Australia VC: Meet the neighbors

A number of recent deals have indicated an increasing appetite among heavyweight Asian investors for exposure to Australia’s technology space. The momentum may be difficult to exploit, however, due to a prevailing cultural inertia in the local venture capital ecosystem.

Notable transactions include first forays into Australia for two Sequoia Capital affiliates that allocate small amounts of capital to peripheral jurisdictions. Sequoia China backed a $13 million round for cross-border payments player Airwallex, while Sequoia India led a $20 million investment in online medical marketplace HealthEngine. Most recently, Malaysian telecom conglomerate Axiata anchored a $23 million round for advertising technology company Unlockd.

Local growth fund Alium Capital Management participated in the Axiata and HealthEngine deals, citing an eagerness to connect Australian technology supply with Asian demand on the back of new support in Canberra.

“The government has a very aggressive strategy in regards to innovation, and whilst it may sound like it’s just rhetoric, we’re seeing it on the ground – more accelerators, more incubators, more enterprise businesses that are investing in technology,” says Rajeev Gupta, a partner at Alium. “Asia Pacific companies out of Singapore, Hong Kong, Malaysia and China are starting to look down here.”

For Australia – an economy historically associated with primary industries – interest in domestic technology represents a chance to play a more progressive role in Asia’s long-term growth story. But political encouragement will not be enough to realize this goal: VCs and entrepreneurs will have to reverse a longstanding tendency to gravitate towards familiar but faraway markets in favor of higher risk neighbors. 

Good government?

Many Australian investment professionals draw a direct line between the acceleration in inbound technology investments and the election of Malcolm Turnbull as prime minister in 2015. Since the start of his administration, entrepreneurship has been promoted through initiatives ranging from visa incentive schemes intended to attract foreign investment to seed funding programs.

Some of the latest tangible progress includes the launch of a start-up incubation program in Singapore that aims to bridge Australian companies with Asian research and marketing resources. The project is part of the government’s A$11.2 million ($8.5 million) “Landing Pads” initiative, which also props up incubators in China, the US, Israel and Germany.

The notion that such programs will not be sufficient to optimally leverage Australian intellectual property in Asia is already disseminating from the roots of the local ecosystem. Sydney-based accelerator BlueChilli, for example, does not currently recommend its start-ups to apply for a place in Landing Pads.

“The current scope of the Landing Pads program is underwhelming and unlikely to make any measurable difference in its current form, either to the export success of Australia’s tech start-up industry or to BlueChilli’s export ambitions in those market,” says Alan Jones, an advisor and mentor at BlueChilli. “The program displays a failure to understand the needs of Australian start-ups entering international markets and fails to commit sufficient resources to make a measurable difference.”

BlueChilli is set to announce an accelerator program including an Asian cohort and is in discussions with Singapore and China-based investors about participation in its venture capital funds. It sees the US as an easier jurisdiction for start-ups to raise money, but expects Asian markets to ultimately eclipse the world’s largest economy as a source of capital.

LP demand for exposure to Asia’s technology-related markets has coincided with the emergence of regional sector successes such as Alibaba Group along with well-publicized explosions in smart phone usage among large, unbanked and upwardly mobile populations. The result has been an increasing pressure on Australian start-ups to pivot away from an historic preference for all things Silicon Valley.

“Generally speaking, several companies in Australia deprioritize a large market opportunity on their doorstep in favor of going after the US,” says Tushar Roy, a partner at Square Peg Capital. “Often, they are not that familiar with Southeast Asia and perceive it as a harder place to do business. But many companies will find that they can make inroads more quickly and easily in those nearby markets, as they are increasingly open to adopting new technologies and can be competitively less intense than the US.”

Earlier this year, Square Peg closed its debut technology-focused fund at A$234 million, exceeding the A$200 million target. It deploys about a third of its capital in Australia, a third in Israel and the remainder split between Southeast Asia and east coast US.

The international approach recognizes that although companies in the digital era are born global, that doesn’t mean they start out properly commercialized in their customers’ home countries. In Asia, tackling this issue presents challenges related to a less developed VC environment as well as perceptions among many Australian companies that some countries are too culturally difficult to penetrate. 

“Fly-in, fly-out doesn’t work,” says Calvin Ng, managing director and co-founder at Aura Funds Management. “The most important thing is to have a dedicated on-the-ground presence in Asia that can navigate the minefields of language, culture, regulation, tax and different political landscapes. If you don’t have that presence, I think you’re going to struggle.”

Aura exercises this strategy through a regional footprint including offices in Australia, Singapore and Thailand as well as a staffing presence in Vietnam. Last year, it launched a A$30 million VC fund and received backing from two Asian family offices. Although predominantly Australia-focused, the vehicle has backed Singaporean financial technology company MC Payment.

Fintech, along with other industries that rely on smart phone usage, has emerged as an important area of focus for Australia-Asia expansion ambitions. Although uptake of software-as-a-service products has been slow in the region, Australian IT players have realized momentum in e-commerce and online marketplaces such as property site REA and jobs portal Seek, which was set up by Paul Bassat, the co-founder of Square Peg.

Cross-border medical hardware supply is also seen as a key opening since Australia is one of few markets in the region with a developed precision manufacturing industry. Brandon Capital Partners has reported strong interest in this segment and was recently one of three GPs selected to manage the government’s A$500 million Biomedical Translation Fund. The firm sees this activity as part of the early stages in a long internationalization process for the local ecosystem.

“For Australian innovation companies and investors to be successful, you have to learn how to work with the Asian economy and vice versa,” says Chris Nave, a managing director at Brandon. “There’s a lot of productive talk about it and genuine interest, but I don’t think [Australia] has learned how to do it properly yet. That means culturally understanding what it is that drives Asian investors, what they’re looking for and working out economic models to make it work.”

Preparing the ground

While Brandon’s medical device connections in China are significant, it has attracted little investment interest from Southeast Asia, challenging conventional wisdom that Australia’s immediate neighbors are the most natural jumping-off point for regional expansion. Singapore, nevertheless, remains the most common beachhead for companies and investors looking to penetrate northward.

AirTree Ventures exercised this gambit last year by joining Sequoia India in a round for 90 Seconds, a cloud video production platform founded in New Zealand and now headquartered in the city-state. The firm expects to see more Asia-first expansions and has recently braced for the trend’s evolving cross-border skills requirements with the engagement of Google’s Anil Sabharwal as a venture partner and Sara Ramirez Morales as head of talent.

“The talent shortage is most acute in product and engineering and Sara is placing an increasing number of candidates who are immigrants,” says John Henderson, a partner at AirTree. “Some of our companies are going even further in their quest for product talent by opening up engineering offices in Asian countries. For example, Employment Hero has a large, high-performance engineering team based in Vietnam.”

Sourcing quality staff in Asia is one of the critical challenges for Australian groups branching into the region and therefore requires a creative look at offshore talent channels. Success in this context depends on finding a balance between the benefits of Asia’s more attractively priced skills and the difficulties of organizing a geographically distributed team.

Australian VCs with Asian networks advise pursuing introductions with portfolio clients while keeping in touch with international university programs and alumni associations. A number of domestic educational leaders have strong relationships in Asia such as technical research institution RMIT University, which maintains a campus in Vietnam.

Skills pipelining of this kind is also a valuable method for generally expanding Australian understanding of Asia’s varied business cultures and how to make meaningful commercial relationships work. As a result, it offers the country a chance to finally leverage its natural geographic advantages against larger rivals seeking to benefit from a growth story in Asia that is no longer possible to ignore.

“As the Southeast Asian economies mature in their use of technology and in doing business, you will see more companies targeting the region – not just from Australia, but from the US and Europe,” says Square Peg’s Roy. “People are increasingly aware of the huge opportunity in that set of markets, and this will accelerate in coming years.”

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• Topics
• Australasia
• Southeast Asia
• Greater China
• Technology
• Early-stage
• Australia
• Venture
• TMT
• Square Peg Capital
• AirTree Ventures
• Brandon Capital