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Australian Venture Capital: the worst of times – or best of times?
The Australian venture capital fundraising environment is tough right now – according to recent numbers from the AVCAL 2010 Yearbook, total Australian VC commitments were down by half during 2010, with Australian VCs raising $168 million in new commitments during the year. In keeping with the experience of most other countries around the world as a result of the global financial crisis, most of this new VC money was provided by the government, as private sources of funding dried up.
Despite these apparent challenges, we at Morgan Cradock are optimistic about the state of venture capital in Australia. In fact, we argue that venture capital in Australia is actually more efficient than ever. The AVCAL data show that while new VC fundraising was down by half, actual VC investments fell by only 7% during 2010 on a year-to-year basis. And many of the particularities of the Australian VC sector show that our private investors are largely taking a smart approach toward their future VC investments.
Pension funds are largely staying clear of regional VC investing – and they are right to do so. Pension funds ought to stick with those VCs that have a proven track record – but are there any VC funds in Australia that can claim to get as good of results as individuals investing on their own?
In order to grow Australia’s VC industry, we need to adopt regional strategies based on the local environment. Some points:
1. Australia’s vast geography means that good university towns and potential technology hubs in regions need a region-specific approach to funding, not a capital city-centric approach. What works in Perth might not work in Sydney, and vice versa – investors who are closest to the action are likely to have the best insights into where the best opportunities can be found. Because we do not have the kind of population density in Australia that was instrumental to the rise of places like Silicon Valley, it’s best to focus on the dispersed nature of our universities and tech hubs – and use this geographical diversity as a strength.
2. High net worth investors, having made all their money in a particular industry, are often better placed to find VC investment opportunities in that industry. Who would you rather trust with your money – investment managers staffed with freshly minted MBAs who went to the “right” schools and who can crunch spreadsheets all day long, or industry veterans who made a fortune in the industry, who understand the globalised market and the prospective customers of the companies seeking funding, and who can assess an investment opportunity based on their real world experience? Venture capital investing is not rocket science, but it does require a broader perspective than someone whose life experiences are limited to one city in a market that represents only 2% of the world’s economy.
3. Australia’s regions are more often better connected to overseas markets for their customers because they’ve always needed to be, as they would otherwise quickly run out of choices. More so than in many other countries, Australian companies and managers are globally minded and well adapted to the global marketplace. This is a real strength of the Australian economy in general, and it can also be a strength for our venture capital sector.
4. The new Early Stage Venture Capital Limited Partnership (ESVCLP) structures have been widely dismissed by the mainstream PE large fund managers. But these structures are the perfect solution for creating small tax efficient funds for high net worth investors. The minimum commitment of $10 million is easy to find amongst a few well-heeled corporate investors wanting a tilt strategy or to back emerging spin out talent, rather than risk losing good employees to a competitor. Family offices of old money should be reviewing the ESVCLP structure and talking with advisors about using these tax efficient vehicles in smarter ways – “use it or lose it,” as the saying goes.
Although the Australian VC industry has gone through a challenging year from a fundraising perspective, if you look closely at the details it’s quite apparent that Australia’s VC sector is in many ways operating with greater efficiency and promise than ever before.
If we continue to focus on regional strategies to connect investors with opportunities close to home, if we draw on the expertise of industry veterans, if we build on the strengths of Australia’s globalised companies, and if we encourage investors to take advantage of tax efficient vehicles like the ESVCLP structures, we can expect to see Australian venture capital emerge as a growing force in the dynamism of the Australian economy.