Australian venture capital needs a new story

Venture-capital executives have downplayed a 9 percent increase in the number of deals this year, which the industry body trumpets as a sign of success.
Written by Mahesh Sharma, Correspondent

Industry group Australian Private Equity and Venture Capital Association Limited (AVCAL) said that venture-capital (VC) firms invested AU$122 million in 83 companies in financial year 2012 across 133 deals; a 9 percent increase in the people receiving money, but a 4 percent drop in the amount being distributed.

The report even cites startups that were founded by Australians, based in America, and raised money from US VC firms — even though this activity doesn't count toward the report.

The story of Australian VC is clearly weak.

One problem is that because there is so little VC available in Australia, an increase does not necessarily indicate a healthy climate, according to Startmate founder Niki Scevak. When framed in the context of the investment activity over the past decade — the standard lifetime of a VC fund — the increase appears to be a "sampling error."

"On an absolute level, it's pretty low. You could probably go back 10 years to see the heights it has reached — certainly, we can see now that the 1999-2000 period was an aberration — but it still is a very, very small amount," said Scevak, who recently co-founded early stage VC firm Blackbird Ventures.

Scevak said that a more relevant (and damning) metric is to compare Australia's per-capita investment with the gold standard: America.

"Australia has over 20 million people. The US has roughly 300 million people. But still, the per-capita rate of venture-capital investment is so much lower than the US. Closing that gap would give me positive thoughts about the industry as a whole."

The federal government's ACRE Clean Technology Fund initiative swelled the pool of available funds by AU$160 million last year, but OneVentures managing director Michelle Deaker said that this will not have a significant impact, and will only benefit a single industry.

"Overall, there is still a dearth of available venture capital in the market, so a 9 percent increase, even if significant, is still off a low base," said Deaker, whose AU$40 million firm has invested in early stage startups, including University of New South Wales spinoff SmartSparrow.

One of Australia's most active tech startup investors Starfish Ventures has spent about AU$30 million on seven startups, most of them early stage, in the past 12 months. The man who leads the firm's mobile/web tech interests, partner Tony Glenning, believes that there needs to be three times as much activity before we should get excited.

"I would like it if it grew 30 percent; then I'd say: 'ah, that's really interesting!' Or if it shrank by 30 percent, but at least plus or minus 10 to 20 percent, otherwise it's just a signpost," said Glenning, who secured a position on the AU$1.5 million investment round in ScriptRock. "There is no way I would tell you this is a dramatic shift or anything."

He said that volume is a better measure of investment.

The industry body has to realign its priorities to create a more meaningful dialogue about the role of Australian VC; otherwise (like many of its older members), it risks becoming another dinosaur made extinct by the modern era of entrepreneurship.

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