Australia VC: An ideal match?

In more than seven years at Hostplus, Neil Stanford oversaw a tenfold increase in the private equity program to AUD 8bn (USD 5.8bn). The Australian superannuation fund carved out a niche in domestic VC as one of the first in its peer group to back a new generation of managers – but there were plenty it couldn't invest in for size reasons, which prompted Stanford's next career move.

He has established V-Ignite, which was recently named as manager of the Victorian Startup Capital Fund (VSCF), an AUD 120m fund-of-funds that will support early-stage GPs. The state government will contribute AUD 60m, rising to AUD 75m if the hard cap is reached, provided V-Ignite secures an equal amount from independent LPs.

"The cheque sizes at superfunds are too big for some of these managers. There was a lot of that at Hostplus, especially as the fund became larger. It is now AUD 82bn, so maintaining exposure to the early-stage space will be challenging," said Stanford. "We can act as an intermediary, bridging the gap between start-ups at one end of the spectrum and risk-averse superfunds at the other."

A first close of at least AUD 40m is scheduled for late May so that V-Ignite can draw down on government money before the end of the current financial year. In addition to superfunds, the firm is targeting family offices, wealth management platforms, and high net worth individuals (HNWIs).

The broad private wealth segment is increasingly seeking alternatives exposure and being sought out by private equity managers, as evidenced by the rise of wealth management platforms and the deployment of feeders to aggregate commitments. Stanford has spoken to several of these groups already, typically those with no previous VC exposure that want an easy way to get started.

"Small investors have limited capital, so it's hard for them to get the level of diversification they need when investing in start-ups," said Stanford. "Every start-up is risky. One failure doesn't mean all will fail, but small investors want to spread their bets and a fund-of-funds offers diversification."

The multiplier effect

Australia has experimented with public-private matching schemes before, notably the federal-level Innovation Investment Fund (IIF) system whereby government money went to start-ups that secured backing from licensed fund managers. It was discontinued in 2015.

V-Ignite is pursuing a similar kind of multiplier effect: the government matches whatever VSCF raises from independent LPs; and then VSCF backs funds on the same basis. The fund-of-funds will make 8-10 fund investments, with an up to 20% allocation for direct investments and follow-on rounds, but the goal is to catalyse the entire ecosystem by establishing clusters of skills and knowledge.

The kicker from an independent investor perspective is the preferred return. The government's return is capped at 5%, so assuming there is additional upside, it all goes to the independent LPs.

"It's a real win-win-win. Start-ups get the capital they need; the government achieves its objectives in terms of creating new high-tech companies, industries, and jobs; and the private investors get the higher returns they want," said Stanford. "We saw a lot of funds at Hostplus but never came across one with two preferred returns. It's highly differentiated. Whether it's unique, I don't know."

Localisation is one of the defining criteria in manager selection. At least half the corpus must go to GPs that are newly established and based in Victoria. Alternatively, they could be based elsewhere and expand into Victoria. For example, Sydney-based AirTree Ventures, which recently closed its fourth fund, could qualify in the next vintage by opening a satellite office in Melbourne.

VSCF is the brainchild of LaunchVic, an independent agency formed in 2016 to develop a start-up ecosystem in the state. As of June 2020, this ecosystem comprised 2,100 start-ups with an estimated cumulative value of AUD 7bn, a threefold increase on 2018.

This appears to track a nationwide trend. Approximately USD 2bn was channelled into early-stage rounds for Australian start-ups last year and an additional USD 2.3bn went into growth-stage investments, according to AVCJ Research. This compares to USD 595m and USD 982m in 2018.

Filling the gap

Victoria was responsible for two of Australia's earliest start-up success stories, jobs platform Seek and automotive marketplace Carsales, each of which ended up going public. More recently, the likes of cross-border payments player Airwallex and enterprise technology provider Culture Amp have achieved unicorn status. But LaunchVic believes the state is missing out.

"They identified a recurring lack of capital available for early-stage start-ups. Even though funding into venture overall was going up, it had plateaued at the early stage," said Stanford. "Historically, Sydney has been the financing capital of Australia and that has flowed into the venture ecosystem. Victoria isn't keeping up."

The state suffers an AUD 96m shortfall in annual early-stage funding, LaunchVic noted in a November 2020 presentation, citing third-party research. Moreover, Melbourne is home to just 20% of Australia's early-stage VCs. "Too few Victorian early-stage start-ups receive funding to scale. This results in less high-growth firms and fewer exits, which disincentivises investors," it noted.

Having resolved to create a fund-of-funds, LaunchVic CEO Kate Cormick approached Stanford for advice on structuring the vehicle so that it appealed to a wide range of investors. He expressed an interest in serving as the manager, but V-Ignite still had to prevail in a more than six-month request for proposal (RFP) and assessment process.

Stanford is joined by Brighid Pappin, who worked alongside him at Hostplus for three years as a private equity investment specialist. Brandon Capital, an Australia-based healthcare investor and Hostplus portfolio GP, is providing back-office support. It cannot receive capital from VSCF.

"My background is engineering, so a lot of people ask how I ended up working at a superfund. Prior to Hostplus, I worked at Jana, an investment advisor to Hostplus, so [V-Ignite] is the final piece in terms of going through the ecosystem myself," Stanford added. "It's also useful experience in terms of bringing an investor mindset to a fund manager."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Australasia
• Fundraising
• Venture
• LPs
• Technology
• Australia
• HOSTPLUS
• Fund-of-funds