Australian Financial Review
by Paul Smith
October 1 2018
Industry super fund Hostplus has cemented its surprising status as the most influential figure in the Australian tech venture capital scene, increasing its assets targeted at future innovation to over $1 billion and calling for more of its institutional peers to embrace risk and fund the future of the country's economy.
Speaking with The Australian Financial Review, following a meeting of the Hostplus board in Sydney, the $36 billion fund's chief investment officer Sam Sicilia said he hoped more funds would see the benefit of embracing risk in order to help develop new industries in Australia, and called on Canberra to develop bipartisan agreements to safeguard innovation policy.
Mr Sicilia, along with CEO David Elia, have developed a reputation as forward-thinking proponents of focusing on tech-led innovation for the future prosperity of the Australian economy. It has led Hostplus to become the most prominent of a small band of super funds, willing to back the emerging tech scene, largely through both VC fund support.
In recent times it has backed Square Peg Capital, Blackbird Ventures, MH Carnegie & Co, Carthona Capital, Brandon Capital Partners' Medical Research Commercialisation Fund, UK-based IP Group's $200 million fund for commercialising Group of Eight universities' research and CSIRO's Main Sequence Ventures fund.
While a number of other institutions have begun flirting with the VC sector, such as First State Super, Sunsuper, Hesta, StatewideSuper and AustralianSuper, most have done so in a limited way or give it a wide berth entirely, in favour of more conservative investments.
Mr Sicilia said Hostplus had recognised that, not only was investing in innovative new ideas a positive thing for the Australian economy, it was also likely to prove a smart move for those invested in it.
"Despite the conservative sector the punchline is that Hostplus is the biggest venture capital investor in Australia by far. We want other super funds to do this, because we can't support a venture capital ecosystem on our own and this country can't do mining and agriculture alone forever," Mr Sicilia said.
"As a fund we have a very young member demographic, with an average age of 34 over 1.1 million members, they are not retiring any time soon so we operate with a 20-year investment horizon.
"As a nation we need a mindset that a culture of innovation is critically important. The nature of venture capital is that most of it won't succeed, but those that do succeed insanely wildly."
Mr Sicilia said Hostplus had recently committed to increasing it investment in Brandon Capital Partners' Medical Research Commercialisation Fund alongside Hesta and would continue to advocate for more funds to go in with them on investments.
He said many he spoke to were reticent to take the plunge because they either feared a lack of liquidity in longer term investments or were still stung by the crash and burn of the dotcom era around the year 2000.
This is misguided on both counts, according to Mr Sicilia, who said he believed the earlier tech boom fizzled simply because the technology was not yet sophisticated enough for the industry changing ideas being sold.
"It probably is ready now, but we can't know for sure ... but it certainly will be in terms of a 20-year investment horizon, when we're talking about almost being in the year 2040," he said.
"We're a $36 billion dollar fund and $1 billion is in venture capital. If the whole thing dies and the whole billion evaporates, we have only lost one divided by 36, which seems like a lot, but it isn't with the potential outsize returns from successful investments ... So my question is why isn't everybody else doing it?"
Blackbird Ventures co-founder Niki Scevak has direct experience of coaxing super funds to invest, and was also able to convince the Future Fund to back his latest $225 million fund. He said it was too early to claim that the floodgates had opened for institutional money, but was optimistic that the initial resistance had broken down.
He said he believed that the scale of Australian funds meant that only a few more getting involved could dramatically change the size of the local industry, however he said the appetite for risk was not easy for some funds to develop.
"I certainly believe that venture capital offers the potential for the best returns in the world ... Sequoia Capital has significantly outperformed Warren Buffet over 40 years, for example. But the reality is that like the average start-up, the average venture capital fund is a failure," Mr Scevak said.
"No other asset class has such a wide variety of performance and so it will be easy for the investor who doesn't believe in the asset class to point to a great number of examples of failure and still miss the bigger picture.
"But the combination of the long term horizons and the inflow of contributions, particularly for those super funds with younger members, mean they are ideally suited to explore the asset class. But you still need the pioneering spirit of the individual investment teams even with those raw ingredients."
Room for more
He estimated that only 20 per cent of VC investment in Australian start-ups currently came from Australian-based VC funds, with most still coming from US-based backers.
This meant there would still be great scope for local money to flow in and reduce the pull for Australian founders to relocate due to funding considerations.
"A few years ago, I think many of them [super funds] started to become curious about some of the local start-ups like Canva, Zoox, SafetyCulture and CultureAmp. They saw wonderful beginnings and that those companies had a chance to be the best in the world," Mr Scevak said.
"The support of big super funds is not only vital, I would say it's existential. The long-term horizons of the capital they manage is ideally suited to venture capital, which is all about creating iconic companies from scratch. Few other asset classes or individuals have the advantage of long-time horizons."
The co-founder of fellow big money VC Airtree Ventures, Daniel Petre revealed earlier this year that he had turned down a a $400 million cheque for fear that money was flowing too fast into the market. He reasoned that if institutional money was blown on underwhelming start-ups simply because VC funds had too much money to spend, then the super funds would run for the hills again.
His Airtree co-founder Craig Blair said he believed increased super fund investments would be a good thing as long as it maps to the cadence of growth in start-ups.
He said the most sophisticated super funds had a portfolio approach to VC, whereby they could plan to support funds of multiple vintages, in order to even out the returns.
"There are some very high-performing VC funds in Australia right now – many are in the top 10 per cent decile globally, so I think any investor fears missing out on these types of opportunity," Mr Blair said.
"It is essential for the local ecosystem to have strong interest from the big super funds, and the raison d'etre of super funds is to provide for their members' retirement. So it makes sense to have a sensible exposure into tech companies that will shape the future of our country."
Government messages and incentives
Unlike some in the tech sector, Mr Sicilia does not believe politicians just need to "get out of the way" of start-ups in order to enable the industry to flourish.
He said the current government was along the right lines with research and development incentives, but needed to start directly investing in the carefully selected areas, where Australia could become a world leader.
He also said it was time for the government to stop avoiding the topic of innovation-led change, simply because it scared voters about their jobs.
"The problem with the R&D tax incentive is that it is indirect ... the government gives any company a research and development tax deduction, irrespective of what research and development they choose to do and irrespective of the outcomes," he said.
"We need a list of preferable areas for our economy to transform to, then we should positively discriminate in favour of them, so that companies in that area get double.
"If you want to make horse saddles, that's great ... make the best horse saddles in the world and export them. You still get the R&D grant, but horse saddles aren't on the list of 10 things, so they get double ... Something like solar panels would be on the list."
Aside from the government's aversion to the innovation topic, Mr Sicilia said he believed the adversarial nature of Canberra politics was holding the country back from developing the tech and innovation economy he is looking to fund.
He said currently any party advocating too strongly for focusing on new innovation was wide open to opportunistic scare campaigns from the other side, falsely claiming that they could protect existing job roles from the advances of technology.
His solution would be an idealistic list of four or five topics on which the major parties agreed to follow a bipartisan approach and not derail progress for the sake of point scoring.
"Australia needs to compete on what I call 'above the neck functions', because we have no advantage in labour intensive activity as our competitor countries have a lower labour cost. There's no point in hoping that labour costs will drop, because it has never happened," Mr Sicilia said.
"We need to position the economy for change because not talking about technology doesn't make it go away. Not embracing technology, only disadvantages the people that are the non-adopters.
"So my worry is that political fear restricts us, meanwhile other countries that are not impeded by the same forces are moving ahead."