Go for the Kangaroos, Stay for the New Rules –

With its Great Barrier Reef, untamed Outback and incomparable wildlife, Australia has little trouble attracting tourists. Now the continent on the bottom of the world is trying to lure a decidedly different group: venture capital investors. The Aussie government recently changed its tax laws to pull more risk capital down under.

At least four firms have already jumped at the opportunity, setting out to raise a total of $478 million for venture funds to be focused in Australia. The latest firm to announce fund-raising plans is Burrill & Co., a San Francisco-based venture firm. It has set a target of $100 million for the new Burrill Australia Fund, which will focus on Australia’s biotech sector. In addition, the firm hopes to raise $100 million exclusively from Australian investors for its Burrill Life Sciences Capital Fund, which has an overall target of at least $250 million.

Three other firms have registered to raise funds. Macquarie Bank, an Australian investment bank, plans to raise about 300 million Australian dollars (AUD). (That’s the equivalent of $197.1 million, based on a conversion rate of $1 to 1.524 AUD on July 10.) Deutsche Bank plans to raise 175 million AUD (or $115 million). And newly formed Starfish Ventures has set out to raise 100 million AUD (or $65.7 million). The Melbourne-based venture firm was started by John Dyson and Michael Panaccio, who established and built the Australian private equity investment unit of JAFCO.

Mission Accomplished

The new fund-raising is exactly what the Aussie government wants to see. In late 2002, the Australian Senate passed the Venture Capital Bill of 2002 and the Taxation Laws Amendment (Venture Capital) Bill of 2002. The new laws made it possible for Australian venture funds to set up limited partnerships and funds-of-funds. “The most important thing that’s happened is the ability to create limited partnerships, which never existed before in Australia,” says Robert Hunt of Invest Australia, an organization set up to attract investments that will spur job growth. “Previously, these funds were set up as corporations or trusts; there was no easy way for an American funds manager-like a fund-of-funds or a pension fund-to actually invest in an Australian fund without a tax liability.”

Even though Australia has the fifth largest pool of pension fund money in the world, according to Hunt, the pool isn’t enough to support very many venture funds, since Australia has a population of just 20 million people. With the passage of the reform bills, the Australian Venture Capital Association Limited (AVCAL) expects $1 billion of new capital to flow into the country over the next five years.

Fund-raising peaked in Australia two years ago (see chart, next page), when the market raised a total of 1.12 billion AUD (or $736.6 million) for the fiscal year ended June 30, 2001, according to AVCAL. Fund-raising fell to 810 million AUD (or $531.3 million) for in fiscal 2002, AVCAL reports.

Big Plans

Of the new funds being planned, Burrill’s is the most ambitious. “There haven’t been any funds of that scope in Australia,” says Steven Burrill, CEO of Burrill & Co. “I have a sense it will either work or it won’t.”

He found “a lot of interest” in a recent fund-raising trip down under, but he isn’t convinced yet that it will translate into actual commitments. “I suspect that we’ll know within 90 days if it has any legs,” Burrill says. “We’ll probably need at least $50 million” to do the fund. He adds that he would not close the fund if commitments top out at $20 million.

While the future of an Australia-only fund isn’t certain, Burrill has already locked up enough money for the Burrill Life Sciences Capital Fund, which will invest worldwide. The firm held an initial close on $70 million late last year, another $70 million in June, and it expected to close on $20 million to $30 million in early July. The fund will hold a final close on Sept. 30-with an extra $100 million from Australian investors-if fund-raising goes as planned.

To date, most venture capital investments in Australia have centered around non-technology industries, such as manufacturing, distribution and retail, Hunt says. “Under some of the old rules, companies were less inclined to take the risks associated with technology,” he explains.

Tech Wary

Interest in overall IT and communications, in particular, has waned, but it is still strong for life sciences. Australian universities put the sector on the map. For example, Monash University of Melbourne did the first successful in vitro fertilization. And Graeme Clark, a professor at the University of Melbourne, invented the first implantable electronic hearing device, which gave rise to Cochlear Ltd., the world’s largest vendor of such devices. Today, Australian companies are active in the areas of reproductive medicine, immunology, stem cell research, and “bioprospecting,” the business of searching for medicines in nature.

If it’s successful with its fund-raising for the Burrill Australia Fund, Burrill plans to focus its investments in three areas: stem cells; so-called “neutraceuticals,” which are at the intersection of agriculture and nutrition; and companies working on personalized medicine. The firm will target three kinds of companies: entities spun out of foreign companies that can be relocated in Australia; spinouts from Australian companies, and startups that emerge from universities.

Burrill doesn’t expect many other U.S. firms to follow him to Australia, even with the changes in Australian tax laws. “I don’t think there is much of an appetite for Australian deals outside of Australia,” he says. “It has world-class science, a lower cost of operation and good people, but the bad news is that it’s a long way from the United States.”

It isn’t practical to have an Australian fund if you don’t have an experienced team in Australia managing the money, he notes. Since the start of the year, Burrill has been assembling talent. He has already pulled together a six-person scientific advisory board and a three-person board to help the Australia fund. And, he has lined up three individuals to invest it: an Australian who is “a leading VC in Europe” and who plans to move back to Australia, a former fund-of-funds manager and a venture capitalist from a small Australian venture fund.