From startup star to near collapse at the ‘next Cochlear’

Seer was feted from its inception in 2017. Former prime minister Scott Morrison used Seer’s Melbourne headquarters in 2021 to announce the federal government’s $1.2 billion digital economy strategy. The technology is “truly magnificent and going to make a big change right around the world”, he said.

Seer Medical’s founders had created a world-first, wearable device that monitored, recorded and communicated brain activity while being worn at home. Previously, this could only be done during a long-term hospital stay. Seer says it could help treat 65 million people worldwide affected by epilepsy.

The company’s new CEO, Joshua Reich, says they have seen more than 6000 patients who otherwise would have directly cost the healthcare system $90 million in hospital expenses.

The device has been used by more than 15,000 Australians and broke into the US market, where it is partnering with medical centres such as the Mayo Clinic and NYU Langone.

After Seer won the Victorian Startup of the Year in early 2022, the newly created Breakthrough Victoria made its biggest investment – a $30 million convertible note to help Seer expand offshore in June that year.

Freestone puts the blame for what happened next squarely on Breakthrough Victoria. He claims the government-controlled fund ultimately put a financial gun to the founders’ heads to give up control or watch the company die.

“In the end, we were left with no choice but to let Breakthrough Victoria take the company from us [the founders],” he tells AFR Weekend.

So. what went wrong?

In March 2023, the company launched a “series B tranche II” funding round to raise $US20 million ($30.6 million). Breakthrough Victoria was expected to contribute an additional $US10 million.

But by May, Breakthrough Victoria withdrew its support unless Seer agreed to change previous convertible note deal terms, a move that would greatly diminish the equity of the other shareholders.

The Seer board was shocked and could not accept Breakthrough Victoria’s demands, says Freestone. The investment round was aborted.

Then in May last year, US VC firm Safar Partners and local super fund Hostplus discussed investing $US10 million as part of a $US15 million capital raising that valued the company at almost $US100 million.

But by December, Freestone claims Breakthrough Victoria’s demands again led to the deal falling over. Safar cited “existing notes being treated equally with new notes”, and “depth of existing investor support” as reasons for pulling out.

In other words, Breakthrough Victoria was demanding unreasonable changes to its previous deal, Freestone says.

Freestone believes Breakthrough Victoria was also working closely with healthcare investor KPRx, and by January, things were looking desperate.

The Safar deal had fallen over and KPRx wanted to value the entire business at close to zero. There were fears the start-up could fall into administration where it could be bought on the cheap.

Then by January 23, Breakthrough Victoria pulled out of that deal too, triggering the emergency meeting of angry investors and resignation of the board, which also included venture capitalist John Quinlan, the CEO of Cadell Food Service, Cameron Kenley (the brother of Seer Medical’s co-founder), and lawyer Victoria Halliday, ASIC records show.

A spokesman for Breakthrough Victoria denies the claims it ever blocked funding.

“All funding decisions relating to Seer at that time were a matter for the Seer board, of which Breakthrough Victoria was not a member,” he said. “Breakthrough Victoria has always been supportive of the company raising capital in a timely manner.”

Reich also disputes the detail. “I understand that there were a few potential investors, but none were moving fast enough given our cash runway.”

Reich says the start-up had a “grow-at-all-costs” mentality which was “buoyed by the frothy capital markets of 2020-21, but was burning cash at too high a rate”.

“Looking at our operating expenses, we recognised that they were too high”, he says. He says Seer ran a smaller cost-cutting exercise in 2023, but “these cuts weren’t large enough … and there was increased pressure to limit the scope of our business and focus only on core near-term opportunities”.

This model was supported by the lead shareholders, he says.

AFR Weekend is aware that other minority shareholders in Seer, including high net-worth families and investment funds, wrote to Seer’s board on January 23 to complain they had not been kept updated on the company’s perilous financial position, and threatened legal action.

Breakthrough Victoria claims its rescue package helped to save the business and protect jobs.

“The founders all voted in favour of these terms at the EGM called to approve the restructure,” it says. “The investment by the independent shareholder group and Breakthrough Victoria enabled Seer to retain 140 employees and stabilised the business to enable future growth.”

But the dispute triggers bigger questions about the fund. The Victorian Liberals have referred Breakthrough Victoria to the auditor-general, warning it is run by “Labor mates”, has been “shrouded in secrecy”, and resulted in start-ups shedding jobs.

They want answers to questions, including: Why does Breakthrough Victoria employ more than 50 staff, including former public servants and political staffers, at a cost of almost $9.9 million a year? Why did it spend $1.55 million on consultants last financial year? And why did it invest just $73.7 million last year when it had $22 million in expenses – a rate venture capitalists say is wasteful and uncommercial?

On Tuesday, Cameron Harrison – Breakthrough Victoria’s director of strategy and corporate affairs and former policy adviser to Daniel Andrews – posted on LinkedIn that he had left the fund.

His departure follows the exit of directors, including former Deakin University vice-chancellor Jane den Hollander, and founding director Andrew Bassat which, according to Breakthrough Victoria, was for personal reasons.

Technology entrepreneur and investor Adir Shiffman says the fund is “completely unnecessary”, and the money should be returned to taxpayers given the “real risk that $2 billion of taxpayers’ money will be incinerated with little to show for it”.

High-profile Melbourne investor and Seek co-founder Matt Rockman agrees, warning the state government should not be playing in a high risk, very specialised area like venture capital.

Former Victorian premier Jeff Kennett says the saga mirrors the former Labor government’s Victorian Economic Development Corporation, a venture capital fund which marked the beginning of the end of the Cain-Kirner governments, after it racked up estimated losses of $110 million and sparked a scandal.

Kennett says the VEDC, together with the collapse of Victoria’s State Bank under the weight of poor lending decisions by its merchant banking arm Tricontinental, manifested the public’s anger over Victoria’s mismanaged finances – an eerie parallel given the state is again headed for unsustainable debt levels of close to $200 billion.

More than one political commentator has painted Victorian Premier Jacinta Allan in the role of Joan Kirner, after nine years of Daniel Andrews’ big-spending government.

Kennett’s frustration stems from the fact that many of the hard economic decisions he made to put the state’s finances back on track as premier have been wiped out.

“No wonder the board are quitting. They could be and should be liable for more sheer wastage,” he says. “The fund must be closed down when Victorians are paying more in taxes to cover for Labor’s mistakes.”

But Victorian Treasurer Tim Pallas rejects the comparison. He says the VEDC fell down because of corporate governance problems.

“We cannot let the sum of our fears consume the future. Being afraid to take risks, being afraid to invest in growth,” he says.

Pallas says the fund was “almost a direct lift” from the Singapore government-owned global investment company Temasek and would have no impact on state debt because the money was already provisioned.

“If you are telling me that there’s more than sufficient venture capital companies out there, I would dispute that and, in fact, what we are hearing from that community is whatever you do, don’t crowd us out, but complement the effort that we put in place.”

And despite all his travails, Freestone still hopes his invention will help millions of people around the globe, even if he, his family and fellow founders never get to share in the riches.

“We have built an incredible product that is loved by the top healthcare institutions. Despite the recent funding challenges, the company will recover, as there is incredible demand for our technology, particularly in the US.

“We never did this to get rich, we did it to see if we could help folks. I’m incredibly proud of what we’ve achieved, but it is bittersweet.”