Venture capital funds set to triple but Australia is “nowhere near” saturation yet

Blue Sky Venture Capital investment director Elaine Stead

Australia has seen a record amount of money going into venture capital so far this year but is still a long way from reaching saturation, Blue Sky Venture Capital investment director Elaine Stead says.

According to a new report by Harvard private equity and venture capital expert Josh Lerne and commissioned by VC firm Blue Sky, nearly $1 billion in venture capital has been announced this year, with a third of it already raised.

That’s up from the $368 million that was raised in total in the last financial year.

But despite concerns that this will lead to a saturation of funding and overblown company valuations, Stead says Australia is still behind tech powerhouses like the US.

“We commissioned the report because there had been a lot of chatter in the industry around the large funds being raised recently,” Stead tells StartupSmart.

“The marketplace and other investors were vocalising a concern that there might be too much capital floating around, but anecdotally our experience was completely the opposite – we see more opportunities than capital.”

Approaching maturity

The report, which compares Australia’s venture capital with other countries adjusting for other factors including GDP and population, serves to validate Blue Sky’s anecdotal experiences, Stead says.

“Now we have some data that supports what we had been seeing,” she says.

“We’re nowhere near saturation in terms of available capital.

“There really are more interesting opportunities than we can invest in at the moment. There’s nowhere near too much capital sloshing around in the market.”

“But we are starting to see the industry approaching maturity and a critical mass.”

When GDP is taken into account, the report shows that the US still has seven times more available capital than Australia despite what’s set to be a record-breaking year.

Plugging the funding gap

Blue Sky is currently in the process of raising a $200 million fund, and Stead says it’ll help to plug a gap in later-stage funding in Australia – dubbed the second ‘valley of death’.

With the sudden influx in capital, this is an issue that is finally being addressed, she says.

“We’re seeing more funds investing in this stage,” Stead says.

“We’re starting to see more funds devote capital to this part of the sector. The challenge now is for companies to make it to that stage and have the right expertise around them to help bridge the gaps.”

Another prevalent concern in the Australian investor community is the prospect of an ‘investor strike’ in the lead up to the implementation of a series tax incentives in July.

But Stead says this concern hasn’t been realised.

“We haven’t seen it,” she says.

“There aren’t any investors saying, ‘I really like what you’re doing but I’m not going to commit until June.

“The majority of investors that we have are high net worth investors that are in a very similar situations to most angel investors, and they haven’t been put off at all by the tax offset announcements.

“They’re pretty savvy. For them the incentives would be nice to have but they’re more focused on making sure they invest capital with a good fund manager that has a proven track record.”

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Denham Sadler is the editor of StartupSmart. He was previously a journalist at the publication and has worked as a freelancer for the Guardian, the Saturday Paper and the ABC. In his spare time he likes puns and jaffles.