Australia VC: New faces
A new generation of VC firms is emerging in Australia, despite little appetite for the asset class from domestic LPs. Success hinges on leveraging Silicon Valley networks and targeting particular market niches
Will Australia's struggling venture capital industry be delivered to safety by angels? In certain areas this appears to be the case. Start-up GP Blackbird Ventures recently reached a first close of A$20 million ($22 million) on its A$30 million internet-focused venture capital fund, with most of the capital coming from a cluster of Silicon Valley- and Australia-based super angels.
The fund's LP roster reads like a who's who of the tech start-up community. It ranges from longstanding US angel investors such as Bill Tai and Dave McClure to the entrepreneurs behind successful Australian technology plays such as Atlassian, Campaign Monitor and Aconex.
"There is a certain dynamic in the market right now whereby a bunch of US investors have started to take an interest in Australia," says Rick Baker, Blackbird's investment director. "Super angels and micro-VC guys are looking further afield for deal flow because the US has become very competitive in this space."
Australia venture capital fundraising has struggled ever since the global financial crisis. According to AVCJ Research, VC investors attracted $137 million in 2012, the highest level in six years, but the majority of this capital went into one fund - Carnegie Private Opportunities Fund - which is expected to make a mixture of growth and venture investments.
However, Blackbird is not the only start-up venture capital firm in Australia. Adventure Capital is targeting $100 million for its debut fund while Kaz Capital is seeking to raise at least A$10 million. Adventure Capital in particular is looking to leverage Silicon Valley connections.
Unpopular asset class
These are encouraging signs in an uncertain environment. The domestic VC industry has recently been emboldened by the government pledging more capital for the Innovation Investment Fund and a clarification on tax breaks for funds using the early stage and venture capital limited partnership (ES/VCLP) structure.
But at the same time, entrepreneurs have been only too keen to lay into the industry. After securing $25 million in funding from US-based Summit Partners, one of the founders of Australian online retailer The Iconic criticized domestic investors for being too conservative on e-commerce. Matt Barrie, founder of prominent internet start-up Freelancer.com, also weighed in recently, declaring the Australian VC industry "dead," and citing a decline in start-up funding.
"VC is definitely a dirty word around Australian investors right now," says Daniel Girgis, managing director at Kaz Capital.
Stuart Richardson, founder and managing partner at Adventure Capital, adds that funds raised before the financial crisis are now approaching the end of their investment periods and LPs are starting to ask tough questions about performance. He argues that VC managers raised funds that were too large in 2006-2007 and this placed a strain on the economics, prompting GPs to write larger checks and take on more risk.
The reality is it depends where you are coming from. Few would argue that Australia's superannuation industry has fallen out of love with venture capital, but as with PE, there are conflicting arguments as to why this has happened and whether the reasoning is justified.
Brigitte Smith, managing partner of life sciences-focused GBS Venture Partners, admits that performance has been uneven, but that doesn't mean universally bad. "The average results are not great but you don't go about investing in VC as an LP by backing the average manager; you invest in great managers," she says. "There have been investments by good managers but it's easier to say on average performance is not any good so why bother."
Blackbird's Baker attests there are quality companies in the portfolios of Australian VC firms, it's just taken a lot longer to commercialize the technologies than expected. This is in part a result of focusing on intellectual property-heavy companies that require more capital and time to reach critical mass.
What the latest start-ups VCs have in common is a focus on digital technology rather than cleantech and life sciences. They are also exclusively investing in companies with business models that work internationally, taking advantage of how technology has reduced the cost of developing and distributing social media applications or cloud-based enterprise software.
"The barriers to entry for going global have dropped significantly in the last few years and we are looking at a number of companies that could grow internationally," says Kaz's Girgis, also stressing the importance of the emergence of a host of domestic entrepreneurs.
With this approach, digital-focused VCs can keep fund sizes and check sizes small. Kaz's sweet spot is A$1-3 million, committing around A$600,000 in equity in Series A rounds and calling on co-investors to contribute the rest. Adventure Capital plans to commit $500,000 to $5 million per investment, while for Blackbird the goal is $3-5 million rounds, with half coming from the fund and the rest from LPs.
While these VC firms would like to raise institutional money from Australia or elsewhere, at present high net worth individuals - the super angels - are their most likely capital source. And these experienced VC players are very much open to co-investment.
Horses for courses
It represents an innovative solution to a tricky situation in Australian venture capital and Baker hopes it can bring momentum - and returns - back to the industry. But it is not for everyone. Those VCs who remain focused on life sciences and cleantech and therefore require larger amounts of capital will have to find other backers.
GBS' Smith notes that this is already happening, albeit slowly. Southern Cross Ventures received roughly half the capital for a VC fund that closed at $40 million in 2011 from Softbank China, the first time a Chinese group has participated as an LP in Australian venture capital. On the life sciences side, there are still more options.
"We will see more super angels, but in life sciences we are seeing more corporates set up their own VC units or coming into funds as LPs," says Smith. "Whatever your niche, you have to evolve to survive."
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