2011 was an up and down year, with 2-speed economies across the globe. In Australia, most of the talk has been of a ‘resource’ bubble (with sprinkles of ‘housing’). Elsewhere, froth was brewing from the ‘tech bubble 2.0’.
The US (or specifically, Silicon Valley) was the source of most concern. Valuations for early stage companies were ‘crazy’, ‘out of control’ and ‘way too frothy’.
It was a topic for much navel gazing and debate. The tech blogs loved it: Was it 1999 all over again? Was it even a bubble? And if so, did it really matter, given all the ‘crazy’ valuations were for private companies? The only investors who’d be affected if/when it burst would be already-rich white guys on the west coast (vs mom and pop shareholders in tech bubble 1.0).
The hand-wringing even went mainstream over here, with SMH publishing a piece by Freelancer CEO Matt Barrie titled ’_The tech boom is back, strap yourself in’_
With all this frothiness, you’d think it would be a mammoth year for VC in Australia…
These charts say it all.
Source: AVCAL Deal Metrics Survey, 2011
2011 was the quietest year for venture capital in Australia since 2006. Both the volume and value of new investments were the lowest in 5 years. Only 34 new VC investments were made last year, at a total value of $35M.
Staggering eh? Can’t wait for that ‘bubble’ to pop…
If 2011 was a ‘tech bubble’, where the bloody hell were the VCs?
I doubt there’s a single answer to this question. But I’ve seen and heard a few offered around the place. I’ll comment on a few potential factors, and what it might mean for the (traditional) VC model in Australia.
_So, what happened to VC investors in Australia in 2011?_ 5 possibilities..
1. They were ‘waiting out’ an uncertain economic climate.
2011 was a year of real uncertainty. US in recession. Europe tanking. Aussie dollar like a yo-yo. Equities markets following. No doubt this played on the mind of any early-stage investor.
You can make a (pretty good) argument that this shouldn’t change things dramatically for early stage investment (and a few famous VC bloggers do just that). VCs raise a fund with a mandate to invest. They should invest through the cycle, rather than worrying about ups and downs. But 2011 did point to some systemic risks (circa 2008), and for many people, cash was king. And as Mark Suster pointed out at the time, VCs are only human to also be concerned by this stuff.
2. Their institutional funding dried up.
Many funds in Australia are apparently nearing the end of life. Once a fund is committed, VCs need to raise another to make any new investments.
Most VC funds are made up of institutional money (eg super funds). If a lack of investment was driven by a lack of access to new funding, we need to ask why.
For the past 3-5 years, I wonder if Australian institutional fund managers were caught up in a bubble of their own: equities (driven by resources) and property? The returns from these asset classes could have arguably outstripped early-stage companies (I haven’t seen the data). And for a period, they probably appeared less risky.
If VCs struggled to raise new funds because institutional funding was allocated elsewhere, then we really need to be focusing on the other ‘bubbles’ in the Australian economy – not anything related to tech.
3. Startups became cheaper to fund, with investments better suited to angels and private investors.
Internet startups don’t need millions of dollars to prove a concept. In most cases, it’s now possible to do with tens of thousands (rather than millions) of dollars.
Small investment amounts like this are generally more suited to angel investors (individuals who invest their own money) than insititutional venture funding. If you’re managing a fund of $100M, it’s just not worth the time and effort to invest $50K in an unproven concept.
The ‘incubator’ concept (made famous by Y-Combinator in the US) did emerge locally last year, to capitalise on this trend. Startmate came first, then PushStart in Sydney, AngelCube in Melbourne, and a bunch of others.
Could it be that Australian startups were still getting funded in 2011, just in smaller amounts by more ‘non-VC’ investors?
4. Overseas capital became more accessible to startups.
The last few years have seen major US investments in several Australian startups. Huge investments from US firm Accel in Atlassian ($60M), 99 Designs ($40M) and ozForex ($70-110M). Big Commerce ($15M) and Kaggle ($11M) were a few other major wins for local startups with US investors. Interestingly, 99Design’s next competitor, DesignCrowd did secure one of 34 VC investments made last year.
At the ‘earlier’ end of town, the trip to Silicon Valley to pitch for investment has also become a reality. Startmate companies went, and conquered: 3 companies achieved investment from US sources. By the end of the year, one had already been acquired.
From what I understand, the Startmate focus on funding from the US was driven as much by necessity as anything else. The response from local angels to investment opportunities was apparently ‘surprisingly low’.
I can speak from first-hand experience in saying that many Australian startups now view the US as a realistic source of potential funding. By all accounts, terms and valuations are more favourable to entrepreneurs (where locally they can seem onerous in comparison). There’s a much stronger culture of early-stage investments, where uncertainty is just a part of building an innovative model (vs a weakness in planning, or an ‘unacceptable’ risk).
This may be naivety on the part of local startups, but there is a genuine belief that with a global idea / business model, funding is no longer restricted to local sources.
Or, one final possibility…
5. Australian entrepreneurs didn’t produce enough fundable startups.
I don’t believe this last point, but added it for argument’s sake. The startup scene is booming, with new incubators, support models and communities seeming to pop up every month.
It may still be an less developed startup scene compared to other global hubs, but I cannot imagine more so than any year previously in Australia (where the level of VC investment was higher).
I think the 3rd and 4th possibilities have the biggest implications for the VC industry in Australia.
Let’s stop to think about the trends startup funding. It’s cheaper than ever to start a company. Smaller amounts of funding can go further (often referred to as the ’lean funding approach’). If your model is globally scalable, it’s now realistic to attract international capital.
What does this mean for venture capital in Australia?
I think these trends point to a shift in the VC landscape in Australia, which is already becoming apparent.
A few hypotheses, at least for venture funds in the tech/internet space:
> Investment amounts will be smaller. Therefore funds will be smaller. Therefore VCs will be competing against a bunch of new players in this space…
> To compete against angel/incubator model, venture funds will need to accept more risk by investing at earlier stages. If they don’t want to compete in this space, they risk being disintermediated altogether. By the time a globally-focused startup needs greater amounts of funding, they’re already heading offshore.
> Australian VCs will increasingly need to position themselves as a ‘bridge’ to global markets. Their role becomes one of guiding and preparing a startup to perform (and raise funding) on a global stage.
> As a result, strong linkages to the US West Coast (or Asia) will be particularly important. ‘Isolationist’ VCs will find it hard to compete. We should see VCs start to differentiate based on their geographic focus.
We’re already seeing evidence of most (if not all) of these trends in the emergence of a few new funds over the past 6 months. Smaller investments. Earlier stages. Strong links to the US.
The ‘traditional’ VC model ($5-10M investments) seems to be dying slow death in Australia. The stats tell the story.
It will be an interesting few years to see who emerges, survives, or disappears in the transition.