snowball group whitepaper - evolution of venture capital in australia
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John Dowell at Snowball Group writes about the past, present and future of venture capital in Australia.TRANSCRIPT
EVOLUTION OF VENTURE CAPITALIN AUSTRALIA12th Feburary, 2014
Level 3, 296 Collins StreetMelbourne Victoria 3000Phone: (613) 9005 2124Email: [email protected]
www.snowballgroup.com.au
WHITEPAPER BY SNOWBALL GROUP
“Disinterest by private
equity investors is resulting
in companies leaving
our shores in droves and
seeking private equity
investment in more liquid
markets. With them we
are losing our innovation,
our talent, our commercial
future.”
3Snowball Group - Evolution of Venture Capital in Australia
Evolution of Venture Capital in AustraliaWe take a brief look back in history at private equity
funds, venture capital funds and start-up funding in
Australia and attempt to predict what the future holds.
Compared to the USA, Europe and throughout
Asia when it comes to investing in start-up
and early stage ventures, risk averse Australian
investors show a distinct lack of interest and
a blatant distain for even bringing them up
as an alternative asset class or an investment
option. On the other hand, private equity
buyout funds and investment in large private
companies appears strong, even if Australian
institutional investors have abandoned the
private equity sector over the last couple of
decades. What does this mean for private
equity investment, and in particular the
venture capital sector’s future? We take a brief
look back in history at private equity funds,
venture capital funds and start-up funding
in Australia and attempt to predict what the
future holds.
There is no doubt the strength of the
private equity buyout sector in recent
times has been due to some of the largest
private equity firms in the world appearing
on our shores. Since mid-2008 onwards
they’ve demonstrated a genuine appetite
for some of Australia’s largest and iconic
companies. This hasn’t been without its trials
and tribulations. Nevertheless, amongst a
plethora of choice, especially coming out of
the emerging economies, in particular Asia,
they have persisted and continue to show a
genuine interest in Australian businesses.
Unfortunately, the Australian Venture Capital
(VC) sector hasn’t faired as well. In fact,
Australian start-up ventures and early stage
companies looking for capital to grow their
companies are now abandoning Australian
4 Snowball Group - Evolution of Venture Capital in Australia
investors in droves and going offshore.
We are losing our most valuable assets,
“innovation and creativity”. It’s going to
overseas investors who’re less risk averse
and more visionary. Overseas venture
capitalists and angels appear to be more
entrepreneurial and prepared to invest in
ventures with higher risk and longer-term
horizons than their Australian counterparts.
However, those that look to Australia are few
in number and constrained in what they can
allocate to ‘Down Under’ investments.
When it comes to investment in innovation
at the seed to start-up stages, irrespective
of the public rhetoric and relatively meagre
incentives offered by Government, local
investor support is abysmal. This isn’t a
swipe at those who’ve tried valiantly to
support start-ups over the last decade. No,
we have the greatest respect for those who
clearly have identified where Australia’s
future lies – and it’s not mining and riding
on the sheep’s back. It’s more of a hard
long glare at institutional investors, angel
investors, large VC and PE fund managers,
and more generally at sophisticated
investors who consistently show a
preference for risk aversion and short-
term gain, sticking with classical stocks
and property investments, without much
foresight for the future of the country.
To shed light on why this continues to occur
in Australia while the USA and Asia are in
a frenzy investing in innovative start-ups,
let’s first take a step back in time. This white
paper reviews the evolution of the venture
capital and private equity investment sector
in Australia and attempts to determine what
lies in ahead.
In the beginning...
The origin of VC funds and private equity
(PE) buy-out funds in Australia occurred
relatively recently in our short history. In the
1970’s the first VC firm was ‘International
Venture Corporation’ Pty Ltd (IVC), dedicated
to private capital transactions. Indicative
of the times, the types of early venture
capital investments IVC focused on included
aquaculture, road surfacing and concrete,
consumer finance, leasing, property services,
marine equipment manufacturing, intensive
piggeries, off-peak heater manufacturing,
Australian film production, laser equipment,
mineral exploration and pyrophyllite
extraction and processing1.
‘Enterprise Management of Australia
Corporation’ (EMA) followed IVC two years
later. EMA invested in the tourism and
leisure sector, as well as the manufacturing
1. We highly recommend you read ‘Inside Private Equity’ by Bill Ferris, which provides an insightful account of the private equity and venture capital scene in Australia. This book published in 2013 by
Allen & Unwin is a main source of many of the historical accounts in this article. In particular refer to pages 208 – 240.
“Right from the gecko Australia’s private equity and
venture capital sector faced a rocky pathway, continually stopping and starting in line with health of the financial and economic climate. “
5Snowball Group - Evolution of Venture Capital in Australia
and services sectors. IVC and EMA had mixed
results, both selling off their assets in the
1980s.
Another participant in the private capital
sector was Hambro-Grantham focusing on
small technology companies operating under
the MIC2 scheme and establishing a parallel
fund.
Other initiatives in the 1970’s included the
Australian Innovation Corporation aimed at
getting investment in early stage ventures,
and the government owned Australian
Industry Development Corporation (AIDC)
focused on major manufacturing and mining
project finance. The AIDC also invested in
small advanced-technology ventures. One
of their most notable investments was in
Optus, later going on to ultimately become
a subsidiary of the SingTel Group out of
Singapore.
Although there was evidence of moderate
success, during those early years there were
also a number of unsuccessful ventures
involved in computer equipment, telecoms
and software development. The result
was an immediate pullback by investors
from private capital investing. Just as the
momentum in private equity investment
started picking up pace, it hit a brick wall
at the first sign of trouble. This began
a continuing trend that remains today,
reflecting the risk averse nature and short-
tem perspective of Australian investors,
with little or no commitment to intrinsic
value and long-term investment. Right from
the gecko Australia’s private equity and
venture capital sector faced a rocky pathway,
continually stopping and starting in line
with health of the financial and economic
climate. As we will see, even government
support and incentives, whether or not done
politically derived, or whether considered
as ultimately ill conceived have never
been able to overcome the deep seeded
structural and cultural problems faced by
the Australian private equity sector and local
investors.
At he end of the 1970’s it was evident that
private equity financial returns weren’t
compelling enough to shift the attitudes
of large superannuation fund managers
and their investors away from risk-averse
investment. Industry funds were sufficiently
catered for from the steady and less risky
returns of the top 100 listed companies,
treasury bonds and inflation-driven property
assets. Here lies the conundrum. The
introduction of equity capital markets in
Australia has been good and bad for the
modern world, and in particular Australia
since their introduction. The ability of
publicly listed companies to trade their
shares on stock exchanges has considerable
2. Management and Investment Companies (MIC) scheme was a program introduced in 1984 to encourage investment in innovative startup technology businesses. It offered financial, strategic and
administrative assistance to venture capital investors. The government issued MIC licenses to companies who satisfied the Government’s strict criteria. By the end of 1991 the MIC program achieved
relatively good success with $225.4 million invested in 155 companies. The scheme provided upfront tax deductions. As a result the tax incentive tended to dominate investors’ motives rather than
the investment outcome itself.
6 Snowball Group - Evolution of Venture Capital in Australia
benefits in the investment world. It enables
companies to raise capital through their
IPO and then later in secondary market
activity. It attracts a wider range of investors
from institutional investors, sophisticated
investors, to retail investors. It provides
greater liquidity within short time frames,
with the safety that comes from regulation,
strict compliance requirements, operating
on a transparent trading market platform.
Continuous disclosure is undoubtedly a
major plus for having public companies. It
ensures fair play and avoids the likelihood of
insider trading and ill-informed decisions by
buyers and sellers.
However for all its benefits, the antithesis
is the cultivation of an investment culture
where investors generally focus on high
turnover, short-term horizons, for market
driven gain. There is little insight or care
given to the specific machinations of a
company, its intrinsic value, and its long-
term vision. In many ways this is the
opposite of private equity where investors,
shareholders and management alike focus
on the core value proposition, the long-term
horizon, seeking reasonable yield along
the way, with a greater focus on long-term
capital growth and sizeable return when
their investment is realised. The investor
has to really buy into the vision, have faith
in the management, understand the risks
and back the core proposition right from
the start. Management and the directors can
make the hard decisions for the long-term
good, not be driven by satisfying analysts
and institutional shareholders about the
immediate impact to earnings in the next
quarter.
Over the years Government has stepped in to stimulate private equity investment
In the 1980’s, as a consequence of a
government review3 a report was released
identifying the problem facing early stage
high-technology enterprises in Australia.
Apart from the lack of quality management
operating these companies, the biggest
problem (as alluded to above) was a
poor attitude toward high-risk, long-term
investment. As a consequence the report
concluded there was a lack of technological
development due to a lack of capital
allocated to it. Investors opted for short-
term, risk-averse investment opportunities.
As a consequence of these findings the MIC
scheme and subsequent programs were
commenced.
Although assistance in promoting
investment in innovation should be
perceived as an admirable initiative, a
3. The Espie Committee was established in 1981 and chaired by Frank Epsie. The findings were released in a report in 1983. As a result the MIC scheme was born.
“The fact government assistance is needed, or in fact is the main
driver for investment in start up and early stage technology investment is an indictment on investors in the Australian market. Elsewhere, notably Silicon Valley, private investors have thrived on
high risk and high returns of long-term investment opportunities in the technology space. It appears investors in Australia are stuck in the risk averse psyche of investing in old faithfuls, old world stocks. “
7Snowball Group - Evolution of Venture Capital in Australia
good thing, it also highlights the inherent
problem facing growth and development of
private equity in this country. Please don’t
get me wrong any help is warmly received.
The fact government assistance is needed,
or in fact is the main driver for investment
in start up and early stage technology
investment is an indictment on investors in
the Australian market.
Elsewhere, notably Silicon Valley, private
investors have thrived on high risk and
high returns of long-term investment
opportunities in the technology space. It
appears investors in Australia are stuck in
the risk averse psyche of investing in old
faithfuls, old world stocks. The truth is the
world has moved on and these traditional
investment selections are now proving to
demonstrate inherent high risk.
More than ever these traditional stock
selections are becoming very sensitive to
the continuing negative influences of an
uncertain global political and economic
environment. Australian investors are still
focused on local banking and finance
companies, property, mining, resources,
energy and utilities, and to a lesser extent
infrastructure investments.
In fact, Australia’s reliance on cyclical
investments such as high-risk mining
stocks is indicative of investors’ short-term
investment horizons. But in the long-term
it presents limited foresight to Australia’s
continuing prosperity. They are now fairly
high risk, rising and falling due to effects of
global economic crises, the high Australian
dollar, and commodity price fluctuations.
The new emerging economies including
China are able to influence world commodity
pricing, placing Australia in a vulnerable
position.
The amount of infrastructure spend needed
is both prohibitive to the Government as it is
to private financiers and investors, including
the miners themselves. Yet investors persist,
relying on non-renewable export products,
ignoring the less riskier and more valuable
resource we have in information technology,
engineering and life sciences.
We astound the world with our high degree
of invention and innovation, but instead of
the private sector harvesting this asset and
encouraging it, meagre funding via
“We astound the world with our high degree of invention and innovation, but instead of the private sector harvesting this asset and encouraging it, meagre funding via government grants and subsidies, and a lack of participation by private investors has seen steady erosion of our precious resource to offshore markets. Optimism about our future won’t overcome the problem that has permeated our history. The reality is overseas investors value what we have and we do not.“
8 Snowball Group - Evolution of Venture Capital in Australia
government grants and subsidies, and a lack
of participation by private investors has
seen steady erosion of our precious resource
to offshore markets. Optimism about our
future won’t overcome the problem that has
permeated our history. The reality is overseas
investors value what we have and we do not.
The pattern has repeated itself throughout
the evolution of venture capital and private
equity in Australia. If we go back around
the mid-1980’s, investment in private equity
began to take hold due to tax incentives
from programs like the MIC scheme. The
owners of private companies also began to
use secondary boards as a great platform
to raise equity capital, or realise their
investments.
It involved less complexity and cost
compared to listed public companies. In
fact around $1.4 billion of capital raising
occurred through secondary boards in
Australia leading up to 1987, with a market
capitalisation of $3.8 billion. However,
with the 1987 financial market crash,
the momentum gained in private equity
investment came to a sudden halt as
investors withdrew and returned to risk-
averse investments, drying up the activity on
secondary boards.
At the end of the decade we saw a range of
activities aimed at encouraging investment.
This included R&D concession schemes
to encourage exporting and investment
in research and development, especially
technology, engineering and life sciences.
The R&D tax concession scheme provides a
tax deduction of up to 125% (since 2011) of
expenditure incurred on R&D activities4.
Another initiative was the Grants for
Industry Research & Development (GIRD)
scheme, aimed at encouraging a focus on
new emerging technologies. These schemes
tend to come and go with the rise and fall
of new Governments, usually with a political
agenda attached.
At the end of the 1980’s other sources of
funds and incentives became prominent.
These proved to be catalysts to the evolving
activity in venture capital and private equity
investment. The MIC scheme
4. R&D tax concession entitlement commenced in 1985, initially as a 150% tax deduction on R&D expenditure. In 1986 this was changed to 125% tax deduction. In 2001 two new elements were
introduced
Post 2011 the R&D Tax Incentive provides eligible companies with a 45% refundable tax offset (equivalent to 150% tax deduction) for R&D entities with a turnover of less than $20 million per
annum. It also provides a non-refundable 40% tax offset (equivalent to 133% deduction) for all other eligible R&D entities.
“Whether it’s due to the tyranny of distance, necessity, or inherently part of our culture, Australia possesses something the rest of the world admires and actively seeks, our inventiveness and ability to innovate. “
9Snowball Group - Evolution of Venture Capital in Australia
was subsequently replaced by the ‘Pooled
Development Fund’ (PDF) program. Unlike
the MIC, PDFs focused on providing tax
incentives when investments were realised;
providing exemption to capital gains tax
and having greater flexibility than the MIC
scheme. PDFs offered greater incentive to
institutional investors. The government also
introduced additional programs, important to
the commercialisation of research work.
The advent of Cooperative Research Centres
(CRCs) in the 1990’s was an important
development in the private equity sector for
several reasons. The aim was to provide the
right incentive to support and commercialise
important scientific research residing in
Australian universities. At the time, and the
reasoning still remains, it was realised that
Australia’s heavy reliance on its primary
source of export, namely minerals, coal,
gas and agriculture was unsustainable.
As mentioned above, these sectors are
cyclical by nature and face increasing global
competitive and price pressures, especially
when the Australian dollar is high against
the US dollar. There was a realisation by
the Government in the 1990’s, and the
same is true today, we needed to harvest
our valuable know-how residing in our
universities and look to commercialise them
to the rest of the world.
Whether it’s due to the tyranny of distance,
necessity, or inherently part of our culture,
Australia possesses something the rest of
the world admires and actively seeks, our
inventiveness and ability to innovate. Over
time, for a country with a relatively short
history and a small population, Australians
have continually been responsible for
some of the world’s most important
break throughs. Today is no different. The
introduction of CRC programs in 1991 was
aimed at enhancing Australia’s economic
growth through fostering collaboration
between government, universities and
private companies. CRC programs look
to facilitate research initiatives and
reap the benefits of cooperation by
encouraging outcomes in adoption and
commercialisation.
Since commencing many CRC programs
have been established in the areas of
manufacturing technology, information
and communication technology, mining
and energy, agriculture, the environment,
and most notably medical science and
technology. Examples of CRC successes
include the ‘Hearing CRC’ producing the
“The point being made is that CRC’s
have proven and will continue to prove invaluable in fostering research, innovation and
commercialisation, providing fertile ground for venture capital markets well into the future. CRCs also identify an important ingredient in fostering commercialisation of technology; you can’t do with just having government support alone, private investors and corporate venturing has to be there in a big way.“
10 Snowball Group - Evolution of Venture Capital in Australia
Cochlear hybrid system restoring hearing
to the hearing impaired across the world,
the Australian Biosecurity CRC Program
producing a genetic diagnostic test used for
equine flu, and the Australian Photonics CRC
which brought together the universities of
NSW, Sydney and Melbourne, the ANU, Telstra
and Siemens.
There is large number of CRC programs
operating in Australia today including a
Polymer CRC for the automotive industry,
a CRC for Enterprise Distributed Systems
Technology, a CRC for Cotton Catchment
Communities and a CRC for Innovative Dairy
Products, an Environmental Biotechnology
CRC, and a CRC for Mental Health.
The point being made is that CRC’s have
proven and will continue to prove invaluable
in fostering research, innovation and
commercialisation, providing fertile ground
for venture capital markets well into the
future. CRCs also identify an important
ingredient in fostering commercialisation
of technology; you can’t do with just having
government support alone, private investors
and corporate venturing has to be there in a
big way.
Innovation Investment Fund (IIF) program
Another major initiative by the Government
continuing to have an enormous impact
on investment in early stage innovative
ventures is the ‘Innovation Investment
Fund’ (IIF) program. The IIF supports ten-
year innovation funds, managed by licensed
venture capital fund managers. These funds
are aimed at helping develop Australian
companies to become globally competitive
by commercialising outcomes of Australia’s
strong research capability. The IIF program
has been operating since 19985.
5. Over the three rounds the program has licensed16 fund managers and supported 100 new companies. In Rounds 1 & 2 nine fund managers were licensed and invested $221 million, matched with
a total funding of $354 million. For Round 3 and 4 the Australian Government committed up to $100 million to be equally matched by private sector capital.
11Snowball Group - Evolution of Venture Capital in Australia
In the latest round6 fund managers
appointed included Carnegie Venture Capital,
GBS Venture Partners and Innovation Capital
Associates. The Carnegie Innovation Fund
No.2, Limited Partnership is focused on
providing capital and support to a portfolio
of investments in seed, start-up and early
stage companies7.
The fund is building upon a successful track
record of investing in Australian companies
that drive innovation in life sciences,
information technology and internet-
enabled sectors, clean technology and other
industries.
The GBS BioVentures V IIF fund is an
Australian life science specialist fund. The
fund invests in companies commercialising
Australian biomedical innovation to
create new medicines and medical devices
to treat unmet global medical needs8.
Innovation Capital Associates has a general
fund investing in Australian technology
companies with global potential. Potential
portfolio companies will operate in the
service and high margin manufacturing
sectors9.
The IIF program and IIF follow-on funding
(IIFF) contribute heavily to commercially
develop targeted firms and to develop a
self-sustaining early stage venture capital
industry in Australia. Notable success
stories include Looksmart supported by IIF
fund manager AMWIN Management who
invested $2.2 million and gained a return of
$245 million. Seek, the online job website
received venture capital by IIF fund manager
AMWIN Management, seeing the company
successfully list for a market capitalisation
of $600 million in 2005. Biotech QRxPharma
was formed in 2002 with Four Hats Capital’s
IIF Innovation Fund providing $4 million
as the founding investor, together with
Innovation Capital Associates (registered
as a PDF) and University of Melbourne’s
Uniseed.
In 2007 the company raised $50 million in
an IPO. Other successes include the drug
discovery company Pharmaxis focusing on
autoimmune diseases and supported by
IIF fund manager GBS Venture Partners,
and biotechnology company Alchemia who
received venture capital from four IIF fund
managers including Start-up Australia, GBS
Venture Partners, AMWIN Management, and
Coates Myer and Company.
5. Over the three rounds the program has licensed16 fund managers and supported 100 new companies. In Rounds 1 & 2 nine fund managers were licensed and invested $221 million, matched with
a total funding of $354 million. For Round 3 and 4 the Australian Government committed up to $100 million to be equally matched by private sector capital.
6. Round 3,Tranche 4
7. The Carnegie Innovation Fund No.2, LP received a matching grant of $40 million in April 2013. It’s reported total greater than $80 million, instead totaling $120 million
8. The GBS BioVentures V IIF Fund received a matching grant of $30 million in April 2013, totaling $60 million.
9. Innovation Capital Associates received a matching grant of $30 million in April 2013. Total fund size is $60 million.
12 Snowball Group - Evolution of Venture Capital in Australia
A rocky road for Private Equity buy-out funds over the last decade
As we entered the new millennium from
2000 and onwards we witnessed rapid
growth in private equity leveraged buy-outs
by private equity funds, mainly to support
expansion capital activity. This occurred
at the time when venture capital activity
and the performance of their funds were
levelling out. However, by the end of the
decade growth in the private equity buy-out
segment started to dramatically dissipate.
Coinciding with the beginning of the GFC
and continuing on to today, large Australian
superannuation funds began withdrawing
from investing in private equity. Participation
is now less than one per cent of their
cumulative assets. They refuse to even even
look at early stage venture capital.
On the other hand, around ten years ago
we saw the first signs of interest from
international private equity funds, replacing
the Australian super funds and investing in
Australian private equity. It initially included
an abundance of large private equity fund
managers such as The Blackstone Group10,
Kohlberg Kravis Roberts (KKR)11, CVC
Capital Partners12, TPG Capital13, and The
Carlyle Group14. Even so, international PE
funds right from the start have found the
going fairly tough. There were a number of
failed attempts along the way at some of
Australia’s largest iconic companies, as well
as less than impressive outcomes for those
transactions that did proceed. Notably, KKR
had a run at Coles for a year before bailing
out in 2007, with Coles eventually being
bought out by Wesfarmers. Other failures
included TPG’s early tilt and spectacular
failed bid of Qantas. This was balanced out
with the buy-out and successful IPO float
of Myers Retail. In 2006 and 2007 there
was CVC’s buyout of Channel 9 at an over-
inflated price, incurring an eventual loss. In
2006, KKR failed in its bid for PBL Media,
subsequently investing in Seven West Media
including Channel 7. KKR exited in 2013.
The attraction of private equity buy-outs
by some of the largest private equity funds
in the world was best demonstrated in
2010 with the takeover battle for private
hospital operator and pathology provider
Healthscope. TPG and The Carlyle Group
hotly contested with KKR with a near $2.7
billion offer.
International PE buy-out funds are no doubt
here to stay. They sit comfortably with the
few large Australian PE funds including
Pacific Equity Partners (PEP), Quadrant,
CHAMP, and Archer Capital. Collectively
10. The Blackstone Group L.P. is an American multinational private equity, investment banking, alternative asset management and financial services corporation based in New York City
11. KKR & Co. L.P. is an American multinational private equity firm, specializing in leveraged buyouts, headquartered in New York. The firm sponsors and manages private equity investment funds.
12. CVC Capital Partners is a private equity firm with approximately US$46 billion in funds focused on management buyouts. Since 1981, CVC has completed over 250 investments across a wide
range of industries and countries
13. Formerly Texas Pacific Group (TPG). TPG Capital is one of the largest private equity global investment firms focused on leveraged buy-outs, growth capital and venture capital. Total assets are
around $US48 billion
14. The Carlyle Group is an American-based global asset management firm, specializing in private equity, based in Washington, D.C. Total assets $US31.6 billion
“What is evident is that innovative start-up ventures
can’t rely and depend wholly on non-government sources of funding to support future innovation in Australia. This is a sad indictment on the foresight and long-term vision of Australian investors and why our talent, intellectual property, our creativity and ability to innovate are progressively being transferred overseas. “
13Snowball Group - Evolution of Venture Capital in Australia
they’ve provided the catalyst and continuing
commitment to private equity investment
in Australia; replacing participation by risk
averse industry funds and large Australian
superannuation funds who have kept away
since the onset of the GFC.
Essential for PE buy-outs is the leverage
required from major Australian banks and
highly liquid offshore Asian banks, whether
as a syndicate or as a club, whether having
a local or offshore presence. PE buy-out
funds rely on leverage to drive returns to
equity. There’s no doubt prior to the GFC
we witnessed banks unrealistically exposed
to risk with respect to private equity buy-
outs. This has moderated compared to 2008
where debt was 8 to 10 times cash flows.
Nowadays, you’re more likely to get 50%
debt and 50% equity. That is, if the equity is
valued at 6 times annual cashflow, then debt
may be 3 times the cashflow.
Even though banks are seen as majorly risk
averse, especially in the light of prudential
regulations and liquidity restrictions due
to Basel III, the truth is they still like the
margins they can earn from private equity
leveraged buy-outs and mezzanine funding.
In Australia we’ve seen the disappearance of
many international investment banks from
Australian shores, less in-house resources
devoted to private equity investment, and
much less risk appetite. Yet the anticipation
of greater M&A activity this year as a
result of an estimated $4 billion of unused
committed investor funds will no doubt see
the banks heavily involved. There’s also an
expectation by market analysts there’ll be
quite a few IPO exits in 2014 as funds seek
to realise long awaited returns. You can
be sure the banks will be there front and
centre.
In the 2009 fiscal year, VC and PE funds were
severely affected by the GFC. In Australia,
the total funds raised fell to $1.54 billion,
similar to FY2004 levels. Investments
involved the supply of capital to existing
investees for follow-on investments
and capital restructures. VC funds in
Australia mainly invested in life sciences,
computer and computer electronics and
communication. PE funds invested mainly in
business and industrial products. VC funds
fundraising efforts fell by 19% to only $263
million. This reflected how difficult
14 Snowball Group - Evolution of Venture Capital in Australia
the fundraising environment was. There was
no commitment for seed investments. Most
of the $180 million investments made in
FY2009 concentrated on start-up to early
stage with only 7% in seed and 26% in later
stage expansion/growth.
The significance of what occurred in 2009
is that it highlights a recurring theme;
as soon as there is any sign of adverse
conditions in the global economy, funding in
innovation initiatives is negatively impacted.
The decrease in committed VC funds was
swift and dramatic, demonstrating investors’
sensitivity to risk. What is evident is that
innovative start-up ventures can’t rely and
depend wholly on non-government sources
of funding to support future innovation in
Australia. This is a sad indictment on the
foresight and long-term vision of Australian
investors and why our talent, intellectual
property, our creativity and ability to
innovate are progressively being transferred
overseas. Perhaps rather than the headline
concerns over foreign ownership of large
iconic businesses and mining resources that
are old world assets we can’t rely on in the
future for our economic prosperity anyway,
we should be more worried more about the
insidious loss of our new world assets. If
nothing else FY2009, the peak of the GFC,
highlighted this ongoing problem we still
see today.
Is there a place for Private Equity investment and Venture Capital funds In Australia?
From a global perspective the past three
years15 has seen a lethargic and flat period
for the private equity buy-out market. This
coincides with problems faced by global
capital markets post-GFC and due to the
ongoing sovereign debt crisis and USA’s
economic woes. Locally, Australia faired
better with a relatively well performing
economy and growth rate, buoyed by the
mining boom and China’s demand for
exports from Australia.
201016
After a period of consolidation the 2010
fiscal year showed signs of gradual
improvement. The Australian private equity
and venture capital funds saw more invested
companies than funds raised. After 2008
and 2009, in an environment where capital
was hard to get, this was very welcome.
Nevertheless, post-GFC and in the light of
the tax treatment17 of private equity firms,
investors remained very cautious during this
15. This white paper was written at the end of CY2013 and start of CY 2014.
16. Refer to ‘The Australian Private Equity & Venture Capital Association’s 2010 Yearbook, released in October 2010.
17. In Australia moves were made to change the ‘Thin Capitalisation’ rules to reduce the safe harbor debt-to-equity ratio from 3:1 to 1.5:1 for non-financial entities. This limits interest deductions on
shareholder debt for Australian investments. This will be put into effect on 1 July 2014. This will have impact on overseas PE funds and their continued investment in private equity in Australia. This
is coupled with future possible tax reforms seeking to address instances of double non-taxation i.e. when exit gains aren’t taxable in Australia due to protection under a double tax treaty and are
also exempt in the vendor’s residing jurisdiction. The issue was raised in 2009 with TPG’s tax-free disposal of Myer Retail and the ATO’s pursuit through the courts to recover tax realised by TPG from
the sale.
15Snowball Group - Evolution of Venture Capital in Australia
time, reflected in less new commitments in
fundraising activity. This was highlighted
in the case of VC firms throughout the
world where they were only able to raise
half of the previous year’s commitments. In
Australia, what VC funds did raise basically
came in conjunction with the release of
Round 3 of the Innovation Investment
Fund program and IIF follow-on fund.
The IIF matching fund for the appointed
VCs was critical to ensure innovation was
not killed off during this time. The whole
aim of the IIF was to address the lack of
capital available to promising innovative
companies post the GFC. In 2010, of the 14
VC funds that raised new capital, nine were
funded under the IIFF program and two
raised matching commitments as part of
the IIF co-investment program. The IIF and
IIFF represented 82% of new VC funding
commitments in FY2010.
Investment by private equity firms was up
on the previous year, while VC funds were
slightly down. Most of it was follow-on
investment not new deals, demonstrating
the industry ‘s steady line of support for
existing investee companies. Interestingly,
PE fund managers significantly increased
their focus on listed companies such as
PEP’s investment in Energy Developments
(ASX:ENE), Investec Wentworth Private Equity
minority equity stake in ClearView Wealth
(ASX:CVW) and Navis Capital’s acquisition of
remaining shares in Peoplebank, (formerly
ASX:PBA).
The general exit environment showed a
gradual improvement with a number of
divestments. Divestments were up on the
previous year with trade sales dominating,
and public offerings reappearing with 3 IPOs
and 7 sales of quoted equity.
201118
In FY2011, the combined effort of the
Australian PE and VC industry improved
across the board in fundraising, investments
and divestments. However, there was a
demonstrable trend towards a higher
concentration of fundraising and investment.
There were a smaller number of funds and
completed deals. Although we witnessed
improvement in the sector it wasn’t a
bounce. This was even though the Australian
economy had a strong performance
compared to the rest of the world. With
the global economic volatility continuing,
a persistently strong Australian dollar, and
unresolved tax issues lingering, any strong
rebound in PE and VC activity was severely
constrained.
Although fundraising was significantly up
on the previous year, the environment for
fundraising remained challenging with most
General Partners (GPs) deferring or shelving
fundraising plans. The number of funds with
new commitments decreased 39% from the
previous year. It should be said that half of
those came from overseas investors and
40% from funds-of-funds.
18. Refer to AVCAL’s 2011 Yearbook, released in November 2011.
16 Snowball Group - Evolution of Venture Capital in Australia
New funding commitments to Australian VCs
continued to decline with three VC funds
raising $120 million, down 24% on the
previous year. Similar to the previous year,
they mainly involved IIF programs. In the PE
space $2.2 billion was raised, up 84% on the
previous year mainly due to Champ III and
the Quadrant PE Fund 3 final closings. Very
little was in new commitments but rather
reinvested gains from older funds, or 2010
and older vintage years, demonstrating the
longer fundraising periods faced by GPs.
Investments were up with the top 10
deals representing three-quarters of the
investment amount. However the number of
companies receiving investments declined
with most being follow-on investments. PE
investments grew by 50% from the previous
year to $3.5 billion. This was mainly due to
the Healthscope transaction19, representing
43%. The fall in VC fundraising on the other
hand reflected an uncertain fundraising
outlook and an aging profile of existing
funds. Around 75% invested was from funds
with vintage years of 2008, and 16% from
funds 9 years and older.
In FY2011, we saw increased investment
activity among international VCs and
investors for high growth Australian
technology companies. Notable was
Accel Partners’ investment in software
development platform provider Atlassian,
crowdsource website 99Designs, and online
FOREX service provider, OzForex along with
The Carlyle Group.
Divestments were up on 2010 with trade
sales still remaining the most popular
method of exit. Interestingly, secondary sales
to PE firms represented 11% of divestments,
and there were no full exits in PE funds
through IPOs. VC funds generally performed
well and had higher net proceeds from
divestments compared to the previous 2
years.
At the end of FY2011, Australian PE and
VC investment in Australian companies
over the previous 4 years outweighed any
fundraising by Australian GPs. This reflected
the difficultly in the local fundraising
climate and at the same time highlighted
the importance of continuing private equity
investment in Australian companies.
201220
Unlike the rest of the world private equity
in FY2012 was quite buoyant in Australia.
We saw a large increase in fundraising and
investment activity, continuing into FY2013
and H1 FY2014.
Like the previous year, there was a
continuing trend in FY2012 in regards to a
concentration of a smaller number of GPs
successfully raising funds. Nevertheless,
there was an increase in committed funds
compared to the previous year. On the other
hand investments and divestments remained
cautious due to the predicted slowing down
of China’s GDP growth rate, global economic
uncertainty, a continued high
19. Public to private takeover of Healthscope by TPG Capital and The Carlyle Group.
20. Refer to AVCAL’s 2012 Yearbook, released in November 2012.
17Snowball Group - Evolution of Venture Capital in Australia
Australian dollar, as well as challenging
M&A and IPO market conditions.
The increase in fundraising was around
59% up on FY2011, totalling $3.34 billion,
the highest since the GFC21. This positive
result was tempered by a plethora of
deferred fundraising commitments and a
concentration of fewer new PE managers
being successful in their fundraising
commitments. Most of the funds committed
to were from overseas investors, reflecting
the continued subdued sentiment by local
participants.
Australian VC funds had a major increase on
the previous years. Most of this was under
the Government’s Renewable Energy Venture
Capital Fund co-investment program. This
amounted to $200 million out of the $240
million total funds raised. The Government
backed programs remained the main source
of new commitments for VC funds, as
fundraising remained difficult for VCs.
A continuing trend in FY2012 was most
VC and PE commitments were raised
from overseas Limited Partnerships (LP),
representing 36% of total new commitments.
Almost no funding was raised from the
domestic private sector by Australian VC
funds.
As mentioned above, investments by PE and
VCs fell during the period. This reflected the
subdued climate as a result of continuing
investor worries and uncertainty concerning
the global economic crisis. It was also a
product of easing of growth in the Chinese
economy and the predicted negative impact
it would have on the performance of the
heavily relied on Australian export mining
industry. These factors greatly reduced
business, consumer and investor confidence.
Three main deals dominated, representing
41% of PE fund investments. They included
Bain Capital’s acquisition of MYOB from
Archer Capital, Affinity Equity Partners
purchase of Primo Smallgoods, Champ
Private Equity’s acquisition of oOh! Media,
and the acquisition of SGA Hygiene by
PEP. With respect to VC funds, investments
remained steady with 42 investments in
new companies and 45 in existing investee
companies. Competition for VC funds
remained tight with only 12 VCs investing.
What came to the fore was the depth of
start-up and early stage ventures competing
for scarce local funding. Foreign VCs were
active, seeing Australia as an attractive
market for technology start-ups with global
VC heavyweights such as Khoshla Ventures,
Index Ventures and General Catalyst Partners
attracted to invest in start-ups such as
Kaggle and Big Commerce.
21. Archer Capital Fund 5 raised half of the FY2012 PE committed funds.
18 Snowball Group - Evolution of Venture Capital in Australia
201322
In the 2013 fiscal year, there was moderate
activity overall in the PE and VC sector,
slightly down from 2012. However, there
were promising signs for improvement for
2014 as we witnessed improved business
confidence and a fairly buoyant IPO market.
Fundraising by Australian PE and VC funds
fell to $867 million in FY2013, reversing the
upward trend in FY2012. Most fundraising
was from PE funds, raising $711 million.
This was a sharp decline from the $3 billion
raised in the previous year. Anchorage
Capital Partners Fund II, Advent 6 and
Anacacia Fund II were the largest domestic
funds, raising 80% of all fundraising
commitment to PE funds.
VC funds raised $155 million, 35% lower
than FY2012. This came from just three
funds. Notable VC funds included the
IIF Carnegie Innovation Fund No. 2 and
Bioscience Manager’s Asia Pacific Healthcare
Fund II, mentioned above.
Investments were slightly down, reflecting
an overall softening of M&A activity.
Investments by PE funds were 7% down
on the previous year. Notable investments
by PE funds included the private to public
takeover of Spotless by PEP, KKR’s buyout of
GensisCare from Advent Private Capital and
TPG’s acquisition of Inghams Enterprises. The
turnaround deal of Dick Smith by Anchorage
Capital who acquired them from Woolworths
featured prominently in in September 2012.
This was followed up with a listing in
December 2013.
Investment by VC funds fell 20% to $111
million. However corporate VCs like Telstra
Ventures, super angels, and funds backed
by successful business founders were active
in backing early stage companies. This
included start-up online graphic design tool
provider Canva (Blackbird Ventures) with
$3 million seed capital, asset management
solution provider Assetic (M.H. Carnegie &
Co.) and SaaS provider Whispir involved in
communication management systems who
have been funded by Telstra Ventures.
Exits from PE funds continued to be
dominated by trade sales including Exego
sale by Unitas Capital to Genuine Parts in
the USA and the sale of Southern Cross
Venture partner’s Virsto Software to VMware.
However there were some good signs for
exits via IPOs with the listing of Virtus
Health by Quadrant Private Equity. We also
saw some major write-offs by PE funds,
notably Nine Entertainment.
Even though FY2013 was fairly benign,
we did see some positive signs with an
indication that PE and VC funds will look to
clear a backlog of exits to make room for a
new cycle of fundraising and investment.
22. Refer to AVCAL’s 2013 Yearbook, released in December 2013.
19Snowball Group - Evolution of Venture Capital in Australia
Today and Tomorrow, what’s in store?
With a steady return to business confidence
and strong demand by institutional
investors, buoyed by the success of the
Virtus Health listing, some large and notable
IPOs occurred in the first half of FY2014.
This included the breathtaking floats of
Freelancer23 and Indoor Skydiving Centre.
PE funds had a few notable IPOs during the
same period who’ve continued to perform
well post listing. These included credit-
checking company Veda Group24 and online
foreign currency company Ozforex25.
However, even with the success of
Freelancer, Veda and Ozforex, there have also
been some equally disappointing results and
share performance after their IPOs. Take the
rocky start for electronic goods retail chain
Dick Smith Holdings26. It opened as high as
5.5% above the IPO share price of $2.20 but
then fell flat by the end of the day to $2.16.
It’s now trading around par but fell below
$2 in late December before recovering.
Turnaround PE firm Anchorage acquired Dick
Smith in November 2012 from Woolworths
for $94 million. At the IPO it was valued at
$520.3 million.
Disappointing listings included the Cover-
More Group owned by PE firm Crescent
Capital Partners, Nine Entertainment
Co., and packaging business Pact Group,
all demonstrating lack lustre results
since their floats late December 2013.
This has signalled mix messages to the
market regarding the much-heralded list
of upcoming floats around February and
March 2014. This includes the listing of
Healthscope by PE funds TPG and The
Carlyle Group for around $4 billion. It also
possibly includes Medibank Private, fleet
management company SG Fleet (owned by
Super Group and Champ Ventures), the large
retirement home operator RetireAustralia
tipped to IPO at $400 million, and a quick
turnaround by PEP with the return of the
catering and cleaning company Spotless27
to the ASX through an IPO. This is predicted
to be worth $1.5 to $2 billion. In addition
other IPOs mooted for FY2014 include
Smartgroup’s Smartsalary ($200 million)
and Sterling Education ($200 million). All in
all the market anticipates a busy time with
around $7 to $8 billion worth of IPOs.
This renewed activity is a result of growing
business and investor confidence. Even
though global economic and political
concerns persist, institutional investors
in Australia are showing some sign of
investment appetite, albeit with ‘under-
23. ASX:FLN) The online job outsourcing platform Freelancer’s successful listing in November 2013 surprised the market. It was of the few stocks that have continued to be strongly supported by
investors post listing. On January 8, 2014 FLN demonstrated a gain since its IPO of 170%.
24. (ASX:VED) The Veda Group is a credit reporting and data services company and returned to ASX after 6 years away. VED listed on 5 December 2013 at 50 cents per share. As at 7 February 2014
share price is $1.90.
25. (ASX:OFX) The online foreign currency and international payment services company listed on 11 October 2013 for $2 per share for a $480M float. It’s currently trading at $3 per share 7 February
2014.
26. (ASX:DSH)
27. PE Fund, Pacific Equity Partners (PEP) acquired Spotless for $723M in August 2012.
“It has become a structural change in
the way business will be conducted in the future, or more to the point, how it’s
being conducted now.“
“Coupled with the enormous activity by technology based companies and investments being made, one only has to see the amount of sustained activity by US private equity & venture capital funds, as well as angel investors and syndicated angel investor groups over the last two years to know where the world is heading. To support this it’s worth noting in 2013 US private equity fundraising totalled around US$193.7 billion.28“
20 Snowball Group - Evolution of Venture Capital in Australia
whelming exuberance’. Still there is appetite
to invest in private equity that’s exiting
via public markets. With more sensible
valuations and hard fought book-builds, PE
firms have been keen to exit investments
they’ve been holding longer than they
normally would, to make room for new
committed funds and new investments.
However, investor interest in start-up and
early stage companies still remains low. Even
with the success of Freelancer and Atlassian
(supported by overseas VC fund, Accel
Partners), mainstream investors in Australia
stay sceptical and risk averse. They remain
stuck on resources, banks, property and
infrastructure, retail and manufacturing. That
is, “old world” businesses who’re struggling
themselves to survive in a brave new global
world that arrived years ago. This is in the
face of the great innovative successes we are
witnessing around the world such as Google,
Facebook, Twitter and now a plethora
of SaaS platforms, cloud technologies,
proliferation of API plug-ins, online enabling
platforms, eCommerce platforms, interactive
ecosystems, big data and analytics, and the
list goes on. Coupled with the enormous
activity by technology based companies
and investments being made, one only has
to see the amount of sustained activity by
US private equity & venture capital funds,
as well as angel investors and syndicated
angel investor groups over the last two
years to know where the world is heading.
To support this it’s worth noting in 2013 US
private equity fundraising totalled around
US$193.7 billion28. Although there were 12
funds there were in excess of US$5 billion,
the average was around US$100 million,
accounting for 32% of the fundraising. VC
funds in 2013 raised less in aggregate than
2012, preferring to focus on smaller vehicles
where capital raised flowed into smaller
early stage funds with the likelihood of
greater gains. There is plenty of dry powder
for later stage
23. Pitchbook Data Inc. 1H 2014 U.S. PE & VC Fundraising and Capital Overhang Report p3
“If it wasn’t evident before it is now, start-up ventures are leaving our shores in droves to find sources of funds and gain access to dynamic and global markets.“
21Snowball Group - Evolution of Venture Capital in Australia
investment with a PE capital overhang of
around US$465.5 billion.
In the case of early stage investments, more
is being spent than is being raised and as
a result the capital overhang is declining
each year, currently at US$57.9 billion. This
is occurring in light of VC deal-making
occurring at break neck speed as many start-
up companies come out of their seed, pre-
series A phases. The ‘series A crunch’ as it’s
come to be known is a product of a rapidly
changing investment environment and is a
sustained trend. It’s unlike the previous dot
com boom experienced between 1995 and
2000. It has become a structural change in
the way business will be conducted in the
future, or more to the point, how it’s being
conducted now.
In Australia, unlike in the USA and Asia, PE
& VC fund managers continue to be risk
averse, even in light of the success of tech
businesses such as Freelancer and Atlassian.
Ask any start-up company, whether it’s a
cloud-based software as a solution, an
online eCommerce venture, mobile device
app, or a scientific technological solution
in health, communications, or engineering
needing to be commercialised. Getting
funding locally is close to impossible. Local
investors will want the start-up to first have
market traction and be making profit before
they’ll consider it. They’ll want a sizeable
chunk of the company, want to be in control
in regards to the business strategies and
commercial decision making, while imposing
onerous conditions on the founders. They
will spend a ridiculous amount of time to do
their ‘due diligence’ and commit to meagre
funding.
This approach by Australian investors is at
odds with the rest of the world. More to the
point it has badly frustrated and stifled our
progress as a nation of smart innovators
over the last decade, and continues to do so.
Many of the bright minds in the information
technology sector are now taking their
destiny into their own hands, and looking to
greener pastures where getting funding is
easier, and the environment is conducive to
being successful. If it wasn’t evident before
it is now, start-up ventures are leaving our
shores in droves to find sources of funds and
gain access to dynamic and global markets.
“Here lies the real difference; you can start-up quickly, with limited seed funding required. You can do it cheaply and with less risk exposure. The mantra is if you’re going to fail, fail quickly and move on. “
22 Snowball Group - Evolution of Venture Capital in Australia
The world has changed, but no one has told Australian investors...
In a poignant special report on tech start-
ups in The Economist29, it’s argued that we
have reached a “Cambrian moment”. It has
taken the last couple of decades and a few
false starts to form, but the framework and
platform has arrived and the planets are
all aligned. To the risk averse, and you hear
this constantly from Australian investors,
they argue its all too risky and similar to
the dot com bubble a decade ago. To the
ignorant, I guess a simplistic and uneducated
conclusion like that could be reached.
However I’m surprised (or may be I shouldn’t
be), I would have thought that a little more
thought and understanding, and foresight
would be put into making investment
decisions. Evidently not!
In the special report, it points out a number
of things that have changed the game and
indicate a lasting and permanent trend.
It’s different to last time for a couple of
reasons. A decade ago it was early days
in the commercial use of the Internet
and the web. There wasn’t such a general
acceptance of the web as there is today. The
technologies and tools were in their embryo
stage. They were limited and predominately
only accessible by techies with commercial
acumen. In addition, there weren’t iPhones
and iPads with wireless connectivity and
infrastructure to support highly efficient
data communication and data storage. In
this limited environment start-ups had to
first come with a product and business
model, raise money and hope for traction.
So what’s different? Start-ups are now being
built on solid foundations enabling them
to get to market with lower costs, faster
and with lower funding requirements. The
Internet is fast, universal, and wireless. Major
infrastructure around the globe has been
created to make it affordable and ubiquitous.
Not only for start-ups, but those that will
consume their products and services. For
start-ups all the building blocks now exist
and are easily accessible. It includes easy-
to-learn programming frameworks, available
online platforms to find and gain access
to developers, the ability to easily share
code, or even outsource testing usability. A
major advancement has been the creation
of a large volume of APIs, multiplying and
growing in number as we speak, allowing
one service to use another. Probably the
most important difference is the arrival of
platform services including affordable cloud-
based hosting infrastructure with virtual
servers. You can now basically rent
29. Refer to an article titled ‘A Cambrian Moment’, 18 January 2014, The Economist, Tech Start-ups. It refers to the beginning of life forms beginning to multiply in an explosion leading a wide variety
of animals on earth around 540 million years ago. This used as an analogy of what is occurring in the entrepreneurial space and digital realm today. A major shift, permanently changing the world as
we know it today.
23Snowball Group - Evolution of Venture Capital in Australia
on-demand and pay-as-you-go, enabling
start-ups to avoid large upfront capital
expenditure on development environments,
allowing them to move quickly to
commercialisation. There are platforms
enabling start-ups to quickly distribute their
products and services to market, eCommerce
enabled with plug-in billing and payment
systems integrated to online fulfilment
systems and accounting platforms. Marketing
has become so much easier with the
advent of social media and a high degree
of interactivity happening on a global basis.
The world has never been so connected.
Here lies the real difference; you can
start-up quickly, with limited seed funding
required. You can do it cheaply and with less
risk exposure. The mantra is if you’re going
to fail, fail quickly and move on. Terms like
“MVP” and “Pivot” coined in the ‘The Lean
Start-up’ by Eric Ries30.
The proliferation of start-ups at seed stage
and their speed to early stage funding
is the reason for the series A funding
crunch. The framework and environment
enables start-ups to take a much different
approach. Start-ups can spend their time
‘tinkering’ to develop a good idea, working
in interconnected ecosystems. Once found
they can then look for a business model to
allow for fast profitable growth. This is the
opposite of the dot com bubble a decade
before where investors and entrepreneurs
alike made their bet on a business plan and
then tried to execute it.
Let’s be clear, the explosion of start-up
technology ventures using the building
blocks outlined above has created a major
shift in the way business is done now and
in the future. It’s structurally, socially, and
culturally changing the way we do business,
replacing traditional structures of doing
business for good. The Economist in its
article points this out by giving examples
such as the social network LinkedIn
fundamentally changing the recruitment
business, Airbnb disrupting the traditional
hotel business, and Uber connecting would-
be passengers with drivers – changing the
taxi business. This is just the tip of the
iceberg and why investors in Australia need
to change the way they think.
Who’s feeding the start-ups?
Start-ups nowadays don’t just rely on family,
friends and maxed out credit cards to get
started. If they did, “tinkering” wouldn’t
be an option. In the US, a movement has
gained momentum due to the efforts of past
entrepreneurs, universities, some corporate
venturers, and a few VCs with foresight.
30. The lean Startup Book by Eric Ries, published by Crown Publishing Group October 2011. “MVP” stands for Minimal Viable Product to prove up an idea and get to market. It’s a core component of
Lean Start-up methodology in the build-measure-learn feedback loop. “Pivot” is the term used to describe the iterative nature of start-ups nowadays where one foot is planted while the other may
have to shift stay still to preserve.
24 Snowball Group - Evolution of Venture Capital in Australia
We are now witnessing an explosion in start-
ups due to a growing list of accelerators,
co-working spaces, and studio like holding
operations. These start-up schools have also
attracted angel investors, syndicated angel
investors, and early stage VC funds, which
actively seek to invest in start-ups.
The formation of these start-up schools
has spawned an interconnected global
ecosystem. Accelerators alone throughout
the world total in excess of 2,000 and
growing. In addition there are a raft of
platforms that service the start-ups in these
accelerators.
In the past technology incubators were
formed to foster young entrepreneurs.
The idea came out of SOHO in New York
and was more about increasing the price
of property by housing dot coms. They
provided entrepreneurs with a workspace
and business facilities, the ability to mix
with other entrepreneurs and share their
experiences, receive mentoring from
commercial professionals on how to get
grants, commercialise and pitch for funding.
Although they had some merit they had
limited success. The reality was small teams
of developers tended to work in isolation,
gaining free rent and access to technology
allowing them to continue coding. Once in
the incubator it was hard to move them on
and difficult to commercialise them.
Accelerators may be considered the
antecedents of the early incubators but
in fact they are structured very differently.
Accelerators are known as “schools for
start-ups”. One of the first seed accelerators
to start back in 2005 was Y Combinator.
This was set-up by Paul Graham, a former
software entrepreneur and angel investor.
If you have a good idea you want to move
to a product you can apply to Y Combinator.
If successful you’ll receive seed funding of
around US$20,000 and relocate to their
facilities in Silicon Valley for 3 months.
During this time you’ll work intensely to
get your small start-up in shape to pitch
to investors, culminating in a Demo Day of
specially selected investors. In return the
start-ups provide Y Combinator with around
8% of their companies. Y Combinator has
had notable successes such as Dropbox
and Airbnb. Other well-known accelerators
include TechStars and Startupbootcamp
who’ve set up international networks.
Accelerators are now operating
independently around the world, but in many
cases remain inter-connected.
As well as accelerators, another development
is the proliferation of co-working spaces.
These facilities host entrepreneurs and
start-ups in one location. They get all the
essential facilities such as high speed
internet, a desk and chair, printing services,
board rooms and meeting rooms. They also
get the opportunity to collaborate with
other start-ups, gain access to mentors and
advisors, and in regular intervals, investors.
This is all for a small monthly fee.
Another option available to start-ups, where
25Snowball Group - Evolution of Venture Capital in Australia
entrepreneurs have turned investor, is
the studio-like holding operations. These
technology studios provide an opportunity
for rapid experimentation and company
development. Technology studios have
sprung up such as ‘Betaworks’, ‘Obvious Corp.’,
‘Monkey Inferno’, ‘Lightbank’ and ‘HVF’. Each
has a slightly different model. Generally
studio creators provide the facilities and
usually take large chunks of equity and
co-founder status. They actively participate,
creating and incubating ideas in-house. They
may provide seed-stage funding but most of
all provide their entrepreneurial expertise
and resources to help generate and build
companies at scale. Start-ups within the
technology studios are able to leverage
functions such as sales and marketing,
hiring, and legal advice. This is ‘parallel
entrepreneurship’ where experienced
entrepreneurs can work in tandem with
talent in-house and help new entrepreneurs
turn ideas into actual businesses. It
effectively leverages repeatable services
across the studio’s start-ups, enabling them
to scale quickly with less capital required.
Of course the latest trend is crowd funding.
At this stage and to this writer it sounds a
lot like promoting and getting discounted
pre-sales. It’s a great way to raise some
seed money and get traction. Noticeably, the
best results come if you’ve got a really cool
gadget, something tangible like what Ninja
Blocks has created. To be successful, you
have to first form a team who’re willing to
develop a concept for free. Then you have
to get lots of followers through your social
network, get hold of some initial seed money
(albeit a small amount) to get your product
offering (or concept) and website up and
running. Then if it’s something the crowd
likes, money will come in with the promise
of some type of reward such as discounted
pre-sold product if it eventuates. There’s
no doubt there has be some really sizeable
successes. In the US the JOBS Act is opening
up the way for donators to become retail
based investors in the company and gain
equity. There’s similar pressure in Australia
to make changes to restrictive rules
pertaining to retail investors. The belief
is by offering equity it will stimulate a lot
more seed funding for start-up ventures and
ratchet up crowd funding investments.
Support for technology start-ups in Australia.
A large Silicon Valley VC firm with $7.5
billion under management, Technology
Crossover Ventures (TCV) who’ve invested
26 Snowball Group - Evolution of Venture Capital in Australia
considerable funds into growth stage media
and technology companies such as Netflix,
Facebook, Groupon and recently Spotify,
injected $30 million into an Australian
online hotel distribution platform SiteMinder
in January 2014. This is significant in itself
but what is more interesting is what TCV had
to say about Australia’s wealth of pragmatic
entrepreneurs who they see as global market
players with compelling products.
These aren’t isolated views. The rest of the
world admires the innovation and creativity
by small start-ups in Australia. Apart from
the level of innovation, they possess strong
development and commercial disciplines
seldom seen in start-ups. It makes them
an attractive proposition for VCs and angel
investors. The fact that they sit in the Asian
region makes them even more attractive
to US investors. The problem is many start-
ups toil for many years without receiving
funding. Finally, through fatigue and
necessity they give up. This is due to a lack
of he capital needed to survive and to take it
to the next level.
Little help has been offered by the
Government to date and this could soon
become even less as the current Australian
Federal Government promotes small
government and greater reliance on private
market forces. Given the unchanging nature
of risk averse Australian private equity
investors as history has shown, this could
spell disaster. At the very least it will force
even greater numbers of tech start-ups to
go offshore, taking the potential for jobs and
Australia’s economic future.
However, in recent times we’re starting to
see renewed hope. Not from traditional
funding sources, but from entrepreneurs
who’ve enjoyed previous success and are
willing to not only invest in tech start-
ups, but will offer their time to mentor
those with good ideas. In a short while,
throughout Australia we have seen the rise
of co-working spaces such as ‘Fishburners’
in Sydney, ‘Inspire9’ based in Melbourne and
home to ‘AngelCube’ accelerator, ‘York Butter
Factory’ also in Melbourne is home to 50
companies, over 200 start-up events a year
and is helped by VC firm Adventure Capital,
and ‘HUB’ based in Melbourne, Sydney and
Adelaide. In addition there is ‘Sync Labs’, and
‘Space Cubed’ in Perth.
Accelerators have also started to pop up
throughout Australia. ‘Startmate’ is a group
of start-up executives who offer mentorship
and seed financing to founders of Internet
and software businesses. This is a five-month
program of where each start-up receives
$50,000 investment. At the conclusion of
the program founders pitch to early stage
investors at demo days (one in Sydney and
one in Silicon Valley). Other accelerators for
start-up tech companies include the Founder
Institute, Slingshot, Ignition Labs, Pollenizer,
PushStart, Blue Chilli, ATP Innovations,
AngelCube as mentioned above, and the
Telstra backed Muru-D.
“The rest of the world admires the innovation and creativity by
small start-ups in Australia. Apart from the level of innovation, they possess strong development and commercial disciplines seldom seen in start-ups. It makes them an attractive proposition for VCs and angel investors. “
27Snowball Group - Evolution of Venture Capital in Australia
We’re also seeing the rise of Australian VC
funds that focus on global Internet start-
ups in Australia. One such firm is ‘Blackbird
Ventures’ with a $30 million fund. The
company is made up of successful start-up
founders in Australia including the founders
of Atlassian, Campaign Monitor and Aconex.
It also has some of Silicon Valley’s top
investors (Bill Tai and 500 Startups chief
Dave McClure) and access to a network of
investors in Silicon Valley. They provide
equity capital for all stages from seed, to
early stage to growth capital. To date they’ve
invested in Canva, Shoes of Prey, Ninja
Blocks, and Coinjar.
Another Australian VC Fund is ‘Adventure
Capital’ focused on advancing digital and
online technology ecosystems built by
Australian talent and their IP in innovation
and entrepreneurship. Adventure Capital’s
current fund, the ‘Digital Accelerator LP’ with
committed funds of $20 million is a super-
angel style venture fund focused on finding
and guiding early-stage tech companies that
are highly capital efficient and have global
ambition and scope. They are seeking to
increase the fund’s size to $100 million.
‘Square Peg Capital’ was recently formed
by a group of successful entrepreneurs
and technology investors. It came about
through the merger of two funds31 and
was orchestrated by Paul Bassat (Seek
co-founder), former banker Tony Holt, and
Justin Liberman. They’ve invested their own
money as well as money from James Packer
to set up a sizeable fund to invest in early
stage to growth stage technology companies.
A recent new Australian VC firm is the
‘Snowball Group’ situated in Melbourne.
Two veterans in the sector, John Dowell
and Anoosh Manzoori, head Snowball
Group. They directly invest and co-invest
in technology start-ups to early stage
companies in the Asia Pacific region.
Snowball Group has strict investment criteria
focusing on the core proposition of the
start-up business, the quality of the people,
and the risk and reward of the venture. In
particular they have a penchant for online
businesses with large ecosystems, conducive
to Big Data and analytic technologies.
Snowball Group sources their VC funds
from the USA and Asia. They’re currently
establishing a $30-$50 million VC fund for
pre series A tech companies operating in
Australia and Asia.
31. The merger was between Square Peg Ventures and Victoria Capital to form Square Peg Capital in 2013.
28 Snowball Group - Evolution of Venture Capital in Australia
‘Southern Cross Venture Partners’ was
launched in 2006 by targeting early stage
technology companies with the potential for
exceptional growth and market leadership.
Their team has a strong record of utilizing
their start-up and management experience,
industry knowledge, network of business/
customer relationships, and recruiting skills
to assist in building significant shareholder
value. They prefer to act as lead or co-lead
in the early stages where they have the
experience to build value rapidly. A typical
initial investment is $2 million to $5 million
with an ability to invest more money in
later rounds. A notable success has been the
recent sale of Virsto to VMware.
‘Starfish Ventures’ is an experienced
venture capital manager seeding, building
and managing high growth technology
companies from an Australian base. Their
investment focus includes high growth
information technology, life sciences, and
clean technology companies. The team
has invested in over 60 companies to
date with 14 trade sales and IPOs. Recent
investments include Audinate32, Nitro33 and
DesignCrowd34.
Another active PE firm investing in
Australian businesses is ‘Blue Sky Private
Equity’, the only listed VC fund manager
in Australia. Blue Sky invests in private
companies taking significant but non-
controlling stakes in its investees. They
focus on long-term investment in real
estate, industrials, hedge funding activity
and water utilities. They’ve also extended
their portfolio recently to biomedical and
pharmaceutical companies. In September
2013 the company launched a $10 million
VC fund for start-up and early stage
investments. They’re not targeting specific
industries with the fund, but see many
opportunities coming from healthcare and
digital sectors. It also is looking at resources
and agriculture sectors.
‘Blue Chilli’ is a software development
company creating online web applications.
It invests in online start-ups by contributing
software development. They call this
‘Venture Technology’. They’re also an
accelerator, or rather a studio-like operation.
Last year they announced a $10 million fund
to invest in early stage tech companies. The
fund will match any angel investment over
$100,000 made by three or more investors
to a Blue Chilli company.
‘OneVentures’ has been operating for some
years, investing in emerging Australian
technology companies with differentiated
technology and compelling business models.
They focus on clean technology, information
technology and life sciences. OneVentures
invests in small high tech companies at the
seed, start up and early expansion stages. As
mentioned previously, OneVentures manages
an IIF fund of $40 million.
Led by Mark Carnegie of the Carnegie Wylie
fame, ‘M.H.Carnegie & Co.’ is a venture
capital, private equity and alternative asset
32. Audinate is a media networking solution enabling the transport of high quality media over standard IT networks.
33. Nitro develops PDF software and cloud collaboration tools.
34. DesignCrowd is an online marketplace providing logo, website, print and graphic design services by providing access to freelance graphic designers and design studios around the world. Design-
Crowd has recently acquired US based BrandStack and launched BrandCrowd, a marketplace for ready-made brands and logos.
29Snowball Group - Evolution of Venture Capital in Australia
manager in Sydney. They manage over $200
million worth of committed funds from
institutional, wholesale and HNW individuals
over several funds. Of interest, they’ve been
granted $40 million in the latest round of
the IIF program. Due to having to match the
Government’s contribution as part of the IIF
program requirement, this totals $80 million.
In September 2013 this was reported to be
a lot more, totalling $120 million. They’re
also collaborating with Vivant, an Australian
user interface and digital marketing
firm, creating an incubation facility.
The collaboration is aimed at fostering
innovative technology providing a launching
pad for those that pass their development
and commercialisation process.
Conclusion
There’s no doubt investment in private
equity in Australia has had an up and down
history. What’s evident is throughout its
evolution there’s been a lack of support due
to the risk averse nature of institutional
investors. When private equity investment
has gained some momentum, it’s been
quickly dashed, caught up in the roller
coaster ride as each economic cycle comes
around. Investment in innovation and start-
up companies has faired far worse. There has
been some recognition of the importance of
supporting innovative start-up companies
in Australia. There is a general consensus of
the need to generate ‘new world’ industries
to support the job market in Australia as
old world industries disappear. The rhetoric
in the press is great, but that’s all it is. To
date, the Government has in reality only
contributed limited funding to support
information technology, life sciences and
renewable energy companies. The lack of
commitment by Government, coupled with
the continuing disinterest by private equity
investors is resulting in companies leaving
our shores in droves and seeking private
equity investment in more liquid markets.
With them we are losing our innovation,
our talent, our commercial future. There is
no doubt Australian companies are capable
of being successful on the global stage.
Unfortunately overseas investor recognise
this more than risk averse Australian
investors.
The efforts of the few, made up of
entrepreneurs and investors who’ve
forged their past successes in spite of the
limitations they faced in gaining adequate
funding are out their fighting the good fight.
The appearance of local VC funds supporting
start-up tech companies, the proliferation of
accelerators, co-working spaces, and studio
operations connected to global ecosystems
provides hope. Whether it’s enough only time
will tell. For Australia sitting at the edge of
the Asian frontier, there’s a lot at stake.
This document is provided by Snowball Group Pty Ltd for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice under Circular 230 or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with qualified technology specialists, professional financial and investment adviors, professional tax, accounting, legal, or other competent
advisors. Before making any decision or taking any action, you should consult with a professional advisor who has been provided with all pertinent facts relevant to your particular situation. The information is provided ‘as is’ with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties or performance, merchantability and fitness for a particular purpose.
30 Snowball Group - Evolution of Venture Capital in Australia
Author:
John Dowell
Executive Director and Co-founder at Snowball Group
John Dowell has over 30 years of experience in corporate finance, venture capital and the ICT
sector. He’s a leader in areas of e-commerce, IT infrastructure, and business intelligence. He has
had extensive experience leading top global technology companies.
Level 3, 296 Collins StreetMelbourne Victoria 3000
Phone: (613) 9005 2124Email: [email protected]
www.snowballgroup.com.au
PRIVATE EQUITY INVESTMENT FIRMGLOBAL CORPORATE ADVISORY SERVICE