With the rise of Aussie start-ups (712 started operating in 2018 in Australia alone) and a growing entrepreneurial culture trending in Australia with the popularity of conferences like StartCon, SouthStart, Spark Festival and LAUNCH Festival, it’s a surprise that The Department of Industry, Innovation and Science’s FY18 Early Stage Venture Capital Limited Partnerships (ESVCLP) report has shown a decline in growth rates of new investments made by venture capital funds across Australia.
According to the report, 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 (when excluding funds that are already past their investment horizon and accelerators which by nature invest in more companies but substantially smaller capital).
In fact, only 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 centinvested in less than five start-ups or didn’t invest at all:.
Looking at the total capital invested seems promising at a first glance with a total of $223.1 million capital invested in FY18 (making it the best year so far). However, when comparing it against the growth rate, it shows a steep decline in comparison to previous years, slowing down by a factor of five-and-a-half times.
In the 2018 financial year, Follow [the] Seed made 13 individual new investments to bring their total investments for startups up to 19.
Andrey Shirben, founding partner at Follow[the]Seed, says that this all has to do with risk aversion and 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 said.
“Australia has a very low reported VC per capita (less than half of the OECD average), and when filtering out the VCLP’s (which mostly correlate with Private Equity and not with VC), it gets even lower. For example, Australian VC per capita is somewhere between $15 & $30 (depends 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. I sometimes feel like some people don’t really understand what the “V” stands for, in the “VC” and focus only on the ‘C’.”