Venture capital (VC) is an integral part of the Australian economy, continuing to shape the business landscape at an increasing pace.
In Australia it has been instrumental in the introduction and growth of some well-known companies such as Canva, Atlassian, Austral, Afterpay and Seek, to name a few. The most notable investments continue to pour into the Technology sector while finance and insurance-related start-ups are also taking up a significant chunk of investment interest.
The VC landscape is historically associated with Silicon Valley; however, the last 10 years have seen an increasing globalised shift. Whilst the US continues to be a significant player in the VC space, Australia’s share is rising and is fifth in the Global Entrepreneurial Index (GEI). Deal values of $200 million in 2011 rose to over $2.5 billion in 2021 and the growing VC landscape in Australia shows no signs of slowing down with over $2.2 billion of capital still to deploy.
A stable economic and political environment combined with the government’s strong response to COVID-19 have increased investor confidence and set us apart from other economies. Traditionally, Australia’s geographic dispersion of economic activity may have been a barrier to the development of a sophisticated global VC ecosystem (unlike clusters in the US such as Silicon Valley and Boston). However, with changes in government policies as well as the impact of COVID-19 to accelerate digitisation and embrace remote working, geographic barriers are no longer a deterrent to investors.
We are likely to see continuous growth in the EdTech, FinTech and Cloud SaaS platforms in the future, however, border closures and immigration restrictions have resulted in an acute shortage of tech skills resulting in early funding rounds due to higher salaries. Further investment by the Federal Government in implementing the latest ‘Digital Economy Strategy’ will continue to see money flowing into the tech sector. Recent data for 2021 indicates a slight drop in technology investments making way for diversified investments in the health and services sectors.
Venture capital in Australia is supported by federally funded programs which encourage investment in venture capital funds by providing incentives and tax exemptions to investors. The programs include the Early Stage Venture Capital Limited Partnerships (ESVCLP) and Venture Capital Limited Partnership (VCLP). Typically, ESCVLP funds attract local institutional investors whereas VCLP funds are preferred by international investors.
IT and Services sectors have the greatest investment amount by ESVCLPs while VCLPs have their largest investments in Services, Manufacturing and Health Care & Social Assistance sectors, according to the recently released venture capital data by the Australian Government. The main sources of funding for VCLP’s excluding Australia are from US and Cayman Islands. The financial year ended 30 June 2021 saw a significant increase in ESVCLP investments in the Start-up and Seed stages compared to the previous periods which was dominated by rising investment in the early expansion stages.
As the VC ecosystem in Australia is still young, there is immense opportunity to strategically invest in areas such as the climate sector, sustainable investing and female-founded businesses, which will influence change in the business dynamic into the future. The rise of investment in Start-up and Seed stages indicate that the market for 2022 is ripe for entrepreneurs as investors chase companies with strong product fits and pre-revenue start-ups.
This article was published in the 2022 IPO Watch Australia Report.