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Main Sequence
10 Feb 2023

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Main Sequence

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Submission

National Reconstruction Fund Consultation
February 2023

Background
Main Sequence was founded by CSIRO to bridge the valley of death in the commercialisation of research from the
Australian Publicly Funded Research Sector.

Main Sequence’s origins within CSIRO reflect its commitment to amplifying connections between industry, research and infrastructure to accelerate deep technology development, and reinvesting economic returns from commercialisation back into science.

CSIRO Innovation Funds 1 and 2 managed by Main Sequence, have invested in 48 companies since its establishment in
2017. These companies have created over 1,800 jobs by working with partners in industry, CSIRO, and 26 Australian universities.

The $240 million first CSIRO Innovation Fund, built on a cornerstone investment by the government and CSIRO, has completed its portfolio and invested in 27 companies since its establishment in 2017. The second, $310 million CSIRO
Innovation Fund commenced investing in mid-2021 and had already invested in 21 companies by the end of 2022.

Main Sequence has a significant amount of private sector funding (just over $400 million) as well as CSIRO/government funding ($100 million) in its Funds 1 and 2. All of this is deployed with the goal of both a strong commercial return and of delivering national policy (translation of Australia’s science excellence) outcomes. Main Sequence invests at early growth companies at different points in development, in order to have a balanced portfolio - from pre-seed to Series B. However, describing financial investment is only part of the story, as a critical element of these investments, particularly at the earliest stage, is that Main Sequence is instrumental in forming the company and building it to become a commercially investable proposition that will be attractive to co-investors. Each dollar invested by Main Sequence in its portfolio has attracted over $4 in coinvestment funding from other venture firms, strategic investors and industry players.

Main Sequence Core Funds being Early Stage Venture Capital Limited Partnership (ESVCLP) Funds, are reported into the
Department of Industry, Science and Resources, which produces a dashboard of overall performance of these Funds nationally https://www.industry.gov.au/data-and-publications/venture-capital-dashboard . Comparison of the data provided by Main Sequence with that from the dashboard shows that:
● Main Sequence’s Core Fund investment in Manufacturing represents $100m of the $134m that all ESVCLPs had
invested to the end of 2020/21; and
● Main Sequence’s Core Fund investment in Agriculture represents $16.2M of the $21.4M that all ESVCLPs had
invested to 2020/21.

This illustrates the critical role that Main Sequence is now playing for ‘deep tech’ investments. The venture capital market has grown strongly (capital invested by ESVCLPs $436 million and by VCLPs, $1,084 million in 20/21) however only a low proportion of early stage investment capital goes into Manufacturing-related (7.6%), Agriculture (1.2%) and Mining (0.5%)
– this early stage venture capital funding is largely going into ICT(40.2%) and Health (19.2%) investments.

The success of Main Sequence in working closely with the Australian university sector led to a government announcement in 2022 of an investment by CSIRO of $150m support for CSIRO investment in future CSIRO Innovation Funds. Main

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Sequence welcomes the opportunity to continue to work closely with universities to commercialise Australian research and build Australian companies addressing global challenges.

Each of our portfolio companies has some advantage delivered by either one of Australia's 43 universities or an applied research organisation such as CSIRO. In some cases this exists before we invest, in others, we facilitate it as part of the company's pathway to scale and impact.

Since establishment in 2017, the Australian deep tech companies supported with Main Sequence venture capital have created over 1,800 new jobs, and the market value of those companies - which have most of their staff and assets in
Australia - has grown to over $6 billion.

Main Sequence is strongly supportive of the priorities identified for investment by the NRF and these are well aligned with the investment challenges in which Main Sequence is investing in high growth companies, as illustrated below:

The availability of venture capital in Australia has grown in recent years, including from the creation and expansion of Main
Sequence, which currently has over half a billion dollars under management and will likely double this through Funds 3 and
4 over the next four to five years. Like other Australian venture firms, we invest from seed stage companies to Series B, or early expansion stage. But our experience with portfolio companies is that there is this ‘second valley of death’ for companies in Australia, when they are ready to scale.

As the companies in our portfolio expand and grow, they need to raise increasingly large capital rounds, beyond the reach of venture capital. At this point, the companies are not yet sufficiently de-risked to secure capital from Australia’s mainstream financing sector and are beyond venture capital capacity. The solution for companies at this stage can be to expand using foreign capital, often offshore, so that the potential for building sovereign capability in new industries is lost.
The availability of Australian capital for the expansion phase growth of new businesses (including manufacturing companies) is a long standing and critical gap in terms of building Australian-based industry. Current examples in the
Main Sequence portfolio are ‘deep tech’ companies creating industry disruptive technologies, or whole new industries, that have proof of production and the next step is to scale to reach a large market, for example by investing in a new production facility or factory.

We see a great opportunity for the National Reconstruction Fund to invest to support Australian companies to scale and create infrastructure onshore, where they are raising Series B, C and beyond. There is also scope to provide funding through a mix of instruments with differing return profiles and timelines - for instance, through a combination of equity investment and non-dilutive low-interest debt.

In this context we see Main Sequence operating between other government initiatives stimulating Australian industry development. At earlier stages, initiatives like the Trailblazer University Program, Australia’s Economic Accelerator and the
ON program will bring forward a refreshed and expanded deal flow of venture capital-ready investible opportunities allowing Main Sequence to create and grow new ‘deep tech’ businesses grounded in Australian research. We anticipate

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mseq.vc doing the rich market analysis and commercial planning to bring new companies to life as well as doing the heavy lifting with industry partners to create disruptive investable opportunities. Post Main Sequence’s involvement, the NRF can be a key source of capital for companies to continue their growth and expansion onshore, creating employment and boosting economic growth in new businesses, industries and sectors.

Main Sequence considers that transformation and diversification across the priority areas should be defined by innovations and new technologies which are not “business as usual”, or providing incremental improvements to existing industries or sectors. We see the potential for whole new product categories and new industries to be developed - industry growth based on “new to world” innovation - then enabled and accelerated by NRF funding.

Common goals
More than capital, the biggest contribution that the NRF can make towards the creation of new industries is to focus the different parts of the innovation system on a set of common goals. A number of new global industries are emerging today that are captured by the NRF’s priority areas. The national stories that rise from a scheme this ambitious will attract further resources to support the fledgling industries by helping others know where to look - and where to concentrate their efforts.
These stories begin with the themes and continue into celebrating the wins as different parts of the system come together to collaborate on resourcing and building.

Working proactively to ‘join the dots’ to deliver whole new industries - more than the sum of their parts - will create a magnet for those global industries to rise from Australia.We have observed in our own work, that when people see something working, they want to participate.

We see great potential in industry disruption and new industries across the common focus areas of Main Sequence and the NRF:
● Alternative proteins and new food production systems
● The application of synthetic biology to carbon-light recycling technologies and food production
● Semiconductor development to restore Australia’s world standing in this field
● Quantum technologies to underpin whichever quantum computing approach “wins” the current development
sprint
● Robotics and automation applied to safety, sensing and discovery
● Renewable technologies and innovative storage, including hydrogen
● Space as service developments
● Enabling technologies in cybersecurity, artificial intelligence and machine learning
Each of these is an opportunity for Australia to develop world leading sovereign capability and technology and build new global industries.

Balancing flexibility and clarity
Our experience to date with the Main Sequence funds is that maintaining flexibility within and between priority or challenge areas is important. While there can be some appeal to tightly defining challenges and allocating resources between them, we have found that this is the most effective way of deploying capital to burgeoning new areas of science and technology, because:

● Many truly innovative developments occur at the boundary of sectors or have multiple applications. For example
synthetic biology technology is being applied to both new food products and production systems, and to low
carbon recycling of plastics

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● Different challenge areas or opportunities have peaks and troughs in the emergence of new technologies and
approaches - so it may be that a wealth of investable opportunities are emerging from one priority area, while
there are few or none from another, in a particular year or investment period.

Ongoing engagement
Main Sequence welcomes the opportunity to provide input to the consultation process for the development of the National
Reconstruction Fund. We see the NRF as an important opportunity for Australia to invest in industry building and transformation and to foster Australian startup and SME growth and expansion on shore including to create sovereign capability. We would be very happy to discuss the content of this submission with you, or expand on any points of interest to you, and would be delighted to work with the National Reconstruction Fund team to ensure complementarity and connectivity between Main Sequence and the NRF in building new Australian industries.

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