The venture capital investment model is outdated and local firms are being forced into a narrower niche in response to increasing funding pressures, according to Accede Capital chairman and former Radiata co-founder Chris Beare.
The start-up investment ecosystem has been disrupted by the new generation of application- and internet-based start-ups that can be launched with minimal investment, Beare said.
The traditional venture model is based on making large investments in long-term, capital intensive businesses, so Beare said the industry had missed the opportunity claimed by angel investors and incubators.
"Because of the nature of start-ups they don't need as much money to prove a concept, you can mash up something ... without much money," Beare said. "So the start-up funding necessary has dropped below what venture traditionally backs."
"The VC really backs more capital-intensive rather than knowledge-intensive businesses," he said. "The VC model doesn't really work for ideas companies, so angel investors have stepped into that space."
The rise of the angels, combined with waning interest from institutional investors, have made it very difficult for venture capital firms, which will be forced into a narrower niche in the funding supply chain, Beare said.
The Accede Capital chairman believes the best opportunity is to invest $5 million to $10 million into entrepreneurs who are developing hardware-based products, such as biotech, medical devices, and IT equipment and components.
Beare had his biggest success when Radiata — the wireless chipset company he founded with David Skellern — was sold to Cisco for $567 million in 2000.
"Those take a long time to get regulatory approval and therefore take a bit of money," Beare said. "I think you'll find venture backing there and I think you'll find it in integrated circuit start-ups and IT equipment companies, but they're all hard spaces these days.
"There's still a niche for Australian VCs, but it's a much narrower niche than it used to be. It won't do angel-backed start-ups in the internet space, it won't be doing the big ticket, later stage deal of the big US funds.
"There'll still be a slice in the middle where they can put $5 million to $10 million in a company that's well founded with experienced entrepreneurs that have done it before, but there's not as many of them and that's a harder space."
Beare admitted that venture capital firms had been doing it tough in the past couple of years, including at Accede Capital, founded in 2000, when it was spun out of Deutsche Bank with a mandate to invest in new technologies.
Its investments included stakes in a number of Nasdaq-listed IT component and equipment companies. The fund reached its end of life in mid 2011, and while Beare would not disclose whether it delivered a profit, he admitted the return "wasn't great".
He added the funding market is tight and institutional investors aren't interested in backing new venture funds.
The Australian venture capital industry is facing increasing competition from American firm Accel Partners looking to invest $120 million in local start-ups, and also Telstra's plans to establish a $50 million pool to invest in local applications, being led by Accede Capital co-founder Matthew Koertge.