Australian Venture Capital
                     Association Limited
                                           Yearbook 20...
Australian Venture Capital
         Association Limited

                2002 Yearbook



An Analysis of Australian Ventur...
Australian Venture Capital Association Ltd.          Thomson Venture Economics

Level 5, 88 Phillip Street                ...
About AVCAL

The Australian Venture Capital Association Limited (AVCAL) is the national association that represents the
ve...
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Table of Contents

  Letter from the Australian Venture Capital Association Ltd.......7

 Milestones in Australian Venture...
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15 April 2003

Dear Reader,
In December 2002, Federal Parliament passed the Venture Capital Limited Partnership (VCLP) leg...
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Australian Venture Capital Association Limited - 2002 Yearbook




Milestones in the Australian Venture Capital Industry

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Australian Venture Capital Association Limited - 2002 Yearbook




1992                                                   ...
Australian Venture Capital Association Limited - 2002 Yearbook




                  Australian Nobel Laureates in Science...
Australian Venture Capital Association Limited - 2002 Yearbook



of cholesterol. Born in Sydney in 1917, Cornforth
gradua...
Australian Venture Capital Association Limited - 2002 Yearbook




Some Australian Firsts in Science and Innovation
1838  ...
Australian Venture Capital Association Limited - 2002 Yearbook


1925                                                     ...
Australian Venture Capital Association Limited - 2002 Yearbook


1985                                                     ...
Australian Venture Capital Association Limited - 2002 Yearbook




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Australian Venture Capital Association Limited - 2002 Yearbook




             A New Era for Australian Venture Capital
M...
Australian Venture Capital Association Limited - 2002 Yearbook


Those who study the Australian economy have             b...
Australian Venture Capital Association Limited - 2002 Yearbook




                      How Australia’s New Rules Work

I...
Australian Venture Capital Association Limited - 2002 Yearbook



taxable, that hold less than ten per cent of the funds  ...
Australian Venture Capital Association Limited - 2002 Yearbook



The result of all these efforts is that funds have much
...
Australian Venture Capital Association Limited - 2002 Yearbook




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Australian Venture Capital Association Limited - 2002 Yearbook




                     A Better Outlook for the Economy
A...
Australian Venture Capital Association Limited - 2002 Yearbook



      investment are manufacturing, property and        ...
Australian Venture Capital Association Limited - 2002 Yearbook




                                      Building up Biote...
Australian Venture Capital Association Limited - 2002 Yearbook



Australian capital is increasingly being used to get lo-...
Australian Venture Capital Association Limited - 2002 Yearbook




                                Technology Leadership

...
Australian Venture Capital Association Limited - 2002 Yearbook




ture Capital, Telecom Venture Group, Temasek Hold- ·   ...
Australian Venture Capital Association Limited - 2002 Yearbook




     Australian Venture Capital in 2002: A Perspective
...
Australian Venture Capital Association Limited - 2002 Yearbook




lian venture capital investors when compared with
their...
Australian Venture Capital Association Limited - 2002 Yearbook




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Australian Venture Capital Association Limited - 2002 Yearbook




                                 Average Fund Size In 2...
Australian Venture Capital Association Limited - 2002 Yearbook




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Australian Venture Capital Association Limited - 2002 Yearbook



                                   Number of Funds by St...
Australian Venture Capital Association Limited - 2002 Yearbook




                               Average Size of Funds by...
Australian Venture Capital Association Limited - 2002 Yearbook




                                                  Numbe...
Australian Venture Capital Association Limited - 2002 Yearbook




                                                   Numb...
Australian Venture Capital Association Limited - 2002 Yearbook



                               Sources of Capital Under
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Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
Australian Venture Capital Association Limited
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Australian Venture Capital Association Limited

  1. 1. Australian Venture Capital Association Limited Yearbook 2002 Industry statistics for the year ending June 30, 2002 Prepared by
  2. 2. Australian Venture Capital Association Limited 2002 Yearbook An Analysis of Australian Venture Capital Prepared by Thomson Venture Economics on behalf of the Australian Venture Capital Association Limited Note: All figures are in $AUD unless otherwise stated.
  3. 3. Australian Venture Capital Association Ltd. Thomson Venture Economics Level 5, 88 Phillip Street 10/F Gloucester Tower Sydney, NSW 2000 The Landmark, 11 Pedder Street Australia Central Hong Kong Phone: (852) 2522-4159 Phone: (612) 9251-3888 Fax: (852) 2530-2920 Fax: (612) 9251-3808 http://www.ventureeconomics.com http://www.avcal.com.au Asia team Chief Executive: Business Development Manager: Andrew Green Toh Lark Lim andrew.green@avcal.com.au (852) 2533-5472 tohlark.lim@tfn.com Chairman: Justin Ryan Research Manager: justinryan@catalystinvest.com.au Sol Flores (632) 878-5862 Deputy Chairman: sol.flores@tfn.com Patrick Elliot Patrick.Elliott@macquarie.com Research Team: Lia Castillo, Ana Chiong, Richie Fernandez, Council Representatives: Carlo Gilladoga, Liezl Navarro, Jonnel Porteza, Roger Buckeridge, Allen & Buckeridge Pty Ltd Aldrin Reyes, Peter Chapman, Accretion Investment Mgt Pty Ltd Rajeev Dhawan, Colonial First State Private Equity Peter Dowding, Deutsche Bank – DB Capital Partners Peter Gold, GS Private Equity Pty Ltd Chris Golis, Nanyang Management Pty Ltd Quentin Jones, Equity Partners J.P. Kaumeyer, ABN AMRO Capital Investment Julian Knights, Ironbridge Capital John Murray, Technology Venture Partners Pty Ltd Michael Panaccio, Starfish Ventures Pty Ltd Greg Smith, AMP Henderson Global Investors Su-Ming Wong, CHAMP Ventures Pty Ltd
  4. 4. About AVCAL The Australian Venture Capital Association Limited (AVCAL) is the national association that represents the venture capital industry’s participants, promotes the industry and encourages investment in growing business enterprises. Membership comprises venture capital firms, investors, banks, incubators, angels, corporate advisors, accoun- tants, lawyers, government bodies, academic institutions and other service providers to the industry. AVCAL’s venture capital members represent most of the active venture capital firms. These firms provide capital for seed and pre-seed ventures, early stage companies, later stage expansion, and finance for manage- ment buyouts and buy-ins of established companies. There are 51 investor members with $6 billion invested or available for investment. About Thomson Venture Economics Thomson Venture Economics, a Thomson Financial company, is the foremost information provider for equity professionals worldwide. Venture Economics offers an unparalleled range of products from directories to conferences, journals, newsletters, research reports, and the Venture Expert™ database. For over 35 years, Venture Economics has been tracking the venture capital and buyouts industry. Since 1961, it has been a recognized source for comprehensive analysis of investment activity and performance of the private equity industry. Venture Economics maintains a long-standing relationship within the private equity investment com- munity, in-depth industry knowledge, and proprietary research techniques. Private equity managers and institutional investors alike consider Venture Economics information to be the industry standard. For more information about Venture Economics, please visit www.ventureeconomics.com. About Thomson Financial Thomson Financial is a US$2 billion provider of information and technology solutions to the worldwide commu- nity. Through the widest range of products and services in the industry, Thomson Financial helps clients in more than 70 countries make better decisions, be more productive and achieve superior results. Thomson Financial is part of the Thomson Corporation (www.thomson.com), a leading provider of integrated information solutions to business and professional markets worldwide. The Corporation reported 2001 revenues of US$7.2 billion and its common shares are listed on the New York and Toronto stock exchanges
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  6. 6. Table of Contents Letter from the Australian Venture Capital Association Ltd.......7 Milestones in Australian Venture Capital Industry......................9 Australian Nobel Laureates in Science.....................................11 Some Australian Firsts in Science and Innovation.....................13 A New Era for Australian Venture Capital................................17 How Australia’s New Rules Will Work.....................................19 A Better Outlook for the Economy............................................23 Building up Biotech..................................................................25 Technology Leadership.............................................................27 Australian Venture Capital in 2002:A Perspective.......................29 Australian Fund Performance.....................................................47 Glossary of Terms.....................................................................57 Acknowledgement of Survey Respondents. ..............................61
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  8. 8. 15 April 2003 Dear Reader, In December 2002, Federal Parliament passed the Venture Capital Limited Partnership (VCLP) legislation, making 2002 a momentous year for the industry. The VCLP legislation gives VC Limited Partnerships flow through status for tax purposes, provides CGT exemption for a wide class of foreign investors, and creates a strong alignment of interests between the GP and the LPs, by providing that the carried interest shall be taxed in the hands of the GP at the discount CGT rate of 24.25%. Funds of Funds can also benefit from the same structure. The VCLP legislation aligns Australia with world’s best practice. AVCAL acknowledges the leadership and courage of the Australian Government in delivering this legislation, and acknowledges the magnanimity of the Federal Labor Opposition and the Australian Democrats for their support of the legislation in the Senate. The numbers published in this, the 2002 Annual Report, are the result of the 4th annual Thomson Venture Economics survey. Readers should be aware that these numbers are generated by Thomson Venture Economics on the basis of raw data submitted by AVCAL members. While AVCAL requires its members to complete the survey, AVCAL is not able to verify the accuracy of the raw data submitted to Thomson Venture Economics. In some circumstances therefore, there could be statistical anomalies due to incomplete or unverifiable data. The good news is that the next AVCAL / Thomson Venture Economics survey will be conducted jointly with the Austra- lian Bureau of Statistics, the Federal Government’s Statistician. This will ensure that the quality of the raw data is of the highest order, as compliance with the Government survey is required by law. The Australian economy continues to be a stand-out global performer, consistently recording GDP growth of more than 3.5% for each of the last 5 years. There are five reasons why Australia is now top of mind with global investors: 1. Sophisticated private equity infrastructure. 2. Integrity - both Corporate & Government. 3. Transparency – AVCAL moving to adopt world’s best practice Valuation Guidelines during calendar 2003. 4. Critical mass of funds under management. 5. World class entrepreneurship skills. AVCAL’s 9th annual conference staged in October 2002 attracted a capacity audience of 550 delegates, and featured prominent international speakers including Herbert Mann (TIAA-CREF), Brooks Zug (HarbourVest), and Jon Moulton (Alchemy Partners). The Australian venture capital industry continues to build upon solid foundations, and presents a compelling case to investors looking for solid returns. We extend our thanks to Jesse Reyes and his team at Thomson Venture Economics for their continuing support. Yours sincerely, ANDREW GREEN Chief Executive
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  10. 10. Australian Venture Capital Association Limited - 2002 Yearbook Milestones in the Australian Venture Capital Industry 1850 1975 Formation of The University of Sydney, followed by Federal Government reduces international tariffs by formation of major independent universities in each 25 per cent, in an endorsement of open international state. trade and investment. 1871 1984 Sydney Stock Exchange formed. First step in creation Federal Government launches Management and In- of national, open financial markets. vestment Companies (MIC) program, creating new vehicles for risk capital. Over the next seven years, 1901 MIC funds raise approximately $400 million. Federation of Australia. Creation of a stable democ- racy, unified economy and independent legal system. 1984 Deregulation of the Australian financial sector and 1916 floating of the Australian dollar, further embracing Advisory Council of Science and Industry created, market economics over government regulations and the precursor to today’s science and research fixed currency exchange rates. organisations. 1985 1937 Federal Government introduces substantial tax in- Formation of the Australian Associated Stock Ex- centives on research and development. changes. 1987 1949 Formation of the national Australian Stock Exchange Creation of the CSIRO, the Commonwealth Scien- (ASX), unifying six state stock exchanges. tific and Industrial Research Organisation. 1990s 1970s Arrival of large corporate investors into the risk capi- Development of state investment corporations to di- tal sector, including Acer and Intel. rect investment into growth sectors. 1990 1970 First Cooperative Research Centres launched to de- Formation of the first Australian venture capital fund: velop and commercialise research in Australia’s uni- International Venture Corporation. versities. In subsequent years, 67 CRCs formed. 1972 1992 Formation of the second Australian venture capital Federal Government launches Pooled Development fund: Enterprise Management of Australia Corpora- Funds to replace MIC program. In the subsequent tion. six years, PDFs invest $155 million in 147 compa- nies. Thomson Venture Economics 9
  11. 11. Australian Venture Capital Association Limited - 2002 Yearbook 1992 1999 Creation of the Australian Venture Capital Associa- The Australian Venture Capital Association and re- tion Limited, AVCAL. In the following year, 17 ven- search company Thomson Financial/Venture Econom- ture funds manage $507 million. ics launch a cooperative effort to prepare regular re- ports and statistics on the Australian VC sector. 1993 Australian Technology Group formed by Federal 2000 Government to invest in early stage technology com- Ten business incubators receive funding from Federal panies. Government under Building on IT Strengths (BITS) program, which will channel $158 million into tech- 1997 nology and telecommunications development. Innovation Investment Fund program launched to channel $130 million of government funding into new 2000 funds. Fifty-five newly created funds formed. A record $1.0 billion raised in 12 months to June 30. 1998 Strengthening role for angel investors, with the for- 2001 mation of several angel investor networks. Federal Government announces $2.9 billion innova- tion action plan to fund new initiatives in education, 1998 research and development. Includes $40 million in AVCAL records growth of venture capital sector to funding for the extension of the COMET program and 40 funds with $2.7 billion in funds under manage- $78.7 million for a pre-seed fund for universities and ment. public sector research agencies. 1999 2002 Federal Government introduces Commercialising Federal government legislates capital gains tax exemp- Emerging Technologies (COMET) program to pro- tion for certain foreign investors, including funds of vide $30 million in funding for individuals and early- funds, that invest in Venture Capital Limited Partner- stage growth firms to commercialise their work. ships. 1999 Federal Government introduces major capital gains tax reform, roll-over relief, and zero taxation for US and certain other Pension Funds. 10 Thomson Venture Economics
  12. 12. Australian Venture Capital Association Limited - 2002 Yearbook Australian Nobel Laureates in Science Seven Australian scientists have been awarded the Nobel Prize for their research in areas such as chemistry, medicine and physics. Sir William Lawrence Bragg Sir John Carew Eccles Nobel Prize in Physics, 1915, for the analysis of Nobel Prize in Physiology or Medicine, 1963, for crystal structures by means of X-rays. Shared the discoveries related to nerve cell membrane. Shared award with his father, Sir William Henry Bragg. the award with Alan Lloyd Hodgkin and Andrew Fielding Huxley. Born in Adelaide in 1890, William Lawrence Bragg remains the youngest person ever to win a Nobel Prize. Eccles led much of the research into synaptic From 1912 to 1914 he worked with his father on the transmission in the central nervous system. By development of X-rays, leading to the publication of discovering the way electric charges are conducted X-rays and Crystal Structure in 1915. from one cell to another, he advanced the treatment of nervous diseases and the understanding of the kidney, Sir Howard Walter Florey heart and brain. Eccles was born in Melbourne in 1903. From 1952 to 1966 he was Professor of Physiology Nobel Prize in Physiology or Medicine, 1945, for at the Australian National University. the discovery of penicillin. Shared the award with Sir Alexander Fleming and Ernst Boris Chain. Sir Bernard Katz Florey, born in Adelaide in 1898, pioneered research Nobel Prize in Physiology or Medicine, 1970, for into the use of penicillin to treat disease during the late discoveries relating to chemical transmission of 1930s. His team’s report in 1940 described the way nerve impulses. penicillin could help to kill sensitive germs in the living body, a breakthrough that was vital in treating wounds Katz was born in Leipzig, Germany, in 1911. He during World War II. became a naturalized Australian in 1941. In 1955, following service in the Australian army during WW2, Sir Frank Macfarlane Burnet he joined the National Institute of Mental Health, where he studied the nerve tranmission. Nobel Prize in Physiology or Medicine, 1960, for the discovery of acquired immunological tolerance. Sir John Warcup Cornforth Shared the award with Peter Brian Medawar. Nobel Prize in Chemistry, 1975, for his work on Burnet pioneered several areas of research ranging the stereochemistry of enzyme-catalysed reactions. from tissue transplants to the identification of viruses Shared the award with Vladimir Prelog. and the practice of culturing viruses in living chick embryos. Born in Traralgon, Victoria, in 1899, Burnet Deaf for most of his life, Cornforth overcame his researched at the Walter and Eliza Hall Institute from disability to conduct leading research in chemistry. After 1923 and remained there throughout his career. World War II, he researched the way enzymes catalysed change in organic compounds, leading to studies of the structure of steroids and the biosynthesis Thomson Venture Economics 11
  13. 13. Australian Venture Capital Association Limited - 2002 Yearbook of cholesterol. Born in Sydney in 1917, Cornforth graduated from Sydney University with first-class honours and a University medal despite being unable to hear lectures. Professor Peter C. Doherty Nobel Prize in Physiology or Medicine, 1996, for discoveries on the immune defence of cells. Shared with Rolf M. Zinkernagel. Doherty helped to discover how an immune system distinguishes virus-infected cells from normal cells, a breakthrough that led to a better understanding of the mechanisms used by the human immune system at the cellular level. This research was begun in the 1970s at the John Curtin School of Medical Research in Canberra. Doherty was appointed to the Wistar Institute in Philadelphia from 1975-82, to the John Curtin School again from 1982-88 and to St Jude Children’s Research Hospital in Tennessee in 1988. 12 Thomson Venture Economics
  14. 14. Australian Venture Capital Association Limited - 2002 Yearbook Some Australian Firsts in Science and Innovation 1838 1897 Pre-paid postage World first issued by NSW Post Differential gears David Shearer, South Australia, Office. built a steam car with a differential inside left rear 1843 wheel hub. Grain stripper John Ridley & John Bull, South 1898 Australia. Strips grain head from stalk and delivers it Teleprinter Donald Murray, Sydney, invented the into a bin for winnowing. teleprinter for recording messages onto a tape. 1850 1903 Refrigeration plant Geelong publisher, James Froth flotation process Charles Potter and Harrison, built world’s first mechanical refrigeration Guillaume Delprat, NSW, developed a process for plant. separating minerals from rock by flotation. 1876 1905 Stump-jump plough Robert Bowyer Smith from Thrust bearing A.G.M. Michell invented the tilt- South Australia’s Mallee country developed a pad thrust bearing which revolutionised thrust plough that could jump over stumps and stones, technology. instead of being caught and damaged by them. 1906 1882 Feature film The world’s first feature length film, Stripper harvester Conceived by Hugh Victor more than one hour long, The Story of the Kelly McKay from Drummartin, Victoria when just 17 Gang was made in Australia and screened in years old. Harvesting machine that can strip, thresh, Melbourne. winnow and bag grain in one continuous operation. 1906 1884 Surf-lifesaving reel Invented by Lyster Ormsby, Box kite Sydney aeronautical inventor, Lawrence first Captain of the Bondi Surf Lifesaving Club. First Hargrave, conducted experimental flights with box person to be rescued was Charlie Smith in 1907. He kites, pioneering the way for heavier than air flight. later became the famous aviator, Sir Charles 1885 Kingsford Smith. Telephane Henry Sutton, Victoria. Forerunner of 1907 the television. Xerography Professor O.U. Vonwiller at The 1886 University of Sydney developed a dry-copy imaging Windmill James Alston built the first all-steel process, the forerunner of Xerox copying. circular windmill as a source of power for lifting 1910 underground water to the surface Hume pipe Walter Hume invented the spun con- 1889 crete pipe, made using a centrifugal process which Electric drill Arthur James Arnot from Melbourne expels the water and makes a dense, strong pipe. patented the world’s first electric drill. 1913 1889 Automatic totalisator George Julius invented a Radial rotary engine Howard Hargrave devel- system to display odds and automatically calculate oped an engine with revolving cylinders attached to dividends for race meetings. propellor blades and powered by compressed air. It 1924 played a major part in the development of aviation in Car radio The first car radio was fitted to an Europe. Australian car built by Kellys Motors in New South Wales. Thomson Venture Economics 13
  15. 15. Australian Venture Capital Association Limited - 2002 Yearbook 1925 1958 Electric record changing salonola Tasmanian Eric Black box flight recorder Dr David Warren from Waterworth invented the stepped centre spindle Melbourne invented the black box voice and later used in record changers worldwide. instrument data recorder. 1925 1965 Pedal wireless Alfred Traeger from Adelaide Inflatable aircraft escape slide Jack Grant from invented a simple radio transceiver powered by a Qantas invented the inflatable aircraft escape slide, pedal generator. which doubles as a raft. 1925 1965 Latex gloves Developed by Eric Ansell. His Wine cask Angoves in South Australia developed company introduced disposable medical gloves in an airless-flow method of packaging wine in a plastic 1964. Now world’s largest producer of latex gloves. bag. Later fitted with dispensing tap by Wynns in 1928 1969. Flying doctor service Dr Kenyon Welsh and pilot, 1970 Arthur Affleck began operating the first flying doctor Variable ratio rack and pinion steering Austra- service out of Cloncurry, Queensland. lian engineer Arthur Bishop developed variable ratio 1930 rack and pinion steering now used extensively in Letter sorting machine Built by A B Corbett, an world automobiles. engineer with Post Master General’s Department in 1971 Sydney. Interscan Invented by Brian O’Keefe and Dr Paul 1934 Wild, the microwave landing guidance system is now Utility vehicle The utility vehicle, with a front like a the international standard for instrument approach car and a rear like a truck was designed by Lewis landing. Brandt at the Ford Motor Company in Geelong, 1979 Victoria. Bionic Ear Professor Graeme Clark from the 1935 University of Melbourne developed the Cochlear Penicillin Sir Howard Florey grew the mould implant, a device which restores a measure of detected by Fleming, extracted the penicillin drug, hearing to the profoundly deaf. refined and tested it. 1980 1946 Wave-piercing catamarans Developed by Phillip Castors George Shepherd invented the dome Hercus and Robert Clifford of Incat in Tasmania. shaped castor with an oil trap to keep the working High speed passenger ferries more efficient and parts permanently lubricated. comfortable. 1952 1981 Atomic absorption spectrophotometer Sir Alan Earth leakage circuit breaker. Developed by Walsh of the CSIRO invented a precision instrument Adelaide based Gerard Industries. for the high-speed analysis of trace quantities of 1984 metallic elements in solids or liquids. Frozen embryo baby The first frozen embryo baby 1953 was born at the Queen Victoria Medical Centre in Solar hot water Developed by R N Morse at Melbourne. CSIRO in Victoria. 1984 1956 Continuous self-cleaning micro filtration A T-VASIS visual landing system Developed by group of engineers and scientists led by Dr Doug Aeronautical Research Laboratory, a set of light Ford invented continuous self-cleaning micro patterns on either side of the runway shows if the filtration. plane is on the correct landing approach. 14 Thomson Venture Economics
  16. 16. Australian Venture Capital Association Limited - 2002 Yearbook 1985 1994 Gene shears CSIRO scientists, Wayne Gerlach Non-invasive TB test The world’s first reliable and Jim Haseloff discovered a way of preventing non-invasive TB test that avoids possible adverse harmful genes in plants and animals from doing reactions was developed by scientists in Victoria. their work. 1997 1985 Dr Bruce Gray founds SIRTeX Medical – a Solar Cells Professor Martin Green breaks the company developing the use of Yttrium impregnated elusive 20% efficiency barrier for silicon solar cells micro spheres for the treatment of liver cancer. 1988 1999 Polymer bank notes The CSIRO developed the Kinetic suspension system Reduces pitch and roll world’s first plastic-laminated bank notes, which while keeping all four wheels on the ground as provide enhanced security and longer life. vehicle traverses rough terrain. Company acquired 1992 by Tenneco (Monroe springs & shock absorbers) Multi-focal contact lens The world’s first multi- 1999 focal contact lens was invented by optical research Relenza anti-flu drug approved for clinical use. scientist, Stephen Newman in Queensland. Based on groundbreaking work by Peter Colman, 1993 then head of CSIRO Bimolecular Engineering in Snoring-prevention Res-Med developed a Melbourne, and Graeme Laver from the Australian machine that pressurizes the airways, keeping the National University. Using X-Ray crystallography, breathing passage open. Laver and Colman studied in minute detail an 1994 enzyme on the surface of the flu virus and worked Photonics / fiber optics – Simon Poole devel- out a way to disable the enzyme, preventing the flu oped a technique that enabled engineers to over- virus from taking hold in the body. Laver and write a number of different fiber gratings with Colman shared the 1996 Australia Prize for their different refraction indeces on top of one another, outstanding scientific work. in the same section of fiber. It also enabled the 2000 inclusion of WDM functions. His company, Indx, CSIRO’s wireless local area network system was acquired by JDS Uniphase, and would patent (US Patent 5,487,069) is at the core of the spearhead Uniphase’s drive to bring the all-optical IEEE802.11a standard for high-speed wireless local dream into networks around the globe. area networks. This patent describes how to over- come multipath effects that arise when transmitting wireless data at high-speed in indoor environments. The patent, and technology to build a radio modem and medium access controller, was licensed to Sydney start up Radiata Communications Pty Ltd, which was sold during 2000 to Cisco for US$300M. Sources: The Dictionary of Australian Inventions & Discoveries Margaret McPhee Allen & Unwin 1993 The Wizards of Oz Peter Spinks Allen & Unwin 1999 Telecosm George Gilder The Free Press / Simon & Schuster 2000 Thomson Venture Economics 15
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  18. 18. Australian Venture Capital Association Limited - 2002 Yearbook A New Era for Australian Venture Capital Major reforms have reshaped Australia’s venture capital industry, removing barriers that have kept international investors out of one of the world’s strongest-growing economies. The outlook for Australian venture capital remains reforms to the nation’s tax system during 2000 put strong as a result of three factors: the country’s finances in a strong position for the 1. The introduction of worlds best practice future. Venture Capital Limited Partnerships; 2. The ongoing strength of the Australian Australia’s competitive position. The Australian economy, and; dollar remains relatively low against major currencies 3. The venture capital industry’s cautious such as the US dollar and the Euro. Economic approach to investments in private compa- fundamentals encourage export growth, a positive nies in recent years. environment for the growth of new export industries and companies that want to expand into global These factors have meant that the Australian venture markets. capital industry has proven resilient over the past few years. Investment and capital raising, while Ongoing corporate restructuring. Most of subdued in the difficult environment, compares very Australia’s large companies and government enter- favourably with Australia’s offshore counterparts, prises continue to evaluate the best growth options and the industry remains positive about future for their businesses, including the option of spinning prospects. off some divisions as separate companies. The number of management buyouts (MBOs) has grown Now the challenge is for Australian venture capital to and appears likely to continue to grow. identify and support a new generation of successful companies, ranging from young technology startups Investment in research. Australia’s total public to substantial buyout opportunities in established and private expenditure on R&D was around $9 industries. billion in 1998-99. There is more investment on the way. In early 2000, the Australian Government This challenge is all the greater given the volatile launched a series of programs worth $2.9 billion outlook for global markets and the lacklustre over five years to fund more research, including the performance of many of the world’s largest econo- formation of two major research centres in the fields mies. of information technology and biotechnology. Growth factors Government reforms. The Australian Government continues to encourage the growth of private equity Five factors suggest there are grounds for optimism investments in order to fuel new growth across the in Australia. economy. Specific policies have created new funds, reduced onerous taxation rules, commercialised Australia’s strong economic performance. public sector research and provided new opportuni- Australia continues to enjoy steady growth, low ties for investment. inflation and solid national financial management. The Thomson Venture Economics 17
  19. 19. Australian Venture Capital Association Limited - 2002 Yearbook Those who study the Australian economy have bring cochlear implants to market. Its sales for the found positive signs for investment. In November year to June 2001 grew 53 per cent to $220.1 2001, the Organisation for Economic Cooperation million. and Development (OECD) forecast that Australia’s gross domestic product would grow 3.2 per cent in · Indx. This optical networking pioneer was 2002 and 4.0 per cent in 2003. Targets that we founded by Dr Simon Poole to develop new tech- have so far been able to achieve. niques in the manufacture of photonics equipment. Indx was acquired by JDS Uniphase three years ago This broader economic growth will be supported by and its Sydney facility now forms the core of private equity. There is generally more private equity JDSU’s fibre optics product group. available for investment in Australia than ever before, and there is more investment going into a greater · Radiata. Basing its research on work by number of Australian companies than ever before. Australia’s main research body, the Commonwealth Science and Industrial Research Organisation There’s no doubt that several hot sectors – espe- (CSIRO), Radiata devised a new way to connect cially biotech, nanotechnology and information wireless local area networks. The company raised technology – continue to inspire entrepreneurs and its first private equity from Broadcom and Cisco attract capital. However, there is also increasing Systems in 1998 and was acquired by Cisco activity in management buyouts (MBOs) where Systems for $567 million in late 2000. The good businesses can be expanded with an infusion company’s Sydney office is now one of the corner- of capital. stones of Cisco’s wireless networking business. Success stories · ResMed. Formed in 1989, ResMed expanded existing university research to become a Over the years, Australia’s world leading research leading developer of medical devices to treat sleep has become the foundation for many highly success- disordered breathing. It is one of Australia’s greatest ful companies, some of which now form divisions of venture capital success stories, generating good global giants. These success stories help to encour- returns for its early supporters. It is listed on the age new companies to achieve global growth. New York Stock Exchange and is investing in new research and administrative facilities in Sydney. Its · Bishop Technology Group. Bishop revenue grew from $US49.2 million in 1997 to technology is incorporated in 20 per cent of all cars $US155.2 million in the year to June 2001, while its manufactured worldwide each year. Founded by Dr net earnings grew from $US7.5 million to $US11.6 Arthur Bishop, the inventor of the variable ratio million in the same period. steering rack, Bishop Technology remains one of the most advanced developers of steering technology, - Sirtex Medical. Pioneering the treatment of generating annual revenue of $45 million from 350 liver cancer. SIRTeX is developing highly targeted patents held in 17 countries. DaimlerChrysler drug delivery methods for liver cancer through the acquired 30 per cent of the company in August use of Yttrium impregnated microcapsules. The initial 2001. investment in SIRTeX was $3 million, in 1997, providing a nominal valuation of the business of · Cochlear. Based on research in Melbourne about $6 million. SIRTeX listed on the Australian in 1967, Cochlear has come to dominate the global Stock Exchange in 2001. A $271 million takeover market for implantable hearing devices, with three bid was announced in March 2003 – a nearly 70- out of four people with cochlear implants receiving fold increase in business value over six years. Cochlear’s system. The company was the first to 18 Thomson Venture Economics
  20. 20. Australian Venture Capital Association Limited - 2002 Yearbook How Australia’s New Rules Work International investors are some of the biggest winners from Australia’s venture capital reforms. Australian venture capital has been transformed by a institutions that invest less than 10 per cent of a VC new set of rules that overhaul the way private equity LP’s capital will be treated in the same way as a funds operate. The changes are being hailed as a pension fund – investing without incurring capital breakthrough with the potential to attract significant gains tax. investors – particularly international institutions – to Australia’s venture capital industry. The new approach has had an immediate positive impact on the ability of Australian private equity Still, investors understand that the devil is in the managers to attract foreign capital. detail. That is why international investors such as pension funds are investigating the fine print of the “These changes will be enormously beneficial to the Australian reforms. venture capital market in Australia,” said Jesse Reyes, the Vice President of Thomson Venture For those outside Australia, one central reform Economics, the global venture capital research stands out. The overall thrust of the Australian company. Government’s changes is the introduction of a new structure for Australian funds: the venture capital “We’re confident that these international funds of limited partnership, or VC LP. This change brings funds and tax-exempt organisations, which had Australian venture capital into line with the structures previously been reluctant to invest in Australian used in most other countries, making it much easier private equity because of the unfriendly regulatory for international investors to know where they stand. regime in place, will look positively upon the changes that bring Australia into line with the US, the Australia’s new VC LP structure has proven imme- UK and other developed countries,” he said. diately attractive to many kinds of international investors such as pension funds, funds of funds, What makes an investor from outside Australia foundations and endowment funds. eligible for tax-exempt status? There are three groups under which investors can qualify: These entities are now considered to be exempt from capital gains tax on their investments in Austra- 1. Funds or entities that are exempt from tax lian VC LPs, provided the investors are resident in a in their home country, provided that country is on designated country. The list of designated countries Australia’s list of designated countries – the US, the currently includes the US, the UK, Japan, Germany, UK, Japan, Germany, France and Canada. This France and Canada, though there are plans for this group would include pension funds, foundations and list to be extended. endowments. 2. Funds of funds from one of the desig- As well, the changes remove barriers for other nated countries. investors outside Australia. Any individuals or 3. Foreign investors, whether exempt or Thomson Venture Economics 19
  21. 21. Australian Venture Capital Association Limited - 2002 Yearbook taxable, that hold less than ten per cent of the funds · Structure its partnership so that no partner – in an Australian VC LP. and its associates – owns more than 30 per cent of the VC LP, although there may be certain exclusions “The major advantage of the new changes, giving to this. Australian venture capital an LP structure, is that it establishes an internationally recognised investment · Structure its fund with an investment time vehicle that is used throughout the world,” says horizon of 5-15 years. Mark Goldsmith, a partner in the Australian law firm of Gilbert & Tobin. AVCAL and the Australian Government have discussed the importance of a balance between “As a result, investors from outside Australia will be ensuring the integrity of the measures – particularly in familiar with the structure being used, helping to preventing tax-avoidance – and the simplicity of the remove a potential barrier to attracting foreign rules, so that the complexity of the tax code does investment into Australian venture capital funds.” not deter investors. However, there are strict eligibility criteria for AVCAL and its advisors are working on specific Australian funds that want to qualify as LP funds. issues related to the VC LP structure that should This, in turn, has implications for international benefit international investors. Some of these should investors that want to ensure they are investing in also benefit domestic investors. tax-exempt opportunities. There are many issues emerging, including the Some of the details of these reforms are yet to be following: finalised, though there are now some clear guide- lines. To be structured as a VC LP, a fund must: · A better outlook for pension funds. AVCAL is working to ensure that domestic superan- · Limit its investments to unlisted Australian nuation funds investing in venture capital are treated companies or trusts, or to listed Australian compa- in a similar way to pension funds in other countries. nies in the process of delisting. · Encouraging investment from a broader · Invest only in companies when the value of range of countries. The Australian Government has the assets of the company is less than $250 million. created a list of ‘exempt’ countries for private equity investment. Investors from these countries are to be · Not invest in property development, a entitled to the proposed capital gains tax exemp- specified list of finance-related activities, or passive tions. These countries are the US, the UK, Japan, investments that do not involve regular business Germany, France and Canada. AVCAL believes this operations (for instance, where income comes from list should be extended. rent or royalties). · Enabling funds to invest in shares. · Limit its investments to businesses that are AVCAL believes that there is a need to permit primarily based in Australia at the time of the initial investments made by a VC LP in listed companies in investment. certain circumstances. Examples of situations where a VC LP may hold shares in a listed company could · Not invest more than 30 per cent of its be as a consequence of exiting from an investment in committed capital in any single investment. an unlisted company by way of an initial public offering. 20 Thomson Venture Economics
  22. 22. Australian Venture Capital Association Limited - 2002 Yearbook The result of all these efforts is that funds have much stronger incentives to invest in Australia. The Austra- lian Government has made the climate for private equity investment more favourable. There will always be new issues that impact interna- tional funds that wish to explore opportunities in Australia. AVCAL continues to work on specific changes to Australia’s tax and regulatory system in order to encourage new investment. Thomson Venture Economics 21
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  24. 24. Australian Venture Capital Association Limited - 2002 Yearbook A Better Outlook for the Economy Australia’s economy appears set for a $1 billion investment boost from the latest reforms. The reforms to venture capital in Australia appear set · Attract fresh capital. With the removal of to boost not only the private equity industry but the the capital gains tax, the cost of capital in Australian economy in general. venture capital investments will be reduced, and foreign investors will be more likely to One study suggests the new reforms will help attract invest in Australia. An increase in foreign an additional $1 billion in foreign investment into venture capital investment in Australia will see Australia’s venture capital funds. figures double from $1 billion to between $1.7 billion and $2.1 billion, reports Econtech. This study was completed in late 2001 by Econtech, one of Australia’s leading independent economic · Increase capital stock. Econtech estimates consultancies and a specialist in economic modelling, that the stock of venture capital will increase tax consultancy, policy and forecasting. by about 17 per cent or $0.9 billion. This addition will come from the foreign-owned Econtech believes that the venture capital reforms will portion, estimated to nearly double from $1.0 greatly benefit the Australian economy, adding $350 billion to about $1.9 billion. million to Australia’s annual gross domestic product (GDP), including the addition of $120 million to net · Increase GDP. Because venture capital is exports each year. used to expand companies, the changes will add $350 million to Australia’s GDP, according “By increasing the pool of venture capital available in to the Econtech analysis. Consumption will Australia, this change will help to start young compa- increase by about $40 million, investment by nies, revitalise existing companies and create new $190 million (in line with the gain in capital jobs,” said Peter Chapman, the chairman of the stock) and net exports by $120 million. A AVCAL Public Policy Committee and the chief ex- study by Coopers & Lybrand in 1997 found ecutive of Rothschild Australia Capital Investors Lim- companies backed by venture capital reported ited. a 42 per cent growth in sales and a 59 per cent growth in profits, compared to 6 per cent Econtech used a Venture Capital Model (VCM) to growth in sales and 7 per cent growth in profits prepare an analysis of the effects of the new reforms. for top 100 companies. The VCM makes widely-used, long-run assumptions of economic modelling that predicts outcomes that are · Generate industry benefits. The Econtech sustainable. analysis found that increased foreign venture capital investment is likely to have beneficial Analysis derived from this model suggests that the effects across a range of industries. According changes will expand the Australian economy in the fol- to data supplied by the ABS, the industries lowing ways: that presently attract the largest venture capital Thomson Venture Economics 23
  25. 25. Australian Venture Capital Association Limited - 2002 Yearbook investment are manufacturing, property and · Increase Australia’s skill base. Venture business services and communication services, capitalists assume a mentoring role, providing and to a smaller extent, the wholesale and retail management advice and business skills that trade. It follows that these industries will ensure efficient use and allocation of capital to especially benefit from increased foreign increase success rates in their investees. venture capital investment in Australia. · Encourage innovation. In parallel with other With increased venture capital investment in Australia, Federal Government programs, the expansion there will be several flow-on benefits for the economy. of venture capital will make new funds available A rise in capital investment will: to commercialise research and development now underway at universities and research · Create jobs. Venture capital fuels some of institutes. Scientists and new technology the strongest job creation in Australia. developers, deemed ‘too risky’ by Companies backed by venture capital conventional investors, are increasingly achieved 20 per cent annual growth in staff targeted by venture capitalists attracted to their numbers between 1992 and 1996, compared innovations. to 2 per cent annual growth at Australia’s top 100 companies, according to a study by As a result of these efforts, Econtech argues that the Coopers & Lybrand in 1997. This is due in new venture capital limited partnership structure will part to expanding businesses needing an ever- have wide-ranging positive impacts for the venture increasing number of employees to support capital industry in Australia and for the general their growth. economy. The reforms are expected to nearly double the level of overseas investment and generate benefits across multiple industries. Higher employment levels, an expanded skill base and increased innovation will all benefit Australia’s living standards in the long term. 24 Thomson Venture Economics
  26. 26. Australian Venture Capital Association Limited - 2002 Yearbook Building up Biotech An earlier generation of industry pioneers has cleared the way for Australia’s emerging biotech leaders. Australia’s life sciences industry is investing heavily in cultural biotechnology and with Shimadzu Corpora- new companies and new technologies that will pro- tion on the development of new scientific instruments. duce commercial products in areas as diverse as agri- Peptech has licence agreements with Knoll AG and culture and medicine. Centocor for technology that neutralises a key protein that contributes to rheumatoid arthritis. The country’s biotech research capabilities are strong and new companies are forming quickly. Venture capi- Alchemia has an alliance with Dow Chemical to re- tal is being directed into the industry at a greater rate. search the synthesis of carbohydrates. As well, Australian life sciences companies are ex- panding into global markets and forming key interna- Other companies are choosing to expand in a differ- tional alliances. ent way. Bresagen has grown through acquisition after the purchase of CytoGenesis, a US company that Some of the industry’s pioneers have helped to clear specialises in stem cell and imaging technology. CSL the way for the industry as a whole. raised $356 million from Australian investors to ac- quire Rotkreuzstiftung Zentrallaboratorium CSL, the former government serum laboratory, is now Blutspendedienst, a foundation of the Swiss Red a global blood products group. ResMed led the de- Cross. velopment of medical devices to treat sleep depriva- tion and now dominates the global market for these With these kinds of alliances being formed, the biotech devices. Cochlear is the world’s leading bionic ear sector is confident of its prospects. Australia’s biotech manufacturer and has more than 60 per cent of the industry has expanded steadily in recent years to global hearing aid market. Axon Instruments develops achieve $1.1 billion in collective revenue in 1999- devices and software used in drug research. Biota cre- 2000, according to a survey of public companies in ated Relenza, an influenza treatment sold internation- the Australian Biotechnology Report released by the ally by GlaxoSmithKline, and is working on new drugs Federal Government in June 2001. based on Australian biotech research. Australia has 35 core biotech and 25 biotech-related More importantly for Australia’s venture capital sec- companies on the Australian Stock Exchange, accord- tor, there are significant partnerships underway be- ing to the Australian Biotechnology Report. tween relatively young Australian biotech companies and their international allies. If these alliances succeed, Most venture capital opportunities are emerging a new generation of biotech startups will join the ranks elsewhere, though. As a result of the commercialisation of Australian venture capital success stories. of institutional research and the creation of new startups, the biotech industry now has a total of 190 Proteome Systems, for instance, works with Dow core biotech companies (an increase of 70 over two AgroSciences on the impact of proteomics on agri years) and 460 biotech-related companies. Thomson Venture Economics 25
  27. 27. Australian Venture Capital Association Limited - 2002 Yearbook Australian capital is increasingly being used to get lo- including gene therapy and molecular investigations into cal companies ready for international markets. aged related macular degeneration and retinal diseases, the development of the artificial cornea and orbital im- Alchemia, for instance, raised funds from Start-up Aus- plant and development of refractive lasers for myopia. tralia, Medica Holdings, AMWIN, BioTech Capital Limited and Rothschild Bioscience to fund the A second more recent spin-out from the Lions Eye company’s development of carbohydrate compounds Institute is Argus Biomedical Pty Ltd, which is cur- that can be used for drug discovery, drug delivery and rently completing the requirements for the regulatory custom synthesis of carbohydrates. approvals of AlphaCorTM, the world’s first soft one- piece artificial cornea, and AlphaSphereTM, a soft bio- Proteome Systems raised funds from BioTech Capital integrable orbital implant. Limited, the Queensland Investment Corporation and individual investors to expand its research into State governments are directing resources into this area proteomics and build on its alliances with Dow in order to encourage the rise of new companies. AgroSciences and Shimadzu. Illustrating this trend is the $157 million national syn- Another company making remarkable progress is Q- chrotron facility being developed at Monash Univer- Vis Limited, a listed company that was spun out of the sity in Victoria, which is being funded with up to $100 Lions Eye Institute in Perth, Western Australia. Q-Vis million from the Victorian Government. Limited is the global leader in the development of solid state laser vision correction (LVC) technology. The Another is a Biotechnology Centre of Excellence to company’s primary activities are its US clinical and produce leading innovation in life sciences – an Aus- FDA regulatory program for its Q-Vis Quantum 213nm tralian Government initiative which has encouraged re- solid state refractive laser. search institutes, universities and state governments to bid to host the centre. The Lions Eye Institute is a world-class research fa- cility, with 120 scientists and support staff, under the The result for Australia’s venture capital sector is an direction of the highly acclaimed ophthalmologist, Pro- increase in new opportunities – and the prospects of fessor Ian Constable. Research is carried out in areas positive returns. 26 Thomson Venture Economics
  28. 28. Australian Venture Capital Association Limited - 2002 Yearbook Technology Leadership Recent achievements signal the bright prospects for Australia’s information technology and telecom- munications sectors. Australian researchers have produced leading work Australia’s private sector, accounting for 35 per cent in fields like quantum computing, software engineer- of all business R&D. ing, wireless networking, photonics, network manage- ment, global positioning systems, and mobile telephony. This investment is being expanded under Federal Gov- ernment programs, including the Backing Australia’s In some cases, the research has been the work of Ability initiative to invest $2.9 billion over five years Australian facilities operated by global giants like to fund more research. One of these projects is a new Alcatel, Ericsson, Fujitsu, Lucent and Nortel. Yet some Information and Communications Technology Centre of the biggest breakthroughs have also come from of Excellence to bring together private and public sec- Australian startups. tor research. One of the best examples is Radiata, a company that One advantage for these research undertakings is was acquired by Cisco Systems for $567 million in Australia’s rapid adoption of new technology. late 2000. Radiata developed a breakthrough ‘wire- Australia’s consumption of information and less engine’ capable of sending data at 54 megabits communication technologies is the second highest in per second, a big advance in the implementation of the world as a proportion of GDP (behind Sweden the 802.11a wireless standard. Some of the core ele- and ahead of the US) according to the International ments of this work came from the Commonwealth Monetary Fund. Science and Industrial Research Organisation (CSIRO). In addition, approximately one quarter of labour pro- ductivity gains in Australia in the 1990s can be traced Australian companies like Aurema, Cap-XX, NetMap to the use of information and communication technolo- Analytics, Open Software Associates, Platypus Tech- gies, according to studies by the ANZ Bank and nology, QPSX, Redfern Photonics, and Sigtec con- Australia’s Reserve Bank. tinue to work on advanced research. Companies like Computershare, ERG, Integrated Re- search, Mincom, Moldflow, Prophecy International, Strong research and Tower Technology have all conquered markets in Europe, Asia, and the Americas. The foundation for many of these companies is Australia’s heritage of leading research. Private equity investors are now searching for the likely successors to that earlier generation of startups. Australia’s total public and private expenditure on R&D was approximately $9 billion in 1998-99. In the 1999 Groups such as ABN AMRO, Advent International, fiscal year, information and communications technology Citicorp Equity Capital, Deutsche Bank, GE Equity, was the largest single area of R&D investment by Intel Capital, JP Morgan, Rothschild, Tallwood Ven Thomson Venture Economics 27
  29. 29. Australian Venture Capital Association Limited - 2002 Yearbook ture Capital, Telecom Venture Group, Temasek Hold- · Redfern Broadband Networks raised $28 million ings and UBS Capital are investing in Australian from Optical Capital Group, Chase H&Q, Allen startups. & Buckeridge and Macquarie Bank to develop dense wave division multiplexing (DWDM) tech- Most of these global funds and institutions have formed nology that promises multi-gigabit speeds for met- significant local operations. They also invest alongside ropolitan area networks. Australian venture capital funds. · Redfern Polymer Optics raised $8 million in seed Some of the most recent investments in Australia con- funding from Redfern Photonics and others to firm the steady increase in activity and success. commercialise its polymer planar and fibre com- ponents and polymer optical fibres. · Astracon raised $50 million from Cisco Systems, Geocapital Partners, Cross Atlantic Capital Part- · Sigtec raised $7.5 million from Nanyang Ventures ners, Telecordia Technologies and the Australasian and Endeavour Capital to develop taxi communi- Media & Communications Fund to further develop cations systems and a tiny GPS receiver that could its telecommunications management software in the be used to pinpoint the location of mobile phone US market. users. · Cap-XX, a developer of supercapitor technology, raised $34 million in September 2001 from ABN Many initiatives are now focusing Australia’s efforts AMRO, Walden International, Acer Technology on the creation of more companies – and investment Ventures, Innovation Capital, Intel Capital, and opportunities – such as these. The Australian Technology Venture Partners. Government’s efforts, in particular, include the Inno- vation Investment Fund program to foster new ven- · Cards Etc raised $16 million from Citigroup, First ture capital partnerships, the Building on IT Strengths Data Corporation and Monetti for its software to (BITS) program of technology incubators and a more personalise smart cards. recent program to start a cluster of seed capital funds. · NetMap Analytics raised $20 million from Insur- Another important part of Backing Australia’s Abil- ance Services Office in the US to help relocate ity is the Federation Fellowship program, which grants the company, which develops software to analyse 15 annual fellowships valued at $225,000 each year financial transactions, to the US. for five years. During 2001, eight of the winners chose to relocate their research activities to Australia. With so many expatriate Australian scientists keen to return · Platypus Technology raised $14 million from the home, these research scholarships could help breed a Carlyle Group and JAFCO Investment to develop new generation of technology leaders. a solid-state memory ‘drive’ and open a US of- fice in New Hampshire. 28 Thomson Venture Economics
  30. 30. Australian Venture Capital Association Limited - 2002 Yearbook Australian Venture Capital in 2002: A Perspective In 2002 Australia's venture capital industry built This trend reflects the poor performance of many on the rapid expansion of the previous three years. of the so-called dotcoms since March 2000 when in- This growth took place despite a weaker global vestments in Internet companies hit their peak value at economy and a more uncertain business outlook, and the end of a speculative boom. The days when early reflects the growing maturity of the industry in the coun- stage venture capital investors could earn an internal try. rate of return (IRR) of 1,126% from companies like LookSmart, an Internet company founded in Austra- During the Australian financial year finishing on lia and later floated on NASDAQ, may yet return - 30 June 2002, the total amount of private equity but not in the immediate future. invested in Australian companies climbed by 13% to $2.3 billion. This is the highest private equity invest- Other high technology sectors also suffered. In- ment figure ever recorded by the Australian venture vestments in computer-related industries and in bio- capital industry. technology were considerably lower than in earlier years. However, recession-proof sectors like the medi- Importantly, this upswing came at a time when cal and health industries continue to attract large pools venture capital industries in many other countries of investment capital. around the world experienced a severe slowdown. However, Australia's economy is not completely In 2001 there were signs that Australia’s decoupled from the rest of the world. venture capital industry was moving away from investing in companies at a relatively early stage of Although Australia's venture capital industry was their development. This trend continued in 2002. hit by the same steep downturn in valuations and per- Investments in companies at the seed, startup and formance observed in the United States and Europe, other early stages of investment declined as a the damage has been markedly less severe. For ex- percentage of the whole, while managers continued ample, between 2000 and 2002 the US venture capi- to pour funds into companies looking to finance tal market went from a commitment level of US$105.8 acquisitions and expansion. billion to $7.7 billion. In the same period Australia's market only halved its level of commitment. To some extent this change goes hand-in-hand with the shift away from high technology investments Investment Trends as the promise of high-value initial public offerings (IPOs) from that sector diminished. In fact, none of There were signs of an important shift of the Australian venture capital funds surveyed partici- emphasis by venture capital managers away from pated in an IPO during 2002. investments in biotechnology, communications and media, computer hardware and semiconductors Less Capital Raised towards industrial/energy and transportation. Most notable was the declining importance of investments In 2002 Australian venture capital funds raised in Internet-specific companies where the number of a total of $810.0 million from investors. While this new investments fell from 30 in the year to 30 June figure represents a fall of almost 28% compared 2001 to just seven in the following year. with 2001’s $1.1billion, it is nevertheless a good performance by international standards and reflects the relatively high level of optimism amongst Austra- Thomson Venture Economics 29
  31. 31. Australian Venture Capital Association Limited - 2002 Yearbook lian venture capital investors when compared with their overseas counterparts. Superannuation funds continue to be the largest single source of new capital. This is a consequence of the way Australians finance their retirement. It is worth noting that superannuation fund managers only direct a tiny fraction of their total funds (typically less than 2%) into venture capital. It would only take a small rise in venture capital allocations for a major change in the amount of funds flowing into the Australian private equity industry. 30 Thomson Venture Economics
  32. 32. Australian Venture Capital Association Limited - 2002 Yearbook Amount of Venture Capital Raised by Year Amount of Capital Raised ($A Millions) 1,200 1,123 1,028 1,000 870 810 800 600 409 400 262 168 148 137 103 200 0 1993 1995 1997 1999 2001 1994 1996 1998 2000 2002 Fiscal Year End June 30 Amount of Venture Capital Raised by Year For four years in the mid-1990s Australia’s Although this may be seen as a disappointing venture capital funds experienced a steady decline performance compared with the earlier rapid in the amount of capital they raised each year. growth, it still represents considerable progress Growth took off in 1997 only to be followed by a compared with the 1990s. Local capital raising sharp decline the next year. The end of the 1990s compares quite favourably with performance saw funds take off in earnest with three years of overseas. double-digit growth; this was during a period when world equity markets raced forward. Since then For example, during the same period US those markets have retreated considerably. venture capital funds hit a 21-year low, raising just US$7.7 billion compared with $37.9 billion in 2001 This sudden burst of growth in funds raised and $105.8 billion in 2000. Nevertheless, the steep by the Australian venture capital industry reversed decline in raised capital highlights the challenges dramatically in 2002. During that year Australian facing the local industry. funds raised a total of $810.0 million in fresh capital. This figure represents a decline of almost 28% when measured against the previous year. Thomson Venture Economics 31
  33. 33. Australian Venture Capital Association Limited - 2002 Yearbook Average Fund Size In 2002 ($A Millions) Avg Stage Fund Size Fund of Funds 253.9 LBO 234.2 Generalist 126.4 Later Stage 84.1 Expansion 80.4 Early Stage 64.8 Balanced Stage 56.6 Seed Stage 22.5 Mezzanine Stage 15.5 Turnaround 9.1 Average Fund Size in 2002 The generalist category saw its average fund size jump from $51.7 million in 2001 to $126.4 million in 2002. During the same period the fund of funds cat- egory also saw a steep climb from $165.1 million to $253.9 million. This is now the category with the larg- est average fund size in Australia's venture capital sec- tor. The other substantial category is the leveraged buyout or LBO fund category. After two years of strong growth the average fund size fell slightly from $253.2 million in 2001 to $234.2 million in 2002. 32 Thomson Venture Economics
  34. 34. Australian Venture Capital Association Limited - 2002 Yearbook Average Fund Size by Year of Fund Formation 151 160 Average Fund Size ($A Millions) 140 120 104 107 97 92 100 84 78 70 67 80 60 60 61 52 60 46 37 40 30 40 23 8 20 0 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '85 '87 '89 '91 '93 '95 '97 '99 '01 Year of Fund Formation Average Fund Size by Year of Fund Formation The trend towards ever-larger funds reversed in 2002 in Australia as around the world. The average size of new funds formed in 2002 was $61 million, compared to $92 million in 2001 and $107 million in 1999. Notably the average size of a new fund in 2000 was $84 million, which was lower than the year before but still well above the 2002 level. Thomson Venture Economics 33
  35. 35. Australian Venture Capital Association Limited - 2002 Yearbook Number of Funds by Stage by Year of Fund Formation Year Later Balanced Seed LBO Generalist Expansion Early Fund of Funds Turnaround Mezzanine 1984 1 1 1 1985 2 1986 1 2 1 1987 1 1988 2 1989 1 1 1 1990 2 1 1991 1 1992 1 1 1993 2 1994 2 2 1 4 1995 2 2 1996 1 5 5 2 1997 4 1 2 1 2 2 1 1998 2 3 6 1 7 1 1 1999 1 7 2 3 2 7 7 3 2000 1 23 8 1 1 3 14 2 2 2001 1 15 4 2 10 9 4 2 2002 4 1 4 5 2 1 Number of Funds by Stage by Year of Fund Formation In most cases the number of funds formed by stage has steadily decreased year-on-year since 2000, a peak year which saw 23 balanced funds, for example, established. In the two years since, the tally of such balanced funds formed has dropped to four, however the number of expansion stage and fund of funds has increased. Similarly, the number of expansion stage funds decreased to four in 2002 from ten in 2001. Five early stage funds were established in 2002 com- pared to nine in the previous year. 34 Thomson Venture Economics
  36. 36. Australian Venture Capital Association Limited - 2002 Yearbook Average Size of Funds by Stage by Year of Fund Formation (in $A Millions) Year Seed Early Stage Expansion Later Balanced LBO Mezzanine Turnaround Generalist Fund of Funds 1984 63.6 75.8 1985 60.0 1986 36.8 1987 46.2 1988 97.5 1989 17.4 3.6 49.2 1990 16.3 1991 151.5 1992 104.2 1993 40.4 1994 24.2 79.1 31.8 46.2 1995 55.1 5.9 1996 65.9 103.9 38.2 1997 17.4 59.0 30.1 64.1 122.4 14.6 73.0 1998 29.8 44.8 60.9 92.9 276.0 134.6 1999 6.3 111.2 108.1 93.1 47.5 213.4 192.1 244.9 2000 21.2 54.9 54.4 74.1 65.0 550.5 6.3 48.3 975.5 2001 29.8 112.6 85.1 41.8 390.7 15.5 135.6 2002 37.8 68.5 Average Size of Funds by Stage by Year of Fund Formation The slowdown in Australia’s venture capital industry is reflected in the changing average size of funds measured by stage by year of formation. But the changes were not uniform across the various stages. For example, the average size of an early stage fund established in 2002 was $37.8 million, which is considerably higher than the average of $29.8 in 2001. Likewise the average size of bal- anced funds established in 2002 was $68.5 million. Thomson Venture Economics 35
  37. 37. Australian Venture Capital Association Limited - 2002 Yearbook Number of Funds by Sequence by Year of Fund Formation 60 Number of Funds Formed 50 40 Legend 30 New Follow-On Sole 20 10 0 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '85 '87 '89 '91 '93 '95 '97 '99 '01 Year of Fund Formation Number of Funds by Sequence by Year of Fund Formation A total of 17 Australian venture capital funds Ye a r Ne w Follow -On Sole were established in the financial year to 30 June 1984 2 1 2002. This is considerably down from the 47 funds 1985 2 1986 3 1 established in 2001 and well below the peak of 55 1987 1 funds established in 2000. 1988 2 1989 2 1 Of the newcomers in 2002, only four funds 1990 3 were created to implement new investment strate- 1991 1 gies. The remaining 13 were follow-on funds estab- 1992 2 1993 1 1 lished to build on strategies by existing venture 1994 3 5 1 capital funds. 1995 3 2 1996 10 2 1 This represents the continuation of an important 1997 9 4 change in direction for the industry. Historically the 1998 13 8 number of new funds has generally been significantly 1999 15 17 2000 36 19 higher than the number of follow-on funds. For 2001 22 25 example, in 2000 there were 36 new funds and only 2002 4 13 19 follow-on funds. However, in 2001 the number of newly established follow-on funds was greater (25) than the number of new funds (22). 36 Thomson Venture Economics
  38. 38. Australian Venture Capital Association Limited - 2002 Yearbook Number of Firms Formed by Year 30 27 Number of Firms Formed 25 20 17 15 14 15 12 10 10 6 6 5 5 4 4 3 3 3 3 5 2 2 2 1 1 0 '80 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 Year of Firm Formation Number of Firms Formed by Year Only three new venture capital firms were formed in the year to June 30, 2002. This follows a significant rise in the number of venture capital firms formed during the late 1990s and into 2001. The year’s relative inactivity indicates the industry is returning to the long-term company formation pattern established before the recent period of rapid growth. Thomson Venture Economics 37
  39. 39. Australian Venture Capital Association Limited - 2002 Yearbook Sources of Capital Under Management as of 30 June, 2002 (in $A Millions) LP Type Capital Committed Superannuation 2,689.1 Banks 826.9 Fund of Funds 646.2 Principal 638.3 Corporations (Non-Pension) 525.6 Insurance Co 514.8 Families & Individuals 469.1 Government 449.0 Public/Government Pension Fund 330.3 Others 218.7 Share Markets 68.2 Sources of Capital Under Management Following the trend of recent years, superannua- tion remains the dominant source of venture capital funds under management in Australia. It accounts for $2.3 billion from a total pool of $7.4 billion. This is more than one third of all funds currently under man- agement and contributes over three times the amount of the second most important fund source, the banks. Please note that the amounts listed for capital under management are cumulative by definition and do not pertain to the fiscal year July 2001 to June 2002 alone. 38 Thomson Venture Economics

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