BIO 2004: Greenbacks and tax traps

Don't think it's impossible for Australian companies to attract venture capital investment from the US, but their chances of success will be much greater if they can also prove that they can attract Australian VC.

"You need venture capital in the location where the entrepreneurs are, as they tend to be actively involved in building the company," says Andrew Schwab, founder and managing partner of 5AM Ventures, an early-stage biotechnology fund sponsored by two of the bigger life science investment firms, Bay City Capital and Versant Ventures.

"Local VC funds are the most important -- and it's always hardest to get the first money."

Schwab told a pre-BIO briefing in Melbourne that firms like Phenomix and Smart Drug Systems, which have based their corporate activities in the US and some of their R&D operations in Australia, were good examples of companies that have successfully obtained investments from consortia of Australian and US VC funds.

Schwab says he is interested in creating models to work with Australian VCs to invest in Australian companies. He says Australia is not alone in having assets greater than available venture capital -- there are plenty of places in Canada, Europe and even in the US where this was the case.

"I'd recommend that Australian companies work together to create fewer, but bigger companies that can thrive internationally. It doesn't matter whether the technology comes from Melbourne or Sydney, what matters is how deep the assets are, how strong the management is. At the end of the day, we want to build companies that can survive and thrive on an international basis," he says.

Homework

Meanwhile, Peter Heinecke, an attorney at US firm Kirkpatrick and Lockhart, recommends Australian companies do their research before approaching potential US investors to identify funds willing to invest overseas. "Creating an international company with R&D in Australia and management in the US can work quite well," he says.

But if a company is considering establishing a presence in the US, it works better to set it up as a subsidiary wholly owned by the parent company in Australia to avoid the tax complications of doing business in the US as a foreign enterprise. "You can set up a subsidiary company in a week or two, and it's not that expensive," Heinecke says.

Heinecke says it is usually best to keep the IP in the parent company in Australia to avoid paying taxes on royalties to the US. "You often have to set up a fairly complex structure to avoid excessive taxes," he says.