By Mike Baird
Chairman – Australian Business Growth Fund
To me, innovation is about pressing fast forward on the ideas, research, technologies, opportunities and leaders that change and shape the nation for the better.
It’s about supporting smart people who are passionate about solving complex problems, and also knowing when to step aside and allow them to do what they do best.
And it’s about the multiplier effect – how one significant change can have a knock-on effect across communities and economies – with each piece of the puzzle connecting two or more others.
I also define innovation by what it’s not. Innovation is not creating hurdles or forcing businesses to wait to grow. It’s not about giving what you want at the expense of what business owners need. And innovation is certainly not dressing up collaboration as a way to take control.
Capital is one of the most critical mechanisms that enable businesses to put their foot on the accelerator. Australia has seen a significant and most welcome increase in the quantity and quality of capital available to growing businesses. The problem, however, is that when it comes to allocating that funding, we’re overlooking many of our highest potential businesses.
The funding influx of the last decade is hiding a secret in plain sight: there’s a critical funding gap for small-to-medium enterprises (SMEs) – and it has resulted in a generation of entrepreneurs being largely ignored by the investment community.
In 2019, in Australia alone, more than $2.2 billion was invested in venture capital deals, with another $15.8 billion in private equity buyouts and a staggering $56 billion in business loans.
How much money went toward minority stake growth capital to SMEs? Just $320 million.
Today, many SMEs find themselves with few funding options. Banks are not designed to take a punt on step-change growth, and while traditional private equity firms have the appetite for larger, riskier deals, their ambitions for a controlling stake don’t align with the goals of most entrepreneurs. Furthermore, many SMEs are simply too small or don’t have the growth profile to attract venture capital.
However, this is a sector we cannot afford to ignore. SMEs create around 7 million jobs and generate 57% of Australia’s GDP. These are the businesses who are active in their local communities and cement our reputation as a nation of entrepreneurs. As we’ve seen in examples such as Atlassian, Canva and ResMed, these small businesses can quickly become large companies that employ thousands and build global influence.
If we want to build and scale companies within Australia’s borders – and reap the rewards that come with nurturing local innovation – we need capital and support working in tandem across every stage of the innovation cycle, from the earliest days of ideation through to global expansion and beyond. That means ensuring our SMEs don’t get left behind.
SMEs need funding solutions that are not just financially robust but also truly supportive and collaborative. The Australian Business Growth Fund (ABGF) was launched to fill this critical funding gap and provide patient, long term growth capital for SMEs – the type of funding those businesses find difficult to secure from investors or traditional lenders.
Uniting strong government support with commercial muscle, the ABGF is a public-private partnership, with the Federal Government and six major banks committing $540 million in funding – ample dry power to make a material impact on a large and diverse group of SMEs across every sector of the economy.
On a per deal basis, it will invest between $5–15 million of growth capital in exchange for equity – but the ABGF will only seek a minority stake (less than 49%) in the investments. That means business owners don’t have to take additional debt or give up control of their business in order to attract investment.
Similarly, we’ve recognise that growing companies require more than capital alone to scale. Portfolio companies will also have access to the ABGF’s Talent Network. Under this model, companies can source a Non-Executive Chair who can use their own business and industry expertise and deep networks to open doors and provide strategic advice.
It is my belief that ABGF will become a critical catalyst for growth in the local SME sector. As a for-purpose fund, its success is judged not just on the returns it can deliver shareholders, but also on its indirect impact on the broader economy – including its ability to connect entrepreneurs to the capital, expertise and wider networks they need to succeed, and to support local job creation and economic growth.
We can look outside of Australia to see the incredible benefits that this model for investing in high-growth SMEs can achieve. The UK set up a similar private-public partnership called the UK Business Growth Fund (BGF) in 2011 following the global financial crisis to provide patient growth capital and support tailored to the unique needs of SMEs.
Fast forward to today and the BGF has invested £2.7 billion (AU$4.6 billion) in nearly 400 SMEs across a range of sectors and realized 102 exits whose capital was reinvested.
There are a number of factors that have contributed the model’s success. First, the long-term nature of the investment allows the BGF to support companies through short term market upheaval. It can see beyond a business’ near-term challenges toward its future potential and provide connections to executive level talent to assist the businesses in navigating strategic roadblocks.
Similarly, the BGF also only takes a minority stake in its portfolio companies, which means it can support with considerable follow-on capital. One example is its investment in recipe kit company Gusto. At the time of investment, the company was facing competition from a new market entrant. The funding helped Gusto expand its team of chefs and nutritionists and ramp up its sales and marketing efforts. The BGF went on to invest £26 million in Gusto across eight separate funding rounds. Now, the company employs about 1,000 people and has achieved “unicorn” status.
The BGF has proven that this public-private model can be incredibly successful – even in a downturn. Despite the challenges presented by COVID-19, the BGF made an average of one investment a week in 2020 and saw 28 of its portfolio companies to a successful exit – an unmatched level of activity considering the circumstances.
If we want to encourage innovation and drive local growth, much of it comes down to how we finance ambitious projects and opportunities created by our entrepreneurs. By plugging the funding gap for SMEs with solutions like the ABGF, we can empower a new generation of businesses to scale with purpose. That means a thriving future for Australia with more jobs, more economic growth and more opportunities for its people.
At the Australian Business Growth Fund™, we provide long-term growth capital to enable SMEs to scale without giving up control of their business. Start the conversation with us today.