Policy settings to encourage the venture capital sector and Labor’s one billion dollar bet on American Company PsiQuantum

The Albanese Labor Government’s decision to invest almost $1 billion of taxpayers’ money in American quantum computing company PsiQuantum raises many issues of concern.

Those include the terrible process that led to the decision (including what looks to be a very loose approach to managing actual or perceived conflicts of interest in Minister Husic’s office); the lack of clarity about what Australian taxpayers get for their money; and the failure to apply the Albanese Government’s much trumpeted national interest framework.  

But there is another issue which is worth thinking about: how does this deal stand up when viewed through the lens of public policy concerning the Australian venture capital (VC) sector?  Venture capital is a really important source of funding for start up and early stage companies, particularly those seeking to commercialise scientific and technological breakthroughs.

Until the last few years the VC sector in Australia was quite weak compared to the US and other advanced economies. But it has expanded markedly, particularly following changes made by the Coalition under our National Innovation and Science Agenda in 2015.

2021 was a record year for VC investments, with $7.9 billion invested, double the $3.9 billion invested in 2020, according to advice provided recently to the Australian government (obtained by my office through a freedom of information request) citing data from Preqin and the Australian Investment Council. The average deal size in 2021 was $296 million.

This is an interesting reference point to assess the PsiQuantum deal: it tells us that the amount of taxypayers’ money Labor committed is over three times the typical size of a private sector venture capital deal.  It also tells us that in one transaction Labor committed around an eighth of the total funding put in by the entire Australian VC sector in 2021.  

Of course there were existing private sector venture capital investors who had already put money into PsiQuantum, such as the Australian venture capital firm Blackbird. But the size of the investment made by Labor in PsiQuantum dwarfs the investments made by private sector VC funds. 

Why should we be concerned?  I think, when we look at Australia’s existing VC sector and compare it to what Labor has done with PsiQuantum, there are at least three reasons to be concerned.

The first is concentration risk. What private sector VC funds do is spread their investments across multiple companies, and not put too large an amount into any one company. Labor by contrast is putting all of its VC investment into one company - PsiQuantum - following one particular path to commercialise quantum technology.  Compared to an alternative strategy of spreading investments across multiple companies, Labor is following a very risky strategy. 

The second reason to be concerned is the amount of money at risk.  This deal is much bigger than typical investments done in the Australian VC market.  This is a strong piece of evidence that Labor has misunderstood the risk it is taking with this investment.  

The third reason for concern is that this decision is emphatically not the right way to develop a vigorous VC sector in Australia. Rather than backing and seeking to build the sector so venture capital funds can make more investments in start up companies, Labor instead wants to do the sector’s job by itself investing directly in one particular start up company, PsiQuantum. The Albanese Labor Government evidently believes it (and its Ministers) can do a better job of finding attractive investment opportunities than private VC funds. This belief of course is delusional. 

Labor’s  approach stands in contrast to the Coalition’s approach. We provided extra funding for VC when in government, but the way we did it was to make a cornerstone investment of public money into Main Sequence Ventures, a venture capital fund to be managed by the CSIRO (and able to draw on the scientific and technological expertise of CSIRO staff.) We then left it to this fund to make individual investment decisions, rather than Ministers making an investment decision as was the case with PsiQuantum. 

The Albanese Labor Government’s decision to bet - and there is no more appropriate word - nearly one billion dollars of taxpayers money on PsiQuantum is a very poor one.  A comparison with the typical investment strategy of the private sector venture capital sector in Australia only confirms just how poor a decision this is.