How can innovative venture capital models assist to grow venture capital in Australia? We look at co-investment strategies for early stage vc and "pull" rather than "push" models to cover the technology risk gap in the commercialisation cycle.
Venture Capital … is financial capital provided to early-stage, high-potential, high risk, growth startup companies. Venture Capital Funds … make money by owning equity in the companies they invest in, which usually have a novel technology or business model in high technology industries, such as IT, software, biotechnology, etc.
~80% of the $5.9B invested in US VC funds in Q2 2012 went to the top 5 firms*Bifurcation - large versus small firms, IT/web startups vs everything else.
A US based study of angel investors by Wiltbank & Boeker calculate the internal rate of return (IRR) of investments as 27%, using the average payoff of 2.6x and the average hold time of 3.5 years. They also found that in 52% of angel investments the business goes under and angels are relying on 7% of all investments to provide 75% of the returns.This chart shows the marginal benefit of doubling the number of startup investments in a portfolio or early stage venture investments, starting at 25 investments. Source: Kauffman Foundation: Angel Investor Performance Project
The Future of Venture Capital in Australia
alternative investment email@example.com venture capital investment in australiaVenture Capital Funds …make money by owning equity in the companiesthey invest in, which usually have a noveltechnology or business model in high technologyindustries, such as IT, software, biotechnology, etc.Venture Capital …is financial capital provided to early-stage, high-potential, high risk, growth startup companies.
alternative investment manager who are we? global alternative investmentmanager invest in early stage ventures,in Australia and China $10M sydney angels sidecarfund $10M slingshot venture fund as principal investors we areuniquely placed to extend ourplatform of niche early stageinnovation & venture firstname.lastname@example.org
alternative investment managerThe traditional venture capital model doesnot scale to cope with a new paradigm ofcapital-efficient technology companiesChallenges:VC must be …as revolutionary as thebusinesses in which they investIn Australia venture capital is underfunded because as an asset class it iscurrently too small for institutional $Money scales …time spent on analysis does not12
alternative investment managerLater StageExpansion StageEarly ExpansionSeed/Start-Up StageRiskFounder, friends & familyEquity Markets$200K $2M $20M $200M+Avg. RaisingReturn30x10x5x2x$50K $100K $1M $5M $100M$500K $10M $50MAcceleratorsVenture Capital$Private EquityCommercial BanksVCAngel Investors stages of growth for an entrepreneurial company
alternative investment manager state of traditional vcUS venture dollars raised in $B1: vc industry has beenexperiencing its second periodof contraction since 20002000-2003 vintage funds2004-2007 vintage funds2008-2010 vintage fundstimetotal value to paid in multiple2:TVPI1X1. NVCA2. Cambridge Associatesmedianannualraise: $22B$0B$10B$20B$30B$40B$50B$60B$70B$80B$90B$100B1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
alternative investment manager australia versus the email@example.com. FUNDING Israel US Canada UK France Germany Australia2012 GDP ($trillion) 0.24 15.09 1.76 2.43 2.77 3.57 1.372012 VC Capital raised ($billion) 0.60 20.6 1.80 1.40 0.72 0.82 0.24VC Capital raised as % of GDP 0.245% 0.137% 0.102% 0.058% 0.026% 0.023% 0.018%Global VC indexed vs Australia 14.1x 7.8x 5.8x 3.3x 1.5x 1.3x 1.0xSources: Dow Jones Venture Source, Thomson Reuters2. CUSTOMERS Asia Africa EuropeLatinAmericaNorthAmericaMiddleEastOceania/AustraliaPopulation (million) 3,922 1,073 820 593 348 223 36Internet Users (million) 1,076 167 518 255 273 90 24Penetration % 27.5% 15.6% 63.2% 42.9% 78.6% 40.2% 67.6%Source: InternetWorldStats
alternative investment manager australian vc is dead long live vc$2B$200BAustraliaUSAvc funds raised since2002vc 1.0 is dead …traditional australian vc can’t go big & can’t go small cost to startup has fallen dramatically traditional vc model not easily exported to early stage local vc can‟t compete with global vc at growth/late stage… long live vc 2.0early stage local & later stage global local vc will invest earlier in more startups target emerging markets for customers and investment crowd-source: funnel & due diligence crowd-fund: co-investment fundsaustralian vc …was it ever alive?
alternative investment manager great time to be an entrepreneurGreat time to be an entrepreneur: now costs significantly less tolaunch, iterate, and scalecompanies sweeping changes in technologyand consumer internet adoptionhave enabled dramaticallyreduced capital requirements forbuilding new software companies accelerated access to customersvia search, social, and mobileplatforms. 0.36 billion2000 2011global internet users:2.20 billion
alternative investment manager challenges facing traditional vcconsequences: vcs rushing to add smaller early stageinvestments to their larger/laterinvestments increasing valuations: Y Combinator average pre-money$2-4M 2010, $6-8M 2011, $10M 2012 median Series A pre-money(US$11M) at an 8-year high in Q220121 bifurcation of market - web/ICT vs. rest1 Cooley Venture Financing Report Q2 201240% 34%30%19%2007 2011earlystagelate stagevc investment allocation2:2007 20112 PwC MoneyTree reportThere is a massive opportunity for new, disruptive venture capital models
alternative investment managerhealthygrass rootscommunityhealthyearly stage:seed & angel rebuilding australian vc bottom upaustralian vchealth reportweakseries A &small trade salessourcelocalsourcegloballife supportlate stage:series B, C … ipo
alternative investment manager influx of new participants in early stage vcACCELERATORSINCUBATORS EARLY STAGE VCCO-INVESTMENT FUNDSUSAUSANGEL GROUPS VCSydney AngelsSidecar FundSlingshotVenture FundBlue ChilliFundVivantVentures FundiAccelerateSeed Fund2 CitiesAngel Fund SA AngelsSA AngelsVCStage 1 of disruption Stage 2 : VC 2.0
alternative investment manager traditional vc model failure to scale402,000Challenges for traditional VCs:• Traditional VCs are finding itincreasingly challenging to scalebecause the declining cost tostart a business means that theymust invest in more companies justto deploy the same amount ofcapital.• In response, they can choose toparticipate in more deals orbigger deals.• Often, the latter wins becausemost VCs will spend a substantialamount of time evaluating a deal,regardless of deal size.Early stage deal flowScreeningDue diligence& investmentMoney scales, time spent on analysis does not.
alternative investment manager picking winners avoiding losersLater Stage Investing: Picking Winners• Active investors / stock-picker• Domain knowledge• Effective due diligence• Working with known entrepreneurs& investors• Involved in strategy/management• Insider can react quickly togood/bad events to guideventure• More relevant as investmentmatures and more performancedata availableEarly Stage Investing: Avoiding Losers• Diversification/Portfolio approach• Due diligence difficult due to lackof information• Outsource deal flow & duediligence• Guild of entrepreneurs/mentors• Co-invest with other early stageinvestors• Buying „options‟ to makeconcentrated follow oninvestments at later rounds whenmore information/traction“You need at least 15 early stage investments to have a 90% confidence of getting your money back” 1“The production of cash is highly concentrated in winners; 90% of all cash returns are produced by 10% of exits” 21. Kevin Dick (Rightside Capital) “How Many Angel Investments?”2. Professor Robert Wiltbank (Kaufman Foundation)
alternative investment manager$10M invested in 100 Startups(selected from 1,000 applicants)Exit at$100MExit at$75MExit at$25MExit at$50M4 exits in 10yrs: ~ 5x capital, 20% IRR 11. Assumes $50K invested at $450K valuation in accelerator round & followon investment of $200K at $1.8M investment at angel round asymmetrical risk distribution
alternative investment manager100%95%90%85%80%75%70%65%60%55%50%> 0.5x > 0.75x > 1.0x > 1.5x > 2.0x > 2.5x > 3.0x800 investments400 investments200 investments100 investments50 investments25 investmentsNumber ofinvestments inportfolio effect of portfolio size on return probabilitySource: Kevin Dick, Rightside CapitalWith 25 investmentsyou have a 65%probability ofachieving a 2.5x returnon your portfolioWith 200 investmentsyou have almost a 95%probability ofachieving a 2.5x returnon your portfolioReturnProbability
alternative investment manager• Angel Group• Incubator• Accelerator• AngelList• Fund Manager• Platform• Capital• AFSLCO-INVESTMENT FUNDSustainable & scalable early stage VC fundCo-investment Funds - a scalable andsustainable solution for early stage VC vc 2.0 co-investment fundsESVCLP STRUCTURETax free returns
alternative investment manager seed/early stage co-investment fundssydney angels sidecar fund: $10M ESVCLP combination of sydney angels &sidecar fund invested $4M in 14early stage ventures during 2012+ =slingshot venture fund: $10M ESVCLP partners include University ofNewcastle, Hunter TAFE,Newcastle Innovation, PwC+ =network,deal flow, filter,due diligence,mentorsinvestmentmanagement,capital raise,compliance, legalco-investment fund:ESVCLP - Australian investorshave no tax liabilityon income or capital gainsmay be an accelerator,incubator, angel group,university, professionalservices firm
alternative investment managerTraditionalVCsAcceleratorsIncubatorsAngel GroupsEarly Stage VCCo-investmentFundsEarly Stage VCFund of FundsNo of companiesscreened per year100-200 200-300 200-300 1,000-1,500No of companiesinvested in per year5-6 10-20 10-20 50-100Number ofcompanies in typicalportfolio25-30 50-100 50-100 250-50065% 75-85% 75-85% 95%Typical investmentper company$2-10M $25-250K $100-600K $25-$600KCapacity to makefollow-oninvestmentsYESNO(except Angelgroups)YES YESMentorshipInternalresourcesMentors alignedwith groupsOutsourced toco-invest partnerOutsourced toco-invest partnerScalability by AssetsUnder ManagementYES NO NO YESScalability byPortfolioDiversificationNO YES YES YESTraditionalVCsAcceleratorsIncubatorsAngel GroupsEarly Stage VCCo-investmentFundsEarly Stage VCFund of FundsNo of companiesscreened per year100-200 200-300 200-300 1,000-1,500No of companiesinvested in per year5-6 10-20 10-20 50-100Number ofcompanies in typicalportfolio25-30 50-100 50-100 250-500Probability ofachieving 2.5x return65% 75-85% 75-85% 95%Typical investmentper company$2-10M $25-250K $100-600K $25-$600KCapacity to makefollow-oninvestmentsYESNO(except Angelgroups)YES YESMentorshipInternalresourcesMentors alignedwith groupsOutsourced toco-invest partnerOutsourced toco-invest partnerScalability by AssetsUnder ManagementYES NO NO YESScalability byPortfolioDiversificationNO YES YES YES future of early stage venture capital