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Amidst a significant funding gap in later-stage rounds for startups as well as hurdles to initial public offerings (IPO), the Australian Tech Council (ATC) has called on the Federal Government to consider the crucial nature of acquisition-based exits in the founder community when implementing its proposed merger reforms.
The government has emphasised that the proposed legislation would make it easier for the majority of mergers to go ahead, and is aiming to expedite the approval process to 30 working days - down from the current 171 - for deals where the regulator raises no concerns.
On the other hand, the Australian Competition and Consumer Commission (ACCC) would be given more powers to identify and scrutinise mergers that pose a risk to competition, consumers and the economy, while in the interests of transparency and accountability a public register of all mergers and acquisitions will be created.
The Tech Council's acting CEO Ryan Black calls on the government to engage further with industry on proposed changes to assess creeping or serial acquisitions to ensure it doesn't have the effect of providing the regulator with the ability to prohibit mergers that are actually not anti-competitive.
"The current merger factors have proven to be remarkably effective and flexible in their application to a broad range of industries and are consistent with international merger laws," Black says.
"Australia’s tech and startup sector is an important driver of competition in our economy."
He says Australia's growing and innovative tech sector is defying concerns about whole-of-economy trends towards increased market concentration and reductions in dynamism. But one of the great incentives for founders to build these businesses in the first place is the prospect of a buyout.
"The amount of venture capital investment and the number of deals has been growing in Australia, but our VC (venture capital) market remains significantly less mature than countries like the US, UK, Singapore and Israel," Black explains.
"Australia can be a challenging place for tech companies to scale – there is a lower probability of a tech company achieving the next funding round, especially from Series B funding onwards, compared to tech firms in the US.
"Access to later-stage funding for scale-ups is a key issue here – there will be a $53 billion funding gap for later stage funding in Australia by 2030, compared with funding on a per-capita basis in the US."
In this context, M&A activity is an integral feature of Australia's tech sector.
"Investors choose to invest in startups on the basis that those investments will eventually result in materialised returns. In order for investors to materialise returns, companies typically need to proceed to an IPO, or be acquired or sold," Black explains.
"There are a range of hurdles to companies realising returns by way of an IPO, and as a consequence, mergers and acquisitions are an important way for investors to materialise returns on tech investments.
"This helps drive further competition in the tech sector and supports the growth of new startups, which ultimately makes Australia a more attractive place to grow and scale a tech company."
Some of these views are echoed by UNSW Founders investments and portfolios manager, Beste Onay, who describes the reforms as a good possible step forward but has asked legislators to consider "all sides of the puzzle".
"While the proposed reforms offer a possible solution, the reality is that they need to better consider the implications for startup founders and the growth of technological innovation in Australia. Being a founder is an incredibly difficult job, and not many will be able to hold onto a business to a point where it can compete with big corporates," Onay says.
"The assumption is that by blocking the merger, the startup will continue to exist in the market, however, there's a bigger likelihood that this will not be the outcome. Mergers and acquisitions have the potential to open up new opportunities for founders, and usually, when a founder goes through an acquisition they're in the process of moving on.
"If we take away these opportunities we risk stifling innovation locally, and discouraging new businesses which means less competition ultimately."
Ryan Black from the TCA highlights data from one unnamed major VC firm in Australia that reports 14 per cent of its portfolio companies have achieved exits, and of those 70 per cent did so through acquisition by another company.
"Creating barriers for companies seeking exit opportunities could have a material adverse effect on the venture capital and investment landscape, and impact the long-term competitiveness of Australian tech markets," he says.
"Supporting the survival and scaling of tech firms can help drive improved competition and better consumer outcomes.
"An effective and well-balanced regulatory regime for mergers and acquisitions is critical for the growth of Australia’s economy and our tech sector."
He says the TCA looks forward to working constructively with the government on the finer details of the proposed reforms, including the proposed refresh of the merger factors and in setting the thresholds for a mandatory notification system.
"The Tech Council is pleased to see the government respond to industry concerns about the certainty and timing of merger reviews by introducing clear thresholds for mandatory notification, strict timeframes for review, and not proceeding with a call-in power for the ACCC," he says.
"We also welcome the Government’s decision to reject the proposal to reverse the onus of proof, which if implemented, would have made Australia a less attractive place to invest, grow and scale a tech company.
"Getting the details of this reform right is critical to ensure that Australia remains a globally competitive economy for fostering growth and investment in tech."
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