Is Australia's VC Landscape Choking?

Is Australia's VC Landscape Choking?

Australia’s level of venture capital (VC) activity is significantly lower than other developed countries, hindering our innovation ecosystem.

This is illustrated below, where between 2003 and 2013 the United States (US) invested US$285 billion in VC funding, equal to four times more than Australia (per capita) which invested US$4.5 billion over the same period of time (MoneyTree, 2013). This puts the Australian VC landscape in the bottom half of OECD (OECD Publishing (Paris), 2013).   

Australia vs United States VC Spend (2003 - 2013)

There are currently very few Series A deals funded by Australian VCs and even fewer Series B/C investments. The driving catalyst of this situation is the sheer lack of scale in our local investment funds, resulting in successful Australian high growth businesses relocating their larger cornerstone funding rounds overseas.

A recent example of this is Campaign Monitor which received $US250m investment from US-based Insight Venture Partners in April 2014. This is the largest ever single VC investment in an Australian tech company (The Australian Business Review, 2014).

The level of local VC investment in Australia can be seen in figure below where it is evident that spending from both local and international (note: a large portion of this was from Insight Venture Partners – above) VC funds has increased significantly.

VC Spend in Australia (FY10 - FY14) (AVCAL, 2014 Year Book, 2014)

When considering the amount of funds being raised by VC funds, it is evident that this increased spending cannot be sustained. An overview of the number of new funds in Australia and the corresponding amount of capital they have raised is shown in the figure below. What is immediately evident from looking at these figures is the large decline in total funds raised by VCs since 2012 from $240m to $120m in FY14. In addition to this, the average amount raised by individual funds had also decreased from $60m in FY12, to 51m in FY13 and $30m in FY14.

VC fundraising (FY10 - FY14) (AVCAL, 2014 Year Book, 2014)

To improve the local VC space, Australian VC funds need to have enough capital committed to support both initial Series A investments and also “follow on” in later funding rounds. Through increasing the capacity of funds, investment activity in this sector of the economy will also subsequently flourish, increasing the likelihood of investors achieving big VC wins as experienced in other global markets.

Australia’s small sophisticated angel investor population (when compared to the larger markets around the world) means that we require the commitment of institutional capital to support the evolution of a sustainable VC industry. However, until recently Australian institutions have failed to get involved in VC funding space. Institutional investors (such as superannuation funds) will typically need to see a track record before investing in VC funds. The catch is, by the time this validation presents itself these larger institutions will have missed the boat and local businesses (such as Atlassian and Campaign Monitor) will have completed funding rounds offshore.

It appears as though this vicious cycle of “suffocating the VC industry” may now be on a gradual mend with two new institutionally backed venture funds (Reinventure Group and Oxygen Ventures) launched in 2014, giving hope to the beginnings of a changing local early stage funding landscape. Reinventure Group is backed by Westpac with a $50 million VC fund, to date they have made 3 investments totalling $10m (Sydney Morning Herald, n.d.). Oxygen Ventures, a $50 million fund, is led by internet entrepreneur Larry Kestelman (AVCAL, 2014 Year Book, 2014), this fund has made 5 investments (one of which based in Silicon Valley) to date for an undisclosed consideration.

A strong VC environment isn’t just imperative for supporting the local early stage funding ecosystem, it is also hugely important and beneficial to the Australian innovation, employment and research and development spectrums (AVCAL, The Economic Impact of VC in Australia, 2013). Research from AVCAL suggests that:

  • For every dollar of assets owned, VC backed companies innovate at a much greater rate than other companies;
  • VC-backed firms make up only 0.01% of GDP but 10% of all business R&D expenditure in Australia;
  • In Australia, VC-backed companies spend on average 200x more on R&D per employee than other businesses;
  • Successful VC-backed companies have strong job creation rates and attract highly skilled staff;
  • Top VC-backed companies Cochlear, ResMed and SEEK alone employ nearly 7,000 people;
  • VC-backed companies are IPO-ready in half the time needed by non-VC-backed companies.
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