Why VC Funding is Slowing in Growing Aussie Startup Ecosystem
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The Australian startup ecosystem is flourishing. Last year, 712 new startups started operating in the country, and venture capital investment into Australian startups jumped 36 per cent, to reach a record high of $1.25 billion.
But that’s not the full story. A report by the government department of industry, innovation and science has shown a decline in growth rates of new investments made by venture capital funds across the country.
The FY18 report by Early Stage Venture Capital Limited Partnerships (ESVCLP), a program that aims to stimulate the early stage venture capital sector in Australia by helping fund managers attract pooled capital, offering tax benefits, connecting investors with early-stage businesses and helping businesses grow by receiving financial support and guidance from experts, says the four most active fund managers in Australia—AirTree, Follow [the] Seed, RightClick Capital and BlackBird—are responsible for 32 per cent of total new investments made in FY18. It adds that mere seven per cent of individual funds have made more than 10 investments, 20 per cent invested in six to 10 start-ups and 73 per cent invested in less than five start-ups or didn’t invest at all.
The numbers look promising if looked at from the perspective of the total capital invested, with $223.1 million capital invested in FY18. But when compared against the growth rate, it shows a steep decline in comparison to previous years, slowing down by a factor of 5.5x.
Follow [the] Seed, for instance, made 13 individual new investments in the 2018 financial year, bringing their total investments for startups to 19. The global data-driven VC, with partners across Sydney, San-Francisco, Tel-Aviv and Beijing, invested last year in Riskwise, a service for property risk assessment that uses smart algorithms to calculate an accurate projected view of the risks and potential returns of individual residential properties across Australia; Jayride, an e-commerce marketplace that provides seamless transport experiences for travellers, to compare and book transfers from over 3,000 transport companies; and Farmbot, an Australian AgTech company that provides a turnkey IoT solution for farmers to remotely monitor their most critical asset, water.
The founding partner at Follow[the]Seed, Andrey Shirben, claims the decline in the number has to do with risk aversion. He adds that only a shift in mindset can bring meaningful change to this ecosystem.
“There are only a handful of funds in Australia that are walking the walk. When a fund doesn’t make any investments or makes very few of them, it means it either doesn’t have sufficient funds or that it is not willing to take the risk, which defeats the purpose of starting an ESVCLP, to begin with. It’s a risky business and the way I see it, if you don’t fail with most of your investments, you simply didn't take enough risk,” Shirben says.
He adds that Australia has a low reported VC per capita (less than half of the OECD average), and when filtering out the VCLP’s (which mostly correlates with PE, private equity, and not with VC), it gets even lower. Australian VC per capita, for instance, is between $15 and $30 (depending on whether you include the VCLP’s in the count or not), while Sweden has $122, UK $114, France $60 and Germany $60. “It all boils down to the conservative investment approach that is so inherited in this country. I think the ESVCLP is a great program that helps shake some of the risk element off and encourage a shift in this paradigm. But if you’re there just for the tax benefits, you are not helping the innovation ecosystem at all.”
There were 22 funds, who are not accelerators and are within their investment horizon, and they made zero investments for the 2018 financial year. This shows that 36 per cent of funds are not making any new investments. Seventy of the investments made are “follow-ons” and they account for almost a third of the deals. While this shows a great support system for the existing already funded startups, the issue is for the 49.2 per cent of new startups that are trying to raise funding to scale their operations, according to the recent Startup Muster survey.
“I sometimes feel like some people don’t really understand what the ‘V’ stands for in the ‘VC’ and focus only on the ‘C’,” says Shirben.