphasis on teaching business skills so that people have a better grasp of how they might best advance their business interests?

Mr Gilligan : I absolutely think that would be a valuable experience for people. I am not quite sure about the mechanism for teaching that. I have not seen—

Senator BULLOCK: I am on another committee that is looking at videogame development. There are courses at university to help people in this area. One of the things that could be included in such courses is entrepreneurship and business development. These people aspire to go off, develop a video game and start their own business, so including some business development skills in relevant curricula could perhaps be an advantage.

Mr Gilligan : I think that definitely helps. Unfortunately, the best teacher is lived experience, and sometimes the sharpest lessons come through failure. I do not think that we should look at the inability of these first-time entrepreneurs to attract funding to build a successful company as necessarily a failure. Perhaps it is a teaching process in and of itself.

Senator IAN MACDONALD: I think you said you tried Westpac and ANZ and other major banks. Did you find that the people you were talking to in the major banks or major financial institutions knew what you were talking about?

Mr Gilligan : At Westpac? Absolutely.

Senator IAN MACDONALD: I should not have been name specific.

Mr Gilligan : Given that they said yes, my answer naturally is yes. But for the other organisations that we met with, no; they had difficulty understanding the concepts that we were presenting to them.

Senator IAN MACDONALD: Does that make you think that you went to the wrong person, or that you were directed to the wrong one? Would there have been someone in those other institutions who would have had an idea of what you were talking about?

Mr Gilligan : It is very challenging. If you have a look at what happened to the media industry, what happened to the telecommunications industry and what happened to Fairfax, as a great company that is no longer of the same stature, half of the digital media revenues in the media industry have now gone offshore via Google, Facebook, Twitter et cetera. They lost their rivers of gold to the up-and-comer entrepreneurs in SEEK, and You can look back in history and say that that was stupid management, but the actual fact is that that is not the case. The decisions that they made at the time were perfectly economically rational in the moment that they were made. It is only with the benefit of hindsight that you can say you would have done something differently. But doing something differently would have been counterintuitive to the decisions they needed to make at the time.

This is one of the challenges I refer to when I talk about not understanding disruption, the patterns of it and how it impacts over time in terms of reshaping industries. I think one of the core challenges that we have overall in our economy is our addiction to dividends and to yield capital. In my mind this is one of the core problems with super funds, particularly with the concentration of our superannuation industry. It is one of the core problems with how Australian companies are expected to manage. Boards are pressured by investors, which then flows through to incentives for management and that kind of schooling. We are not an economy that invests for the long term. We are an economy that invests for the short term so that we can get our dividends, so that we can pay them back to super funds, because that is how they get their incentive. In the dividend imputation scheme, combined with the company tax rate, we have created a culture of addiction to dividends. What you need to drive innovation is growth capital, not yield capital. That distinction between yield and growth capital is at the heart of what is wrong in our economy.

Senator IAN MACDONALD: Could I try to understand how your organisation works? I have a great idea. I come to you and convince you that it is a good idea and that I can make money. How do you go about getting me the money?

Mr Gilligan : We have a committed fund—a contractual arrangement with Westpac—that when we make a call as a general partner in our funds we sign a term sheet with the entrepreneur. We say, 'It is a great idea.' We agree what the value of the company is, how much capital the company needs, how much we will provide and whether other investors are going to come in as well, and we facilitate that.

Senator IAN MACDONALD: When you say you provide, do you mean your company or that you can get money from someone else?

Mr Gilligan : Our funds. We have invested directly as the only cheque in a company, and at the same time an entrepreneur might have said, 'I have got a few investors; I would like you to be one as well.' We then participate in a round in that funding. If it is a very early stage company, it might be a million-dollar cheque from us. We then sign a term sheet, we make a call to Westpac, who have to put money into the fund, and then we pass that through to the company.

Senator IAN MACDONALD: Do you have any liability to Westpac if it goes wrong? I mean, I should not use names again, but—

Mr Gilligan : To our limited partner?


Mr Gilligan : No.

Senator IAN MACDONALD: You tell them, 'Look, this is a good thing; you should put money in,' and they—

Mr Gilligan : We have no liability. My partner, Simon, and I are also limited partners in the fund. If we lose Westpac's money, we lose our money. That is the alignment of interest. Most of what you need in being a good investor is alignment of interests. For the entrepreneur, we only get paid if they get paid. We do not get paid any other way.

Senator IAN MACDONALD: Okay. So if it is not—in your case—Westpac, where else do you look around to source funds for my great idea that I have convinced you is going to make money?

Mr Gilligan : There are generally a couple of stages to a company's evolution which are pretty consistent. The first one is that if you have a great technology idea—and I will focus on technology for now, if I may, which is probably my area of expertise—the beautiful thing in this day and age is that the cost of starting a new company has never been lower. It can take tens of thousands of dollars to build the first version of a product. Ten years ago it would have been maybe $2 million or $3 million to build that first idea. The cost of technology has plummeted to near zero. If you have technical skills, the cost can be near zero. The hardest problem is for non-technical entrepreneurs, who then need to find that initial technology team to build the first version of the product. That can be challenging for them on a few fronts.

That first phase of building a product is generally what we call 'family, friends and fools'. That is where you get your money from. That is generally a couple of hundred thousand dollars that you need to pull together your initial technical team and build your first version of a product. Really, that is only people who put money in because they like you and they want to see you try something and be successful. They only put in an amount that they are happy to lose. That is generally that whole experience. The fail rate around that is incredibly high. It is a very big fail stage of people persevering, because it is an incredibly difficult journey. For a lot of people there is a romanticism attached to entrepreneurship, and the reality does not marry up to that.

The next stage is what we generally call seed funding or angel funding, and it might be around half a million dollars. Generally speaking, the best source of that capital is angel investors—high net worth individuals, professional angel investors, who might invest across 10 or15 different ideas. They might have domain expertise, they might be from industry. They have surplus cash and they are happy to punt a bit of money into an idea and help out. Each individual might cut a $25,000 to $50,000 cheque. Generally, they would qualify as sophisticated investors. You can get half a million dollars to build the initial team and the initial version of the product.

Then you qualify for what we call 'series A' capital—and series A capital is probably your first institutional capital. Some institutions will go down to seed stage. We invest at seed stage, but not many do. Series A is between $2 million and $6 million. At that stage you have built a product, you have customers, you have revenues and you have traction. People can actually see what you are building and generally have an idea that this idea has legs and it is in a big market. If your idea is not proven, or if the market pursuing it is not big, you will not attract institutional capital at that stage. Depending on the kind of business you are pursuing, you would probably continue to move into high-net-worth individuals and head down that path.

If you have a high-growth technology company and you have traction, you will be a good candidate for series A capital. Once you have secured series A capital, you have basically built the company. You go from building a product to building a company. You build a more significant team and you start to gain scale. You optimise your economics. And then you move into big institutional capital—series B and series C—which tends to be $10 million to $20 million cheques. That is where there is something of a gap in the Australian market, which the US investors are actively stepping into in this market today. That is really about scaling your company to a very large scale globally. There is money available for that here, but it is not as easy to find as it is in the US.

Senator IAN MACDONALD: I do not want to delve into your personal business but you said you had started with $50 million. That was not something you just pulled out of your pocket. You were borrowing from someone or getting friends—and fools!—to help you with the initial thing?

Mr Gilligan : No. In our case we raised a fund from a single limited partner, Westpac. They committed $50 million up-front. I have co-founded several businesses before. For one of them, I raised a couple of million dollars from angel investors and money from institutional capital—venture capital. For another one, which I did for seven months, I bootstrapped it myself. I spent seven months building it out with no external investment whatsoever.

Senator IAN MACDONALD: Tell me what happens if I think someone is switched on and I would like to put some of my savings into their business—not necessarily you, but people like you. Are you totally privately owned by you and your partner, or do you accept equity investment?

Mr Gilligan : No, we do not. We have had a lot of approaches from family offices asking if they could invest in our funds. We have a very deliberate strategy in partnering with Westpac. This is really about helping Westpac transition as their industry reshapes. That is the deliberate strategy we have chosen. I think it is a strategy that a lot of Australian corporates should consider as their industries reshape, across a lot of different industries. In this economy, I think technology is going to reshape a lot of industries. Generally speaking, most Australian corporates are not prepared for that journey. It would be great to see more of them consider strategies to tackle that.

Senator IAN MACDONALD: You have read the news blurbs about the government's innovation policy—and this is not a political speech. Is that heading in the right direction—perhaps I should not asked this question—or is it all just words?

Mr Gilligan : It is. We have been active dissidents, at many levels of government, over the last couple of years for policy changes to a bunch of areas in the ecosystem. In particular, in fin tech, we have been watching the UK government steal the global lead in this industry category and declare its desire to be the fin tech capital of the world. Chancellor George Osborne has personally driven that strategy. We have been agitating for quite a while. The change of government at the end of last year has been a huge catalyst for a lot of initiatives that are absolutely heading in the right direction.

Senator IAN MACDONALD: Which country are you talking about?

Mr Gilligan : The UK.

Senator IAN MACDONALD: Did the UK government change last year?

Mr Gilligan : Sorry, the change of leadership in the Australian government last year has been a catalyst for a huge amount of change. It is all heading in the right direction. There is a lot more to do. We now have a level of engagement in our community that has not existed at any level of government prior to this.

CHAIR: You said that the average term of venture capital is five to seven years and the average loan is half a million to $1 million.

Mr Gilligan : It is an investment rather than a loan. Our average cheque size across our portfolio companies probably ends up being around $5 million. We generally invest about $5 million across 10 companies over that five- to seven-year period.

CHAIR: Do you see us bring in overseas money down the track? Our former trade minister, Andrew Robb, told us on many occasions that a lot of money from overseas is available if we have the right sort of projects in Australia. Do you and Westpac already involve overseas money in these ventures?

Mr Gilligan : Yes, we do. We have relationships with other venture capitalists in other markets. For some of our ventures, particularly those that have global aspirations, having some global investors is the right thing to help those businesses grow into new markets. My observation from talking to them, particularly in the last few months, is that they sense there has been a significant shift in the Australian economy. A lot more of them are focusing on this market, paying attention to it and making visits down here. They are hugely encouraged by the step-up in the maturity of the Australian ecosystem here. I definitely think there is an increasing interest from overseas capital in this market. My observation is that, for good companies, that capital is very liquid.

CHAIR: Interest rates are a strange thing. It depends on what sort of loan you want from the big four or from Macquarie or other banks. Housing loans are four to five per cent. Business loans are seven to eight per cent. I could be way off the mark there, but that is what I have been quoted recently. What could I expect if I had the right project with venture capital?

Mr Gilligan : Venture capital is not a loan, so there is no interest rate.

CHAIR: It is not just an investment, it is ownership?

Mr Gilligan : Correct. We take part ownership in the company. In that sense—

CHAIR: How do you work that out?

Mr Gilligan : It is an art, not a science! It is a negotiation between the entrepreneur and the venture capital. It is the point at which you land. They sell you the dream and you try and pop the bubble. You land at a point in the middle. Once you have made that investment, you are both trying to sell the dream.

Senator WANG: Is the negotiation just between you and the company you are aiming to invest in? Is there a role for an independent report of valuation or something?

Mr Gilligan : Not really. As a rule—and this makes us unpopular with corporate advisers—we generally do not invest in a company that is advised by a corporate adviser either. We use a lot of filters in VC. When you are inundated with approaches, you use whatever raw filters you can to filter out companies that you do not want to invest in. One of those filters is that if as an entrepreneur you cannot hustle your own cash, if you cannot front an investor directly, then you probably cannot do all the other things that are necessary to build a great company. So we do not invest in companies that have advisers in that process.

Senator WANG: That means, at least in your view, that the manager of a start-up company needs to have critical financial skills—

Mr Gilligan : They need to be a jack-of-all-trades. Generally speaking, the great entrepreneurs are bush lawyers, investment bankers, marketers, technologists and HR specialists. They have to have that breadth of skills to some degree. Particularly to hustle their own cash, to sell the dream, they have got to have those skills. Sales is the critical skill for an entrepreneur. You are selling to your first investors, your first employees and your first customers. If you cannot convince them of your dream, you get nowhere. We talked about the skills that are missing. To a large degree, I think a lot of that is missing. Some people just do not have the capabilities to be a great entrepreneur; they can be part of a great team but they cannot necessarily lead a venture in that sense. I am not sure how much of that can be taught other than through experience.

Senator BULLOCK: One of your answers to an earlier question from Senator Macdonald threw me a little bit. We were talking about companies that were growing through the various stages—angel funding and series A capital. You said a good company might grow to a particular size and be looking for a significant amount of capital but that sort of company, notwithstanding that it is profitable, would not attract institutional capital, it would have to go to high-net-worth individuals. That threw me because I thought the sort of return that a high-net-worth individual might want on his capital would be higher than what the bank would want.

Mr Gilligan : Don't think about us as the bank; think about us as a VC. As a VC we are looking to make an internal rate of return, an IRR, of somewhere between 25 and 35 per cent over five to seven years. So to turn $50 million into $200 million is our objective. That means we are prepared to take on a lot of risk. For a high-net-worth individual a much more sensible strategy is—

Senator BULLOCK: Given your independence, that make sense. Yesterday we had some evidence not in your area but in manufacturing. This is not a venture capital question, it is a bank question, so excuse me for asking it. They were saying that, with regard to manufacturing in Australia, while there might have been money available for high-tech start-ups, people looking to develop sound businesses with a track record were going to the bank for a loan and they were told that the bank does not invest in manufacturing because they regard it as a risk and they are not prepared to put their money into it. Is there anything to that, or is that just nonsense?

Mr Gilligan : I am probably not qualified to speak on what it is like to get debt financing. I have never been involved in the provision of debt financing.

CHAIR: Thank you, Mr Gilligan. That was very informative. If you have been asked to provide further information—and I do not think you have—would you please provide it to the secretariat by 23 March. If this committee has any further questions, we will send them to you in writing through the secretariat. Thank you for coming in. Good luck. I think you are on the up, and it is great to see.

Mr Gilligan : Touch wood! Thank you.