Snowball Group Whitepaper - Evolution of Venture Capital in Australia
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Snowball Group Whitepaper - Evolution of Venture Capital in Australia

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John Dowell at Snowball Group writes about the past, present and future of venture capital in Australia.

John Dowell at Snowball Group writes about the past, present and future of venture capital in Australia.

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Snowball Group Whitepaper - Evolution of Venture Capital in Australia Snowball Group Whitepaper - Evolution of Venture Capital in Australia Document Transcript

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