A strong and growing start-up sector and the international rise of crowd-sourced equity are set to shake up the Australian venture capital ecosystem for the better in coming years.
Over 60 venture capital and private equity investors gathered in Sydney today to explore the future of the Australian venture capital at the first of three national events coordinated by accounting and research group PricewaterhouseCoopers.
Kar-Mei Tang, head of research at national venture capital industry association AVCAL, told the room the sector was set for signficant changes in the coming years as the start-up ecosystem developed.
“The start-up sector has been an emerging force over the last three years and we’re starting to see more founder investors and super angel activity which will filter through to venture capital,” Tang said.
According to a PwC and Google report on the start-up ecosystem released earlier this year, there are over 500 angel investors, 10 angel groups and one sidecar fund, and almost $600 million in management by 20 venture capital groups.
According to Tang, the emergence of new funds has mostly alleviated AVCAL’s concerns about a Series A funding crunch, but the concern is now for the later rounds.
“It’s very important not to leave this gap unplugged,” Tang said. “It matters because we know venture capital works to drive innovation, and we know it works in Australia with venture capital backed companies having far higher job creation rates than standard companies.”
She added 10 new smaller funds have launched in the last few years, and the sector was on track to see a 20% increase in venture capital activity.
The venture capital funds are gathered around the eastern seaboard, and different cities have different strengths.
“Sydney is still the place to be for start-ups in the technology space,” Tang said. “Victoria is leading in life science and environmental investment, probably due to supportive strategies and policies of the state government there.”
Tang added AVCAL would continue to encourage the federal government to create a workable employee share schemes system, to be supportive of innovation and continue policies such as the Innovation Investment Fund and to increase wider awareness about the critical role of venture capital in moving Australia forward by enabling innovation.
Director of legal services at PwC, Steve Maarbani, said the future was bright for start-ups and local venture capital investors, but they needed to increasingly focus on Asia, specifically Indonesia as vast new markets to tap into for fundraising.
“It’s fair to say the federal government policies around start-ups and venture capital are strong,” Maarbani says, citing the early stage venture capital limited partnership tax treatments, research and development grants, innovation grants, national broadband network as effective policies.
Maarbani said the concerns around the future of the Innovation Investment Fund, sparked by GBS Investments returning their funding this year, had been resolved.
“There was concern that it would be reconsidered, and it was. But they’ve come out with the largest commitment of funds ever, with $350 million on the table next year,” Maarbani says.
The Innovation Investment Fund allocates several million to venture capital firms, who then raise funds to match the amount.
Maarbani added the growth of the tech start-up ecosystem has caused a significant change in the investment landscape.
“We’re looking at a significantly different venture capital ecosystem compared to even 12 months ago. I use the term ‘groundswell’ very intentionally,” Maarbani said. “Early stage financing deals are being done much earlier now, with angel deals are becoming more important. This means start-ups can prove they have traction before a venture capital investor even sees them.”
Angel investment has grown significantly in the last few years. In 2011, $4 million worth of deals were made. This increased to $8 million in 2012 and $21 million in 2013 so far.
Describing the environment for investors and entrepreneurs as very positive, Maarbani noted the challenges of working with risk-shy institutional investors, but said fund managers needed to look to Asia to raise their funds.
“Instead of endlessly lamenting capital markets moving their cheese, you can work on a better value proposition, or find new cheese,” Maarbani said.
According to PwC research, over 50% of the world’s financial assets will be based in Asia by 2050.
“As the balance of global financial power shifts to Asia, and it is, as the Asian universities start outperforming the rest of the world, and they will, it’s becoming absolutely imperative for fund managers to have an Asian strategy,” Maarbani says.