Australia VC: Interesting times

If you left Planet Australia VC in 2013 you would have left behind a country with a few quality startups (Atlassian, Campaign Monitor to mention just two), not much funding available for any stage of development, and, bar one or two stand out exceptions, a reasonably dead investment ecosystem. Returning to look at the landscape in 2016 shows a world transformed."

Daniel Petre made this observation on the day the venture capital firm he co-founded, AirTree Ventures, closed its second fund at A$250 million ($188 million) - the largest early-stage vehicle ever raised for Australia. No wonder he's feeling positive, but Petre listed a string of reasons why others should share in his ebullience: plenty of local entrepreneurs wanting to start businesses; plenty of accelerators, incubators and angels willing to support them; record sums flowing into VC funds; and favorable government policy.

His predictions for the future are also bullish. By 2020, Australia will have created at least 20 globally significant technology companies and 3-4 globally competitive venture capital firms.

Petre's comments are self-serving - he admits as much - but these are indeed interesting times for Australian venture capital. An industry that was in distress a few years ago, as local investors withdrew from the asset class, dismayed by poor performance, has staged a turnaround. According to AVCJ Research, Australia-focused VC funds received about $200 million in commitments between 2009 and 2011. In 2015 alone, they raised more than $460 million.

Success stories help, even though the likes of Atlassian and Campaign Monitor slipped through the fingers of local VC firms and won backing from US investors. New local players have also emerged. The likes of AirTree and Blackbird Ventures raised initial funds with commitments from tech entrepreneurs before reeling in institutional capital once they proved an ability to execute on their global-from-day-one investment theses. And government policy has never been as friendly to start-ups as it is now.

For this rush of activity to be sustained, the industry needs sustainable sources of capital. The three largest Australian venture capital funds ever raised have achieved final closes in the last 18 months, but the LP bases are highly concentrated.

Blackbird's A$200 million fund includes A$145 million from First State Super and HOSTPLUS, while two superannuation funds account for half of the AirTree corpus. Both are structured as a core vehicle plus a follow-on vehicle, and most of the super fund money will go into the latter and be used to support portfolio companies beyond the Series A round. Brandon Capital, which raised a A$200 million life sciences fund, accommodated AustralianSuper, Statewide Super, HESTA and HOSTPLUS by providing opportunities for co-investment. In each case, concessions are likely to have been made on fees.

It is encouraging that these GPs have found a way to include super funds in a way that is amenable all parties. And although these LPs represent a small percentage of Australia's institutional investor base, the feedback on venture capital from across the spectrum is generally positive. Indeed, some super funds desire to participate in early-stage investment is expressed almost as an obligation - but they have duty to fund members to create a cost-efficient and risk-conscious structure for doing so.

What remains to be seen is whether their commitment will remain strong across cycles as opposed to the opportunistic jump in, jump out approach taken in the past. Petre warns that there are "icebergs to avoid," citing the local tech IPO market and the fact that whenever venture capital is awash with money bad ideas get funded and good teams get funded at levels that may prove to be unsustainable. If any of these risks crystallizes into a high-profile horror story, super funds may come under pressure to review their allocation policies.

Australian VC is different from previous iterations in terms of how GPs are being funded and how they are deploying the capital. The industry needs institutional investors to remain involved for long enough to realize the upside.

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• Topics
• Australasia
• Venture
• Fundraising
• LPs
• GPs
• Early-stage
• Australia
• AirTree Ventures
• Blackbird Ventures
• Venture
• Brandon Capital