venture capital investments - australia

0

Copyright© UZABASE, Inc. ALL RIGHTS RESERVED Contact us: [email protected] LinkedIn: uzabase/speeda

Venture Capital Investments – Australia

Industry Overview

Despite Favourable Environment, Australian VC Market

Remains Underdeveloped Compared to Peers

Despite a favourable environment featuring a strong market-based economy,

robust financial framework, and high-quality education system, the Australian

venture capital (VC) industry has not been able to tap into its full potential. This

can be attributed to several factors, including a lack of government support for

the innovative sector; poor commercialisation of the R&D sector; cumbersome

legislation surrounding innovative industries, for example regulations pertaining

to ESOP schemes, and insufficient tax incentives; and conservatism among

Australian investors leading to a paucity of capital, particularly in late-stage VC

funding.

As of 2015, high-growth technology companies contributed only 0.2% to

Australia’s GDP. Past government efforts to boost the industry, such as the

Innovation Investment Fund (IIF) established in 1997 to create domestic VC

funds, saw limited success, leading to the scrapping of the program in 2014. In

2014, the previous government under Tony Abbott introduced budget cuts for

the CSIRO, the country’s leading research institute, further highlighting the

government’s poor commitment to innovative industries.

Montana Clapton [email protected]

mailto:[email protected]


1

However, recent macroeconomic shifts such as the end of the country’s mining

boom, weakness in key commodity export markets such as China, and fears of a

possible housing bubble have prompted the newly elected Turnbull Government

to shift focus toward innovative industries – particularly in the ICT and health

sectors, which accounted for 52% and 31% of VC investment respectively (based

on number of companies) in 2015. In December 2015, the government published

its National Innovation and Science Agenda (NISA), under which it has pledged to

improve commercialisation of the country’s R&D sector; streamline regulations

and improve taxation frameworks in the innovative sector; and introduced

several schemes to encourage a higher amount of VC investment in the country

from both foreign and domestic investors. In line with these recent

developments, the Australian VC industry has also seen an increase in interest

from previously conservative institutional investors such as superannuation

(pension) funds. Super funds represent a huge pool of potential capital, with

around AUD 2 trillion in assets as of 2015. The combined improvement in both

government and investor attitudes bodes extremely well for future growth in

the Australian VC sector.

Shift in Focus toward Innovative Industries

Driven by Looming End of Resources Boom,

Fears of Property Bubble and Uncertain Future

in Major Export Markets

The Australian economy is vulnerable to a number of risks. Firstly, its status as a

capital-importing country means that it is highly influenced by fluctuations in

overseas markets. Second, Australia’s banking system is highly concentrated.

Each of the four major banks (Australia and New Zealand Banking Group (ANZ;

AUS), Commonwealth Bank of Australia (CBA; AUS), National Australia Bank

(NAB; AUS), and Westpac Banking Corporation (WBC; AUS)) have large offshore

funding exposures and are heavily exposed to developments in the housing

market. Third, according to the Financial System Inquiry commissioned by the

government in 2014, Australia faces lagging productivity growth, due to a

combination of high wage growth from the resources boom coupled with an

ageing population.



2

For many years, the Australian economy has been overly dependent on sectors

such as resources (e.g. mining); export of commodities (e.g. the export of iron

ore to China); and real estate investment. The lag in the mining sector has been

well-documented (a 2015 report by BIS Shrapnel estimated mining investment in

Australia to drop 58% over the next three years); in addition to weak demand in

China affecting iron ore exports (on 8th December 2015, iron ore prices dropped

to a 10-year low; recent figures recorded a 5.6% yoy drop in Chinese imports);

and what many believe to be a property bubble soon to burst (in 2015

investment bank Macquarie (AUS) forecasted a 7.5% quarter-on-quarter fall in

house prices beginning from March 2016).

Faced with these dangers, it has become more crucial than ever for the country

to turn its focus toward new businesses and new technologies — the so-called

innovative sector — in which venture capital funding plays a fundamental role.

According to a 2013 study commissioned by Google Australia, high-growth

technology companies could potentially contribute up to 4% of the country’s

GDP (or AUD 109 billion) from the current 0.2% by 2033. However, urgent

measures must be taken by the government in order to overcome the numerous

challenges strangling the industry at present and capitalise on the sector’s latent

potential.

Venture Capital Funds Take Form of VCLP,

ESVCLP or AFOF

In Australia, venture capital funds are registered with the regulatory body

Innovation Australia. They may take the form of either a regulated venture

capital limited partnership (VCLP); an early stage venture capital limited

partnership (ESVCLP); or an Australian Venture Capital Fund of Funds (AFOF).

There are currently 12 registered ESVCLPs and seven conditionally registered

ESVCLPs, while there are 40 registered VCLPs and four conditionally registered

VCLPs. There is only one currently registered AFOF.



3

Each type of fund must meet certain criteria, outlined below:

VCLP: must seek to raise a minimum of AUD 10 million and not more than

AUD 250 million for investing into unlisted Australian businesses

ESVCLP: must not raise more than AUD 100 million for investing into early

stage Australian businesses

Both VCLPs and ESVCLPs: must only invest in new shares, units, options or

convertible notes that have an equity characteristic in these Australian

entities (companies or trusts) where at least 50% of the entities’ assets and

staff are located in Australia. The relevant entity must not have property

development, land ownership, finance or construction as its predominant

activity.

ESVCLP: must have a plan to invest in early stage venture capital

investments, which includes investment in businesses at the pre-seed, seed,

startup, and early expansion stage of development.

Both VCLPs or ESVCLPs: restricted from investing in loans, pre-owned shares

or in non-Australian entities.

VCLP: investments must be in Australian entities with total assets not

exceeding AUD 250 million.

ESVCLP: investments must be in Australian entities with total assets not

exceeding AUD 50 million.

Both VCLPs and ESVCLPs: must not invest more than 30% of committed

capital in any single entity.

Structure of Australian VC & LSPE Industry

Source: ABS Note: LSPE = Later Stage Private Equity



4

Australia Boasts Strong Research Culture and

Significant Investment into R&D, However

Commercialisation of New Technologies

Remains Poor

The healthcare and life sciences sector plays a significant role in the Australian

VC industry. The sector was the biggest contributor in terms of amount divested

at cost in 2015, with a 38% share. It also contributed 31% of total VC investment

in 2015 based on the number of companies receiving funding. In addition,

roughly 25% of healthcare companies currently listed on the Australian Stock

Exchange (ASX) received venture capital backing in their startup stages. Some

examples of prominent healthcare businesses that have grown from early VC

backing include Cochlear (AUS), Spinifex (AUS), Hatchtech (AUS), and Nitro (AUS).

In order to ensure the success of such businesses — and thus a healthy rate of

return for investors — a good rate of commercialisation of new R&D

technologies is crucial to VC firms investing in the healthcare and life sciences

space.

According to Bill Ferris, founder of Australia’s first venture capital company and

recently appointed chairman of Innovation Australia, Australia ranks somewhere

between third and fourth in the world in terms of health and medical research,

and also ranks highly in other research fields such as astronomy, environment,

agriculture, engineering, information and communications and renewable

energy. Australia’s higher education expenditure on R&D as a proportion of GDP

is above the OECD average, and the country ranks highly in terms of research

quality and output.

However, according to the Global Innovation Index 2014, Australia ranks lowest

among OECD countries on the rate of collaboration between researchers and

firms, indicating the poor commercialisation of its R&D sector. The collaboration

rate between researchers and large companies was 3%, which was far below the

OECD average of 37%; for small to medium enterprises (SMEs), it was 2%

compared to the OECD average of 14%. The reason for this poor

commercialisation is largely due to a lack of communication between

researchers and industry, as well as differing motivations and expectations.



5

As announced in the 2015 NISA, the Turnbull Government has pledged to take

the following initiatives to help improve the rate of R&D commercialisation in

Australia:

Launch a new AUD 200 million CSIRO Innovation Fund to co-invest in new

spin-off companies and existing startups that will develop technology from

CSIRO and other publicly funded research agencies and universities

Establish a new Biomedical Translation Fund to co-invest AUD 250 million

with the private sector to increase the capital available for commercialising

medical research within Australia

Provision of grants such as AUD 520 million for the Australian Synchrotron;

AUD 294 million for the Square Kilometre Array; and AUD 1.5 billion for the

National Collaborative Research Infrastructure Strategy (NCRIS)

Streamlining and refocusing a greater proportion of research block grant

funding toward collaboration with industry, as well as an additional AUD

127 million to research block grant funding

VC Fundraising vs Research and Innovation Metrics (2014)

VC Fundraising as % of GDP (%)

Compound Growth Rate of GDE on R&D, 2000-2010 (%)

Publications in Top-Quartile Journals (per 10,000 inhabitants)

Science & Tech Occupations as % of Total Employment (%)

Australia 0.01 7.2 13 37

UK 0.05 1.5 12 28

Canada 0.06 1.6 12 30

USA 0.17 2.1 9 35 Source: Austrade, WEF, AVCAL



6

Improvements to ESOP Legislation Expected to

Help Startups Attract and Retain Top Talent

There are several challenging factors for startups looking to establish themselves

in the Australian market, including a lack of access to capital, lack of government

support, and the high costs of running a business in the country due to the

combined effect of strong wage growth, high energy costs, and high

transportation costs.

In addition to these, one of the biggest hurdles for startup growth in Australia is

the paucity of skilled talent available. Due to factors such as the poor

commercialisation of R&D in the country as well as the burdensome regulations

surrounding ESOP schemes, many successful Australian startups struggle to

recruit local talent. In the Startup Muster 2015 report, 42% of startups cited a

lack of available technical talent as their biggest external challenge. The lack of

strong relationships between higher education institutes and corporations

results in many promising graduates working for overseas MNCs rather than

home-grown domestic companies. For example, in 2014, more than half of the

participants in telecommunication giant Telstra’s (AUD) Cyber Security Challenge

– a competition designed to locate the best cyber security talent in the country –

opted to work offshore for multi-national technology companies, rather than

seek employment in Australia. As such, many domestic startups are driven

overseas in search of talented employees.

An Employee Stock Ownership Plan (ESOP) is one of the most common ways for

startups to lure and retain talent as well as boost employee productivity, since

the value of each employee’s stake is directly tied to the success of the company.

However, as of 2015, 41% of Australian startups had no employees with equity

or options. This is because ESOP schemes in Australia have traditionally been

burdened by complexity, cost, and the unreasonable tax treatment of options,

whereby options are taxed at the time they are provided to the employee rather

than when they are exercised. Many Australian entrepreneurs have said that the

tax treatment of ESS options has reduced their ability to find talent in Australia

and eventually pushed them to move operations overseas.



7

Thus, in order to retain talented Australian entrepreneurs and generate a strong

pipeline of startups, the Australian Government in 2014 announced a series of

measures to improve the taxation scheme on ESOPs, including:

Income tax will be exempted from the first AUD 1,000 of ESS interests given

to employees who earn less than AUD 180,000 per year

Employees who are issued with options under deferred tax schemes will be

able to defer tax until they exercise the options

The Government will extend the maximum time for tax deferral from seven

years from acquisition of interests to 15 years

Startups who earn less than AUD 50 million revenue, are unlisted and

incorporated for less than 10 years will be allowed to issue options under

certain conditions or shares at a small discount, and have taxation deferred

until sale or the small discount exempt from tax. The shares or options

would need to be held for at least three years.

Additionally, as part of the December 2015 NISA, the government announced

several further reforms to improve the accessibility of employee share scheme

legislation. Under the new rules, companies will now be able to offer shares to

their employees without having to reveal commercially sensitive information to

their competitors.

Visa Reform Aimed at Pulling in Offshore

Investors and Entrepreneurs

The Significant Investor Visa (SIV) was introduced to fuel investment from

overseas investors in innovative sectors as well as enhance commercialisation of

Australian R&D. As part of the minimum AUD 5 million worth of complying

investments required over a four-year period, the visa also requires applicants to

invest a minimum of AUD 500,000 in qualifying VC and growth PE funds (or

qualifying funds-of-funds).

Until recently, the Australian SIV was found to lack competitiveness compared to

other countries with similar investor visa programmes due to cumbersome

application process coupled with a high minimum threshold. Thus the

government in 2014 proposed a series of reforms for the SIV, including a more

streamlined application process.



8

In 2014 the government also introduced a Premium Investor Visa (PIV), which

offers a fast-tracked 12-month pathway to permanent residency for those

contributing a minimum of AUD 15 million. Additionally in December 2015, as

part of the National Innovation and Science Agenda (NISA), the government

introduced an entrepreneur visa in order to attract potential overseas talent to

the country. These measures should serve to encourage further investment from

overseas as well as bring HNWIs into the country.

There is also reform planned for the existing 457 skilled migration visa, which,

along with the previously mentioned ESOP reform, should help to increase the

pool of talent available for local startups. Given that migrants have relatively

high levels of education, with 26.5% of Australia’s overseas-born population

holding tertiary qualifications (compared to only 17% of the Australian-born

population), it can be expected that such efforts to increase skilled migration will

contribute significantly to human capital development and technological

progress in the Australian workforce, and thus spur further development in the

innovative sector.

Recently Announced Tax Incentives Bode Well

for Previously Neglected Startup Space

In the past, the Australian government focused tax breaks on favoured industries

such as the resources sector and property investment whilst neglecting tax

incentives for the innovation sector. For instance, in 2015, NATSEM estimated

that Australia currently foregoes AUD 3.7 billion in revenue each year to

negative gearing of residential property (a number which reaches AUD 7.7 billion

when combined with the discount on capital gains tax).

Although VCLP and ESCVLPs had previously been eligible for a number of tax

incentives, such as an exemption from capital gains tax (CGT) for eligible VCLP

foreign investors under certain conditions and total exemption from tax for

investors in an ESVCLP, this had proved insufficient to attract investment in the

space.



9

The new Turnbull government has recognised the need for improved tax

legislation in the venture capital space and announced the following additional

incentives under the NISA:

A new 20% non-refundable tax offset for early stage investors in innovative

startups based on the amount of their investment, as well as a capital gains

tax exemption

A new 10% non-refundable tax offset for capital invested in new Early Stage

Venture Capital Limited Partnerships (ESVCLPs)

Increased cap on committed capital from AUD 100 million to AUD 200

million for new ESVCLPs

Relaxing the ‘same business test’ that denies tax losses if a company

changes its business activities, and introduce a more flexible ‘predominantly

similar business test’ to allow startups to bring in equity partners and

secure new business opportunities without worrying about tax penalties.

Australia’s Risk-Averse Investing Culture

Discourages Startups and Stunts Growth of VC

Industry

In general, venture capital is a high-risk high-return business, and companies

operate under the assumption that the majority of startups in their portfolio will

fail, where these failures will be offset by one or few big successes. Around 90%

of returns will come from 10% of startups in a typical portfolio. Further, most VC

funds have a 10-year timeline, meaning businesses must achieve growth fast.

For this reason, it is vital for startups to have lofty ambitions and look toward

global markets in order to achieve a sizeable market cap of at least AUS 1 billion.

Likewise, increasing the total number of startups is critical in order to increase

the potential number of deals that can be invested in. Australia fails on both

these fronts due to its risk-averse business culture, which can be put down to a

number of factors.



10

Firstly, the size of the Australian market is small compared to countries such as

the USA, which have a thriving startup ecosystem and can thus afford a higher

rate of failure. The Australian tech startup ecosystem is still in its nascent stages,

and as a result many startups founded in Australia are focused on small niche or

domestic markets. There are relatively few disruptive, ambitious startups looking

to global markets—27% of Australian startups estimate their market value at

less than AUD 10 million, which is a far cry from the ideal AUD 1 billion.

Secondly, Australia’s insolvent trading laws are among the strictest in the world.

Up until very recently, Australian company directors were personally liable for

payment of compensation and risked a pecuniary penalty order and/or

disqualification from managing a corporation if their firm encountered financial

difficulties. This served both to discourage entrepreneurs from taking risks with

their businesses and deterred potential investors from joining as company board

members.

However, Prime Minister Malcolm Turnbull recently announced reforms to

insolvency laws as part of the Government’s Innovation Statement, released in

December 2015. The reforms include a reduction of the default bankruptcy

period from three years to one; protection of directors from personal liability for

insolvent trading if they appoint a restructuring adviser to develop a turnaround

plan; and a ban on ‘ipso facto’ contractual clauses that allow an agreement to be

terminated solely due to an insolvency event if a company is undertaking a

restructure. Alleviating the pressure placed on directors should help to foster

more ambitious attitudes among Australian entrepreneurs, and thus encourage

an increase in the amount of high-risk VC investment.



11

Traditionally Conservative Super Funds

Increasingly Eye Investment in VC

As of 2015, the Australian superannuation system (equivalent of pension funds)

has accumulated over AUD 2 trillion in assets. It is the second largest part of the

country’s overall financial system and represents a huge pool of capital. Super

funds could play a vital part in the context of providing much-needed late-stage

funding, especially since traditional bank lending via business loans is ill suited to

the high-risk nature of startups.

Up until recently, however, super funds have been hesitant to invest in high-risk

ventures. Reasons for this include the current framework of the superannuation

system, which is geared to a one-side focus on fees rather than considering net

returns to fund members; and a perception that domestic startup industry is not

successful enough to justify the risks associated with VC investment. Indeed, the

Australian VC industry has in the past had a poor track record both in terms of

exit opportunities such as through successful IPOs and a low rate of return for

investors — according to 2008 AVCAL data, Australian venture capital funds

formed between 1985 and 2007 had a pooled internal rate of return (IRR) of -

1.4%.

Further, the Australian VC industry is burdened with cumbersome regulations

which further discourage super funds from investing in unlisted high-growth

businesses. For example, super funds are currently required to publicly report

the market valuation of their unlisted investments into venture and private

equity.

Despite these challenges, there has been a recent opening up of superannuation

funds to the VC industry. Superannuation funds were the biggest contributor to

the significant increase in VC fundraising witnessed in 2015, accounting for 60%

(over AUD 200 million) of the total VC fundraising for the year. This was due

primarily to the newly established Brandon Capital Partners’ MRCF3 fund, which

pooled capital from four major super funds for investment in the medtech sector.



12

Equity Crowdfunding Eyed as Boost for Early-

Stage Capital; However, Recently Proposed

Government Initiatives are Disappointing

Another significant challenge facing Australian startups is the lack of available

capital. In 2014, it was reported that only 33% of Australian startups received

external funding, with 61% coming from private capital. Meanwhile, 66.8% of

startups surveyed said they required funding to continue doing business into the

following year.

In December 2015, the Australian Government introduced legislation to enable

the participation of retail investors in equity crowdfunding, which is estimated to

increase the amount of available capital by AUD 300 million over the next 3

years. The Government recognised the development of a crowd sourced equity

funding market as an urgent priority in order to support the funding needs of

early stage innovators.

However, the proposed legislation has received backlash from the Australian

startup community. In effort to protect investor interests, the legislation

mandates that only public companies with annual turnover and gross assets of

less than AUD 5 million will be able to access crowdfunding. Going public is an

arduous process and not a realistic option for many startup companies.

As a result, startups must first become “exempt public companies” to be able to

utilise crowdfunding, and will eventually be required to become full public

companies after a set period of time. This will mean startups themselves will end

up bearing excessive administrative and compliance costs, rather than

crowdfunding platforms such as VentureCrowd (AUS) or unit trusts, and restrict

access to early-stage capital. Moreover, under the current laws, equity

crowdfunding is restricted to sophisticated investors with more than AUD 2.5

million in investable assets or annual earnings of more than AUD 250,000.

These proposed changes again highlight the risk-averse culture in Australia, with

the tendency to impose cumbersome regulations in order to “legislate the risk”

out of business, which in many cases actually serves to stunt the growth of new

businesses.



13

Growing Gap between Early-Stage and Later-

Stage Funding Pushing Promising Startups

Overseas

The lack of funding for later VC rounds is even more conspicuous than the lack of

capital for early rounds. In 2015, only 16% of companies saw investments at the

later VC stage. This gap is pushing many growing companies wishing to scale up

and expand their businesses overseas in search of capital, or else look toward

offshore venture funds.

One notable case of this is successful Australian-born tech startup Atlassian

(GBR), which moved its headquarters from Sydney to London in 2014. Atlassian

is well-known for not receiving outside funding until 8 years after its founding —

even then, the investment was made by Silicon Valley-based Accel Partners

(USA), rather than a domestic VC firm. The company has stated that it will likely

not list on the Australian Securities Exchange (ASX) in future, citing a lack of

knowledge or support from local investors for technology companies.

Late-stage funding is vital for fuelling economic activity, since the scaling up of

businesses has a number of positive side effects such as the creation of new jobs

and an increase in the leasing of office space. Thus, further effort is required to

boost late-stage funding and encourage domestic startups to keep their

operations onshore, such as the creation of government co-investment funds

and greater contribution from institutional investors.

VC Funds Raised by Investment Stage in FY2015 (AUD Million)

Investment Stage Amount (AUD million) No. of Funds Raising Capital

Seed/Early Stage VC 283.00 4

Balanced/Later Stage VC 84.60 3

Total VC 367.60 7 Source: AVCAL

Note: No. of funds raising capital includes all funds with first, intermediate or final closings in FY2015.



14

Market Trends

Significant Increase in VC Capital Largely Due to

Entry of Super Funds

In 2015, VC fundraising in Australia reached a total of AUD 368 million. VC

investment fell 58% year-on-year to AUD 224 million in 2015, although this

figure was still higher than the 10-year average of AUD 203 million. The boost in

the VC industry in 2015 in terms of fundraising can be largely attributed to the

establishment of three large super-backed funds – from Blackbird Ventures

(AUS), Brandon Capital Partners (AUS) and Square Peg Capital (AUS) – each of

which accumulated a total capital pool of AUD 200 million.

As of 30 June 2015, the total number of investee companies in VC and PE

portfolios reached 606, which was a 9% increase over the previous year. The

number of high-tech companies as a proportion of all VC and PE-backed

investees increased slightly from 38% to 39%.

Source: AVCAL Note: Amount refers to combined total of seed, early stage, balanced VC and later stage VC funds.

143

357 352

175 158100

240

152126

368

44

6

9

13

34

3

5

7

0

2

4

6

8

10

12

14

0

50

100

150

200

250

300

350

400

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

No

. of Fu

nd

s Raisin

g Cap

ital (un

its)A

mo

un

t R

aise

d (

AU

D m

illio

n)

VC Funds Raised in Australia

Amount Raised No. of Funds Raising Capital



15

Snapshot of Australian VC Industry (as of 30 June 2014)

Funds Under Management

No. of Active Fund Managers

No. of Portfolio Companies Held

Investment in FY2014

AUD 2.2 billion 26 269 AUD 516 million Source: AVCAL

Number of Investee Companies in Australian VC and PE (as of 30 June 2015)

Venture Capital Private Equity Total

Number of high-tech companies 210 34 239

Number of cleantech companies 22 19 40

Total 270 345 606 Source: AVCAL

1. High-tech: A company with exclusive ownership of certain intellectual property rights such as design rights, patents, copyrights, etc. which are critical elements in adding value to the products and business of a company and which are being developed in-house by the company’s

permanent staff. 2. Cleantech: Companies or investments focused on products or services aimed at reducing energy consumption, pollution or waste.

Super Funds the Biggest Contributor to VC

Fundraising

VC commitments from Australian superannuation funds accounted for 54% of

total VC fundraising in 2015, followed by private individuals and corporates. A

large proportion of this was attributable to Brandon Capital Partners’ MRCF3

fund, which raised capital from super funds AustralianSuper (AUS), HESTA (AUS),

Statewide Super (AUS), and Hostplus (AUS).

According to a report by the Australian Bureau of Statistics (ABS), there was a

total of AUD 18,514 million committed to Venture Capital and Later Stage

Private Equity (VC & LSPE) investment vehicles as of 30 June 2014. Of this, super

funds were the largest source of funds in terms of drawdowns for VC & LSPE

investment vehicles, with a contribution of 53%.



16

Source: ABS

Note: Percentages have been rounded up.

VC Investments in Australia Concentrated at

Early Stage Funding

In 2015, the majority of VC investments were in early-stage funding (seed,

startup and other early stage), with only 16% of companies invested in at the

later VC stage. Close to half of the total VC dollars invested in FY2015 was in

early stage rounds (seed and Series A), with Series A rounds accounting for 40%.

In terms of the number of investments, seed and Series A rounds made up 71%

of the total, with the number dropping sharply for Series B and above, indicating

a large gap between early and later stage VC investment.

VC Investments in 2015 by Stage of Investee Company

Stage of Investee Company

Amount (AUD million)

% of Total No. of Companies

% of Total

Seed 19.34 9% 30 31%

Startup 130.80 58% 38 39%

Other early stage 19.44 9% 12 12%

Late stage VC 48.08 21% 15 15%

Other VC 6.22 3% 3 3%

Total VC 223.89 100% 98 100% Source: AVCAL

Note: Stages with fewer than three companies receiving investments have been grouped into "Other". Percentage figures have been rounded off to the nearest whole percent, and refer to the percentage of either total PE or VC investment.

19

53

7 75 2

7

0

10

20

30

40

50

60

2014

% o

f to

tal i

nve

stm

ent

in V

C &

LSP

E ve

hic

les

Drawdown from Investors by Investor Type (2013-14)

All Non-Residents Super FundsTrading Enterprises GovernmentTrusts ADIs and Life Insurance Offices



17

ICT Most Popular Sector for VC Investment,

Followed by Healthcare

A total of AUD 144 million was invested in the ICT sector in 2015, which made up

two thirds of the total investment value for the year. The sector was also

significant in terms of the number of startups receiving VC investment— 49

startups in the ICT space received VC investment in 2015, representing over half

of the yearly total.

Due to a lack of specialist funds, investment in the life sciences/biotech sector

witnessed a decrease both in value terms and in terms of the number of life

sciences startups receiving VC investment. These fell by 19% to 29 and by 27% to

AUD 46 million respectively. The majority of VC investment in life sciences

companies in 2015 was comprised of follow-on rounds for existing portfolio

companies.

In terms of investor source by region, although domestic ICT startups have seen

increased interest from international VC firms in recent years, investment in life

sciences companies continues to come purely from local VC firms.

Source: AVCAL

64.0%

21.0%

7.0%

3.0%4.0% 1.0%

FY2015 Sector Breakdown of VC Investments by Value

ICT Healthcare and Life Sciences

Consumer Products, Services and Retail Business and Industrial Products and Services

Energy and Environment Other



18

Source: AVCAL

Note: Sectors with fewer than three companies receiving investments have been grouped into “Other”.

Sydney Biggest Region for VC Activity due to

Flourishing Startup Ecosystem

According to data from StartupAUS, there are an estimated 1,200 tech startups

in Australia, accounting for 0.06% of all Australian businesses. A 2014 survey

found that 48% of Australian startups were in the state of New South Wales

(NSW), followed by 18% in Queensland and 13% in Victoria.

Sydney, located in the state of NSW, has the biggest tech startup ecosystem in

Australia. It is 55% larger than the next biggest, Melbourne (located in the state

of Victoria). Over 64% of Australia’s tech startups and up to 15% of Australian

workers employed in the ICT sector are located in the Sydney Government Area,

since the region hosts a large number of tech/finance/telecommunications

companies. Due to the strong concentration of startups in the area, there are

also a number of incubators and accelerators such as telecommunications giant

Optus’ Innov8 (AUS), ANZ’s InnovyzSTART (AUS), and BlueChilli (AUS).

52.0%

31.0%

8.0%

3.0%3.0% 3.0%

FY2015 Sector Breakdown of VC Investment by Number of Companies

ICT Healthcare and Life Sciences

Consumer Products, Services and Retail Business and Industrial Products and Services

Energy and Environment Other



19

Australian Venture Capital Investment in 2015 by Region

Location Amount (AUD million)

% of Total No. of Companies

% of Total

Australia 166.94 75% 70 74%

New South Wales 106.22 47% 30 32%

Victoria 40.45 18% 25 27%

Queensland 18.65 8% 9 10%

Western Australia - - - -

South Australia - - - -

ACT 1.57 1% 5 5%

Other 0.05 0% 1 1%

North America 49.56 22% 20 21%

Asia 7.06 3% 3 3%

Other 0.33 0% 1 1%

Total investment 223.89 100% 94 100%

Source: AVCAL Note: Locations with fewer than three companies receiving investments or for companies whose headquarter location have not been disclosed by

the VC or PE firm have been aggregated into "Other".

Trade Sales Account for Majority of VC

Divestments in 2015

In FY2015, the total number of companies exited by PE and VC fell to 51 from 70

in FY2014 and 68 in FY2013. Trade sales accounted for the majority of VC exits.

One such exit was the sale of Spinifex Pharmaceuticals, backed by GBS Venture

Partners (AUS), Brandon Capital Partners and Uniseed (AUS), to Swiss-based

Novartis for an upfront payment of USD 200 million. Meanwhile, non-trade sales

for VC included the listing of 3P Learning (AUS), an online education provider

backed by Insight Venture Partners (USA), on the ASX in July 2014.



20

VC Divestments by Exit Route in 2015

Type of Divestment Divestment at Cost (AUD million)

No. of Companies

Divestment by trade sale 69.73 10

Divestment on flotation (IPO) - -

Sale of equity post-flotation - -

Secondary sale - -

Other 26.77 4

Total divestments 96.49 14

Source: AVCAL

Healthcare and Life Sciences Biggest Contributor

in Terms of Amount Divested at Cost

The healthcare and life sciences sector was the biggest contributor in terms of

amount divested at cost in 2015, contributing a 38% share. This was generally

attributed to the listings of Healthscope (AUS), with an IPO issue size of over

AUD 2 billion, and Estia Health (AUS), with an IPO of AUD 725 million.

Meanwhile, the business and industrial products and services sector contributed

a roughly 25% share both in terms of total divested companies and the total

amount divested at cost. One significant exit in this sector was the sell-down of

Pacific Equity Partners’ (AUS) post-IPO stake in credit reporting agency Veda

(AUS), which listed on the ASX in December 2013.

Source: AVCAL Note: Sectors with fewer than three companies divested have been grouped into “Other”.

56.0%

7.0%

37.0%

FY2015 Sector Breakdown of VC Divestment by Value

Healthcare and Life Sciences ICT Other

56.0%

7.0%

37.0%

FY2015 Sector Breakdown of VC Divestments by Number of Companies

Healthcare and Life Sciences ICT Other



21

Competitive Trends Several Large-Capital Funds Launched in Recent Years Showing Upswing in VC Industry

Due to the recent push toward investment and government support for the

innovative sector, the Australian VC industry has seen a number of funds

launched in recent years which are notable for their significantly larger pool of

capital compared to past years. This increase in committed capital can be

attributed to factors such as a rise in investment from offshore investors as well

as renewed interest from superannuation funds in the VC industry.

In 2014, USA-based Insight Venture Partners made an AUD 266 million

investment in Campaign Monitor (AUS), a Sydney-based email marketing

campaign developer. This was the largest ever single VC investment in an

Australian technology company, reflecting the increased interest from foreign

VC investors in recent years. Further, offshore investors accounted for 44% of

the announced deal value in FY2015 compared to 36% in FY2014.

Likewise, with the opening up of super funds into the VC market, 2015 saw the

launch of three AUD 200 million funds backed with investment from a

combination of private investors and superannuation players. These were

Blackbird Ventures’ second tech fund, backed by super funds First State Super

(AUS) and Hostplus Super; Brandon Capital Partners’ Medical Research

Commercialisation Fund 3 (MRCF3), backed by super funds AustralianSuper,

HESTA, and Statewide Super; and Square Peg Capital’s new venture capital fund,

backed by HNWIs such as billionaire James Packer and several super funds

(presently undisclosed).



22

There has also been increased government support toward the innovative sector,

which has been another contributor to boosting VC investment. For example, in

November 2015, government-owned Australia Post (AUS) announced the 2016

launch of its Innovation Capital Fund, which is expected to grow to an eventual

AUD 100 million. The fund has a special focus on drone technologies.

List of Registered ESVCLPs, AFOFs and VCLPs as of October 2015

Registered ESVCLPs Registered AFOFs Registered VCLPs

AirTree Ventures Partnership (AUS) Arowana Partners Australasian Growth Enterprise Fund II (AUS) Blackbird Ventures BlueChilli Venture Fund (AUS) Blue Sky (AUS) Carnegie Innovation Fund (AUS) Constant Innovation (AUS) Follow the Seed Australia Venture Fund (AUS) OneVentures Innovation Fund (AUS) Reinventure Fund (AUS) Slingshot Venture Fund (AUS) Sydney Angels Sidecar Fund (AUS) Tank Stream Ventures Fund (AUS)

Artesian Venture Capital Fund of Funds (AUS)

Anacacia Capital (AUS) Anchorage Capital Partners Fund (AUS) ANU MTAA Super Venture Capital Partnership (AUS) Archer Capital (AUS) CHAMP Ventures Investments (AUS) Cleantech Australia Fund (AUS) Crescent Capital Partners (AUS) Fulcrum Capital Partners Fund (AUS) Harbert Australian Private Equity Fund (AUS) Innovation Capital Fund (AUS) Jolimont Secondaries Fund (AUS) Lazard Australia Corporate Opportunity Fund (AUS) Next Capital (AUS) Quadrant Private Equity (AUS) Southern Cross Fund (AUS) Starfish Technology Fund (AUS) Wolseley Partners Funds (AUS)

Source: by UZABASE



23

Blackbird Ventures

Blackbird Ventures is a tech startup-focused VC firm founded in 2012. The

company has 2 major funds; the first was launched in 2012, with a total of AUD

30 million backed by 35 investors, the majority of whom are themselves tech

entrepreneurs (including the founders of successful Australian tech startup

Atlassian); and the second in 2015, with a total of AUD 200 million, again from

tech founders in addition to superannuation funds First State Super and

Hostplus.

Blackbird typically takes equity stakes of between 5% and 20% in local startups.

List of Blackbird Ventures’ Investee Companies

Date Investee Company Amount (AUD) Round

July 2015 AffinityLive (AUS) 2 million Seed

April 2015 Bugcrowd (USA) 7 million Series A

November 2014 Dogetipbot (USA) 0.5 million Seed

July 2014 Canva (AUS) 3.6 million Seed

May 2014 Autopilot (AUS) 10 million Series B

December 2013 CoinJar (AUS) 0.5 million Seed

July 2013 Ninja Blocks (AUS) 1 million Seed

March 2013 Canva (AUS) 3 million Seed

Source: CrunchBase



24

Square Peg Capital Square Peg Capital was founded in 2012 by SEEK (AUS) co-founder Paul Bassatt.

The company has a focus on venture and growth stage online and technology

companies, with a geographic focus on companies based in Australia and New

Zealand, South-East Asia and Israel. In 2015, the company opened an AUD 200

million fund with backing from James Packer and other prominent HNWIs, along

with several undisclosed super funds.

List of Square Peg Capital’s Investee Companies


November 2015 Fiverr.com (USA) 60 million Series D (Lead)

June 2015 JethroData (ISR) 8.1 million Series B (Lead)

August 2014 FeedVisor (ISR) 6 million Series A (Lead)

August 2014 ScriptRock (USA) 8.73 million Series A

July 2014 Canva (AUS) 3.6 million Seed

June 2014 School Places (AUS) 2 million Seed

March 2014 Vend (NZL) 20 million Series B

November 2013 ROKT (AUS) 8 million Series A

November 2013 Glide (ISR) 6.5 million Series A

September 2013 goCatch (AUS) 3 million Seed

September 2013 Bugcrowd (USA) 2.05 million Venture

July 2013 Ninja Blocks (AUS) 1 million Seed

June 2013 Wego (SGP) 17 million Series C

May 2013 Vend (NZL) 6.5 million Venture

May 2013 Booodl (AUS) 2.9 million Seed

March 2013 Glide (ISR) 2 million Seed

March 2013 ImageBrief (USA) 0.7 million Venture

March 2013 Canva (AUS) 3 million Seed

March 2013 CalReply (AUS) 1 million Seed

January 2013 Bellabox (AUS) 1.37 million Series A

November 2012 biNu (AUS) 4.3 million Series A

Source: CrunchBase



25

Brandon Capital Partners

Brandon Capital Partners was founded in 2007 with a focus in the life sciences

space. Brandon Capital manages three funds: Brandon Biosciences Fund 1,

established in 2008 with a total of AUD 50 million; the Medical Research

Commercialisation Fund (MRCF) Trust 1, established in 2007 with AUD 11.1

million; the MRCF IIF, established in 2011 with AUD 40 million; and the MRCF3

Fund, established in 2015 with AUD 200 million. The MRCF3 is backed by super

funds AustralianSuper and Statewide Super, HESTA, and Hostplus. The fund aims

to ensure greater commercialisation of Australian medical technology and is

Australia’s biggest life sciences fund to date. Around AUD 50 million of the fund

will be put into 20-30 early seed stage investments in biotech or medical device

startups, with the remaining AUD 150 million set aside for later-stage

investments.

List of Brandon Capital Partners’ Investee Companies


June 2015 Global Kinetics Corporation (AUS)

13.3 million Venture

May 2015 OccuRx (AUS) 6.5 million Venture

April 2014 Heart Metabolics (IRL) 20 million Series A

April 2014 Spinifex Pharmaceuticals (AUS)

45 million Series C

December 2013 Auspherix (AUS) 1 million Seed

August 2011 Spinifex Pharmaceuticals (AUS)

19 million Series B

April 2010 Signostics (AUS) 5 million Series B

September 2009 Signostics (AUS) 4 million Series A

Source: CrunchBase



26

Artesian Capital Management

Artesian Capital Management (AUS) is an alternative investment management

company spun out of ANZ Banking Group’s capital markets business in 2004,

with a focus on early stage ventures in Australia and China. The company is

backed by ANZ Private Equity and runs a number of smaller funds including

Slingshot, Sydney Angels Sidecar Fund, iAccelerate (AUS), BlueChilli and Ilab

(AUS).

VentureCrowd

VentureCrowd was launched in 2013 and has grown to become one of

Australia’s most prominent equity crowdfunding platforms. To date, companies

have raised more than AUD 10 million using the VentureCrowd platform.

Starfish Ventures

Starfish Ventures (AUS) was established in 2001 with a focus on high-growth ICT,

life sciences, and clean tech companies. The company has raised three funds:

the PreSeed Fund and Technology Funds I and II, amounting to a total of over

AUD 400 million. The team has invested in over 60 companies with 14 trade

sales and IPOs, including listings on the NASDAQ, AIM and ASX.

GBS Venture Partners

GBS Venture Partners was established in 1996, with a focus on early-stage

investing in the healthcare, biotech and life sciences spaces. The company has

raised over AUD 400 million across its five funds: The Australian Bioscience Trust,

GBS Bioventures II, The Genesis Fund, GBS Bioventures III, and GBS Bioventures

IV. The team has invested in a number of successful medtech startups, including

Spinifex (clinical stage drug development) and Pharmaxis (AUS)

(pharmaceuticals).


venture capital investments - australia

Economy & Finance