Writing is on the wall for Aussie VC industry

Writing is on the wall for Aussie VC industry

Summary: It is telling that Australian venture-capital providers VCs have barely rated a mention in what has been a watershed year for local start-ups, and it appears that the vanishing act will persist for some time.

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TOPICS: Start-Ups, Banking
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It is telling that Australian venture-capital providers VCs have barely rated a mention in what has been a watershed year for local start-ups, and it appears that the vanishing act will persist for some time.

It has been a stellar year of investments for Aussie start-ups whose business models have been validated by American VC firms and investors, including an $11 million investment in Melbourne-based data research start-up Kaggle ($11 million), Wollongong-founded digital receipts start-up Grabble being acquired by Walmart (over $10 million), US$15 million being injected into Sydney-based ecommerce application BigCommerce and a $35 million investment in design marketplace 99designs by Silicon Valley firm Accel investments.

This top-level cherry picking complements the huge groundswell in grassroots investment activity led by seed accelerators Startmate and AngelCube, as well as angel investor organisations, such as Sydney Angels, which this year launched a $10-million sidecar fund. Even the Australian Government recently got in on the act with a $10-million funding commitment for 23 inventions.

Yet at a time when the local industry is going gangbusters, the Australian VCs have had their heads in the sand.

I understand that at the recent Advance Innovation Program event in Melbourne, Aussie local VCs said that they were only interested in local entrepreneurs that had completed an apprenticeship in Silicon Valley.

The irony is that Australian entrepreneurs in the Valley don't need local VCs, as demonstrated by this week's announcement of a $1.5-million investment in antipodean start-up Science Exchange.

Worryingly, this kind of small-world thinking completely ignores the strength of Australian start-ups.

The likes of Atlassian and 99designs succeeded because they embraced the challenging Australian market conditions, not because they avoided them.

Australia's small local market forces start-ups to aim global from day one — a distinct advantage over their navel-gazing American counterparts — and the lack of human capital available here means that Aussie companies need to do more with less, often driving efficiency through automation and processes.

Most importantly, the lack of locally available funding forces Australian companies to develop profitable business models in order to survive.

Traditionally, the VC plays a critical role for start-ups that have proven their business models and need to graduate to the next level of growth and returns, usually going global by scaling their operations.

In an increasingly globalised funding market, Australian VCs are just sitting on their hands, and can't compete with the dollars, contacts and knowhow of their American counterparts, which are travelling great distances to secure deals in our own backyard.

One hope for the industry is the new $25-million early stage fund Adventure Capital, which hopes to be the Dave McClure of Australia, and which has already gone close to some big deals (including funding Grabble).

However, it will take time before the fund realises its full investment potential, and until then the local venture-capital industry will shrink in relevance.

Topics: Start-Ups, Banking

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