Snowball Group Whitepaper - Evolution of Venture Capital in Australia

EVOLUTION OF
VENTURE CAPITAL
IN AUSTRALIA
12th Feburary, 2014

WHITEPAPER BY SNOWBALL GROUP

Level 3, 296 Collins Street
Melbourne Victoria 3000
Phone: (613) 9005 2124
Email: contact@snowballgroup.com.au

www.snowballgroup.com.au

“Disinterest by private
equity investors is resulting
in companies leaving
our shores in droves and
seeking private equity
investment in more liquid
markets. With them we
are losing our innovation,
our talent, our commercial
future.”

Snowball Group - Evolution of Venture Capital in Australia

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Evolution of Venture
Capital in Australia
We take a brief look back in history at private equity
funds, venture capital funds and start-up funding in
Australia and attempt to predict what the future holds.
Compared to the USA, Europe and throughout
Asia when it comes to investing in start-up
and early stage ventures, risk averse Australian
investors show a distinct lack of interest and
a blatant distain for even bringing them up
as an alternative asset class or an investment
option. On the other hand, private equity
buyout funds and investment in large private
companies appears strong, even if Australian
institutional investors have abandoned the
private equity sector over the last couple of
decades. What does this mean for private
equity investment, and in particular the
venture capital sector’s future? We take a brief
look back in history at private equity funds,
venture capital funds and start-up funding
in Australia and attempt to predict what the
future holds.

they’ve demonstrated a genuine appetite
for some of Australia’s largest and iconic
companies. This hasn’t been without its trials
and tribulations. Nevertheless, amongst a
plethora of choice, especially coming out of
the emerging economies, in particular Asia,
they have persisted and continue to show a
genuine interest in Australian businesses.

There is no doubt the strength of the

Unfortunately, the Australian Venture Capital

private equity buyout sector in recent

(VC) sector hasn’t faired as well. In fact,

times has been due to some of the largest

Australian start-up ventures and early stage

private equity firms in the world appearing

companies looking for capital to grow their

on our shores. Since mid-2008 onwards

companies are now abandoning Australian

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investors in droves and going offshore.

paper reviews the evolution of the venture

We are losing our most valuable assets,

capital and private equity investment sector

“innovation and creativity”. It’s going to

in Australia and attempts to determine what

overseas investors who’re less risk averse

lies in ahead.

and more visionary. Overseas venture
capitalists and angels appear to be more
entrepreneurial and prepared to invest in
ventures with higher risk and longer-term
horizons than their Australian counterparts.
However, those that look to Australia are few
in number and constrained in what they can
allocate to ‘Down Under’ investments.
When it comes to investment in innovation
at the seed to start-up stages, irrespective
of the public rhetoric and relatively meagre

In the beginning...

incentives offered by Government, local
investor support is abysmal. This isn’t a

The origin of VC funds and private equity

swipe at those who’ve tried valiantly to

(PE) buy-out funds in Australia occurred

support start-ups over the last decade. No,

relatively recently in our short history. In the

we have the greatest respect for those who

1970’s the first VC firm was ‘International

clearly have identified where Australia’s

Venture Corporation’ Pty Ltd (IVC), dedicated

future lies – and it’s not mining and riding

to private capital transactions. Indicative

on the sheep’s back. It’s more of a hard

of the times, the types of early venture

long glare at institutional investors, angel

capital investments IVC focused on included

investors, large VC and PE fund managers,

aquaculture, road surfacing and concrete,

and more generally at sophisticated

consumer finance, leasing, property services,

investors who consistently show a

marine equipment manufacturing, intensive

preference for risk aversion and short-

piggeries, off-peak heater manufacturing,

term gain, sticking with classical stocks

Australian film production, laser equipment,

and property investments, without much

mineral exploration and pyrophyllite

foresight for the future of the country.

extraction and processing1.

To shed light on why this continues to occur

‘Enterprise Management of Australia

in Australia while the USA and Asia are in

Corporation’ (EMA) followed IVC two years

a frenzy investing in innovative start-ups,

later. EMA invested in the tourism and

let’s first take a step back in time. This white

leisure sector, as well as the manufacturing

1. We highly recommend you read ‘Inside Private Equity’ by Bill Ferris, which provides an insightful account of the private equity and venture capital scene in Australia. This book published in 2013 by
Allen & Unwin is a main source of many of the historical accounts in this article. In particular refer to pages 208 – 240.


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and services sectors. IVC and EMA had mixed

momentum in private equity investment

results, both selling off their assets in the

started picking up pace, it hit a brick wall

1980s.

at the first sign of trouble. This began
a continuing trend that remains today,

Another participant in the private capital

reflecting the risk averse nature and short-

sector was Hambro-Grantham focusing on

tem perspective of Australian investors,

small technology companies operating under

with little or no commitment to intrinsic

the MIC2 scheme and establishing a parallel

value and long-term investment. Right from

fund.

the gecko Australia’s private equity and

Other initiatives in the 1970’s included the
Australian Innovation Corporation aimed at
getting investment in early stage ventures,
and the government owned Australian
Industry Development Corporation (AIDC)
focused on major manufacturing and mining
project finance. The AIDC also invested in
small advanced-technology ventures. One
of their most notable investments was in
Optus, later going on to ultimately become
a subsidiary of the SingTel Group out of
Singapore.

venture capital sector faced a rocky pathway,
continually stopping and starting in line
with health of the financial and economic
climate. As we will see, even government
support and incentives, whether or not done
politically derived, or whether considered
as ultimately ill conceived have never
been able to overcome the deep seeded
structural and cultural problems faced by
the Australian private equity sector and local
investors.
At he end of the 1970’s it was evident that
private equity financial returns weren’t

“Right from the gecko

compelling enough to shift the attitudes

Australia’s private equity and

of large superannuation fund managers

venture capital sector faced a rocky

and their investors away from risk-averse

pathway, continually stopping and

investment. Industry funds were sufficiently

starting in line with health of the

catered for from the steady and less risky

financial and economic climate. “
Although there was evidence of moderate
success, during those early years there were
also a number of unsuccessful ventures
involved in computer equipment, telecoms
and software development. The result
was an immediate pullback by investors
from private capital investing. Just as the

returns of the top 100 listed companies,
treasury bonds and inflation-driven property
assets. Here lies the conundrum. The
introduction of equity capital markets in
Australia has been good and bad for the
modern world, and in particular Australia
since their introduction. The ability of
publicly listed companies to trade their
shares on stock exchanges has considerable

2. Management and Investment Companies (MIC) scheme was a program introduced in 1984 to encourage investment in innovative startup technology businesses. It offered financial, strategic and
administrative assistance to venture capital investors. The government issued MIC licenses to companies who satisfied the Government’s strict criteria. By the end of 1991 the MIC program achieved
relatively good success with $225.4 million invested in 155 companies. The scheme provided upfront tax deductions. As a result the tax incentive tended to dominate investors’ motives rather than
the investment outcome itself.

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benefits in the investment world. It enables

and institutional shareholders about the

companies to raise capital through their

immediate impact to earnings in the next

IPO and then later in secondary market

quarter.

activity. It attracts a wider range of investors
from institutional investors, sophisticated
investors, to retail investors. It provides
greater liquidity within short time frames,
with the safety that comes from regulation,
strict compliance requirements, operating
on a transparent trading market platform.
Continuous disclosure is undoubtedly a
major plus for having public companies. It
ensures fair play and avoids the likelihood of
insider trading and ill-informed decisions by
buyers and sellers.
However for all its benefits, the antithesis

Over the years Government has
stepped in to stimulate private
equity investment

is the cultivation of an investment culture
where investors generally focus on high

In the 1980’s, as a consequence of a

turnover, short-term horizons, for market

government review3 a report was released

driven gain. There is little insight or care

identifying the problem facing early stage

given to the specific machinations of a

high-technology enterprises in Australia.

company, its intrinsic value, and its long-

Apart from the lack of quality management

term vision. In many ways this is the

operating these companies, the biggest

opposite of private equity where investors,

problem (as alluded to above) was a

shareholders and management alike focus

poor attitude toward high-risk, long-term

on the core value proposition, the long-term

investment. As a consequence the report

horizon, seeking reasonable yield along

concluded there was a lack of technological

the way, with a greater focus on long-term

development due to a lack of capital

capital growth and sizeable return when

allocated to it. Investors opted for short-

their investment is realised. The investor

term, risk-averse investment opportunities.

has to really buy into the vision, have faith

As a consequence of these findings the MIC

in the management, understand the risks

scheme and subsequent programs were

and back the core proposition right from

commenced.

the start. Management and the directors can
make the hard decisions for the long-term
good, not be driven by satisfying analysts

Although assistance in promoting
investment in innovation should be
perceived as an admirable initiative, a

3. The Espie Committee was established in 1981 and chaired by Frank Epsie. The findings were released in a report in 1983. As a result the MIC scheme was born.


“The fact government assistance
is needed, or in fact is the main
driver for investment in start

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More than ever these traditional stock
selections are becoming very sensitive to
the continuing negative influences of an
uncertain global political and economic

up and early stage technology

environment. Australian investors are still

investment is an indictment on

focused on local banking and finance

investors in the Australian market.

companies, property, mining, resources,

Elsewhere, notably Silicon Valley,

energy and utilities, and to a lesser extent

private investors have thrived on

infrastructure investments.

high risk and high returns of long-

In fact, Australia’s reliance on cyclical

term investment opportunities in

investments such as high-risk mining

the technology space. It appears

stocks is indicative of investors’ short-term

investors in Australia are stuck in the investment horizons. But in the long-term
risk averse psyche of investing in old it presents limited foresight to Australia’s
faithfuls, old world stocks. “

continuing prosperity. They are now fairly

good thing, it also highlights the inherent

global economic crises, the high Australian

problem facing growth and development of

dollar, and commodity price fluctuations.

private equity in this country. Please don’t

The new emerging economies including

get me wrong any help is warmly received.

China are able to influence world commodity

The fact government assistance is needed,

pricing, placing Australia in a vulnerable

or in fact is the main driver for investment

position.

high risk, rising and falling due to effects of

in start up and early stage technology
investment is an indictment on investors in

The amount of infrastructure spend needed

the Australian market.

is both prohibitive to the Government as it is
to private financiers and investors, including

Elsewhere, notably Silicon Valley, private

the miners themselves. Yet investors persist,

investors have thrived on high risk and

relying on non-renewable export products,

high returns of long-term investment

ignoring the less riskier and more valuable

opportunities in the technology space. It

resource we have in information technology,

appears investors in Australia are stuck in

engineering and life sciences.

the risk averse psyche of investing in old
faithfuls, old world stocks. The truth is the

We astound the world with our high degree

world has moved on and these traditional

of invention and innovation, but instead of

investment selections are now proving to

the private sector harvesting this asset and

demonstrate inherent high risk.

encouraging it, meagre funding via

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government grants and subsidies, and a lack

The R&D tax concession scheme provides a

of participation by private investors has

tax deduction of up to 125% (since 2011) of

seen steady erosion of our precious resource

expenditure incurred on R&D activities4.

to offshore markets. Optimism about our
future won’t overcome the problem that has

Another initiative was the Grants for

permeated our history. The reality is overseas

Industry Research & Development (GIRD)

investors value what we have and we do not.

scheme, aimed at encouraging a focus on
new emerging technologies. These schemes

The pattern has repeated itself throughout

tend to come and go with the rise and fall

the evolution of venture capital and private

of new Governments, usually with a political

equity in Australia. If we go back around

agenda attached.

the mid-1980’s, investment in private equity
began to take hold due to tax incentives
from programs like the MIC scheme. The

“We astound the world with our

owners of private companies also began to

high degree of invention and

use secondary boards as a great platform

innovation, but instead of the

to raise equity capital, or realise their

private sector harvesting this

investments.

asset and encouraging it, meagre

It involved less complexity and cost

funding via government grants

compared to listed public companies. In

and subsidies, and a lack of

fact around $1.4 billion of capital raising

participation by private investors

occurred through secondary boards in

has seen steady erosion of our

Australia leading up to 1987, with a market

precious resource to offshore

capitalisation of $3.8 billion. However,

markets. Optimism about our future

with the 1987 financial market crash,

won’t overcome the problem that

the momentum gained in private equity
investment came to a sudden halt as
investors withdrew and returned to riskaverse investments, drying up the activity on

has permeated our history. The
reality is overseas investors value
what we have and we do not.“

secondary boards.
At the end of the decade we saw a range of

At the end of the 1980’s other sources of

activities aimed at encouraging investment.

funds and incentives became prominent.

This included R&D concession schemes

These proved to be catalysts to the evolving

to encourage exporting and investment

activity in venture capital and private equity

in research and development, especially

investment. The MIC scheme

technology, engineering and life sciences.

4. R&D tax concession entitlement commenced in 1985, initially as a 150% tax deduction on R&D expenditure. In 1986 this was changed to 125% tax deduction. In 2001 two new elements were
introduced
Post 2011 the R&D Tax Incentive provides eligible companies with a 45% refundable tax offset (equivalent to 150% tax deduction) for R&D entities with a turnover of less than $20 million per
annum. It also provides a non-refundable 40% tax offset (equivalent to 133% deduction) for all other eligible R&D entities.


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was subsequently replaced by the ‘Pooled

inventiveness and ability to innovate. Over

Development Fund’ (PDF) program. Unlike

time, for a country with a relatively short

the MIC, PDFs focused on providing tax

history and a small population, Australians

incentives when investments were realised;

have continually been responsible for

providing exemption to capital gains tax
and having greater flexibility than the MIC

“Whether it’s due to the

scheme. PDFs offered greater incentive to

tyranny of distance,

institutional investors. The government also

necessity, or inherently

introduced additional programs, important to

part of our culture,

the commercialisation of research work.

Australia possesses

The advent of Cooperative Research Centres

something the rest of the

(CRCs) in the 1990’s was an important

world admires and actively seeks,

development in the private equity sector for

our inventiveness and ability to

several reasons. The aim was to provide the

innovate. “

right incentive to support and commercialise
important scientific research residing in

some of the world’s most important

Australian universities. At the time, and the

break throughs. Today is no different. The

reasoning still remains, it was realised that

introduction of CRC programs in 1991 was

Australia’s heavy reliance on its primary

aimed at enhancing Australia’s economic

source of export, namely minerals, coal,

growth through fostering collaboration

gas and agriculture was unsustainable.

between government, universities and

As mentioned above, these sectors are

private companies. CRC programs look

cyclical by nature and face increasing global

to facilitate research initiatives and

competitive and price pressures, especially

reap the benefits of cooperation by

when the Australian dollar is high against

encouraging outcomes in adoption and

the US dollar. There was a realisation by

commercialisation.

the Government in the 1990’s, and the
same is true today, we needed to harvest

Since commencing many CRC programs

our valuable know-how residing in our

have been established in the areas of

universities and look to commercialise them

manufacturing technology, information

to the rest of the world.

and communication technology, mining
and energy, agriculture, the environment,

Whether it’s due to the tyranny of distance,

and most notably medical science and

necessity, or inherently part of our culture,

technology. Examples of CRC successes

Australia possesses something the rest of

include the ‘Hearing CRC’ producing the

the world admires and actively seeks, our

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“The point being

The point being made is that CRC’s have

made is that CRC’s

proven and will continue to prove invaluable

have proven and will
continue to prove
invaluable in fostering
research, innovation and

in fostering research, innovation and
commercialisation, providing fertile ground
for venture capital markets well into the
future. CRCs also identify an important
ingredient in fostering commercialisation

commercialisation, providing fertile

of technology; you can’t do with just having

ground for venture capital markets

government support alone, private investors

well into the future. CRCs also

and corporate venturing has to be there in a

identify an important ingredient

big way.

in fostering commercialisation of
technology; you can’t do with just
having government support alone,
private investors and corporate
venturing has to be there in a big
way.“

Cochlear hybrid system restoring hearing
to the hearing impaired across the world,
the Australian Biosecurity CRC Program
producing a genetic diagnostic test used for

Innovation Investment Fund (IIF)
program

equine flu, and the Australian Photonics CRC
which brought together the universities of

Another major initiative by the Government

NSW, Sydney and Melbourne, the ANU, Telstra

continuing to have an enormous impact

and Siemens.

on investment in early stage innovative
ventures is the ‘Innovation Investment

There is large number of CRC programs

Fund’ (IIF) program. The IIF supports ten-

operating in Australia today including a

year innovation funds, managed by licensed

Polymer CRC for the automotive industry,

venture capital fund managers. These funds

a CRC for Enterprise Distributed Systems

are aimed at helping develop Australian

Technology, a CRC for Cotton Catchment

companies to become globally competitive

Communities and a CRC for Innovative Dairy

by commercialising outcomes of Australia’s

Products, an Environmental Biotechnology

strong research capability. The IIF program

CRC, and a CRC for Mental Health.

has been operating since 19985.

5. Over the three rounds the program has licensed16 fund managers and supported 100 new companies. In Rounds 1 & 2 nine fund managers were licensed and invested $221 million, matched with
a total funding of $354 million. For Round 3 and 4 the Australian Government committed up to $100 million to be equally matched by private sector capital.


11

In the latest round6 fund managers

$245 million. Seek, the online job website

appointed included Carnegie Venture Capital,

received venture capital by IIF fund manager

GBS Venture Partners and Innovation Capital

AMWIN Management, seeing the company

Associates. The Carnegie Innovation Fund

successfully list for a market capitalisation

No.2, Limited Partnership is focused on

of $600 million in 2005. Biotech QRxPharma

providing capital and support to a portfolio

was formed in 2002 with Four Hats Capital’s

of investments in seed, start-up and early

IIF Innovation Fund providing $4 million

stage companies .

as the founding investor, together with

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Innovation Capital Associates (registered
The fund is building upon a successful track

as a PDF) and University of Melbourne’s

record of investing in Australian companies

Uniseed.

that drive innovation in life sciences,
information technology and internet-

In 2007 the company raised $50 million in

enabled sectors, clean technology and other

an IPO. Other successes include the drug

industries.

discovery company Pharmaxis focusing on
autoimmune diseases and supported by

The GBS BioVentures V IIF fund is an

IIF fund manager GBS Venture Partners,

Australian life science specialist fund. The

and biotechnology company Alchemia who

fund invests in companies commercialising

received venture capital from four IIF fund

Australian biomedical innovation to

managers including Start-up Australia, GBS

create new medicines and medical devices

Venture Partners, AMWIN Management, and

to treat unmet global medical needs8.

Coates Myer and Company.

Innovation Capital Associates has a general
fund investing in Australian technology
companies with global potential. Potential
portfolio companies will operate in the
service and high margin manufacturing
sectors9.
The IIF program and IIF follow-on funding
(IIFF) contribute heavily to commercially
develop targeted firms and to develop a
self-sustaining early stage venture capital
industry in Australia. Notable success
stories include Looksmart supported by IIF
fund manager AMWIN Management who
invested $2.2 million and gained a return of

5. Over the three rounds the program has licensed16 fund managers and supported 100 new companies. In Rounds 1 & 2 nine fund managers were licensed and invested $221 million, matched with
a total funding of $354 million.

For Round 3 and 4 the Australian Government committed up to $100 million to be equally matched by private sector capital.

6. Round 3,Tranche 4
7. The Carnegie Innovation Fund No.2, LP received a matching grant of $40 million in April 2013. It’s reported total greater than $80 million, instead totaling $120 million
8. The GBS BioVentures V IIF Fund received a matching grant of $30 million in April 2013, totaling $60 million.
9. Innovation Capital Associates received a matching grant of $30 million in April 2013. Total fund size is $60 million.

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managers such as The Blackstone Group10,
Kohlberg Kravis Roberts (KKR)11, CVC
Capital Partners12, TPG Capital13, and The
Carlyle Group14. Even so, international PE
funds right from the start have found the
going fairly tough. There were a number of
failed attempts along the way at some of
Australia’s largest iconic companies, as well
as less than impressive outcomes for those

A rocky road for Private Equity
buy-out funds over the last
decade
As we entered the new millennium from
2000 and onwards we witnessed rapid
growth in private equity leveraged buy-outs
by private equity funds, mainly to support
expansion capital activity. This occurred
at the time when venture capital activity
and the performance of their funds were
levelling out. However, by the end of the
decade growth in the private equity buy-out

transactions that did proceed. Notably, KKR
had a run at Coles for a year before bailing
out in 2007, with Coles eventually being
bought out by Wesfarmers. Other failures
included TPG’s early tilt and spectacular
failed bid of Qantas. This was balanced out
with the buy-out and successful IPO float
of Myers Retail. In 2006 and 2007 there
was CVC’s buyout of Channel 9 at an overinflated price, incurring an eventual loss. In
2006, KKR failed in its bid for PBL Media,
subsequently investing in Seven West Media
including Channel 7. KKR exited in 2013.

segment started to dramatically dissipate.

The attraction of private equity buy-outs

Coinciding with the beginning of the GFC

by some of the largest private equity funds

and continuing on to today, large Australian

in the world was best demonstrated in

superannuation funds began withdrawing

2010 with the takeover battle for private

from investing in private equity. Participation

hospital operator and pathology provider

is now less than one per cent of their

Healthscope. TPG and The Carlyle Group

cumulative assets. They refuse to even even

hotly contested with KKR with a near $2.7

look at early stage venture capital.

billion offer.

On the other hand, around ten years ago

International PE buy-out funds are no doubt

we saw the first signs of interest from

here to stay. They sit comfortably with the

international private equity funds, replacing

few large Australian PE funds including

the Australian super funds and investing in

Pacific Equity Partners (PEP), Quadrant,

Australian private equity. It initially included

CHAMP, and Archer Capital. Collectively

an abundance of large private equity fund
10. The Blackstone Group L.P. is an American multinational private equity, investment banking, alternative asset management and financial services corporation based in New York City
11. KKR & Co. L.P. is an American multinational private equity firm, specializing in leveraged buyouts, headquartered in New York. The firm sponsors and manages private equity investment funds.
12. CVC Capital Partners is a private equity firm with approximately US$46 billion in funds focused on management buyouts. Since 1981, CVC has completed over 250 investments across a wide
range of industries and countries
13. Formerly Texas Pacific Group (TPG). TPG Capital is one of the largest private equity global investment firms focused on leveraged buy-outs, growth capital and venture capital. Total assets are
around $US48 billion
14. The Carlyle Group is an American-based global asset management firm, specializing in private equity, based in Washington, D.C. Total assets $US31.6 billion


13

they’ve provided the catalyst and continuing

valued at 6 times annual cashflow, then debt

commitment to private equity investment

may be 3 times the cashflow.

in Australia; replacing participation by risk
averse industry funds and large Australian

Even though banks are seen as majorly risk

superannuation funds who have kept away

averse, especially in the light of prudential

since the onset of the GFC.

regulations and liquidity restrictions due
to Basel III, the truth is they still like the

“What is evident is that
innovative start-up ventures
can’t rely and depend wholly
on non-government sources
of funding to support future

margins they can earn from private equity
leveraged buy-outs and mezzanine funding.
In Australia we’ve seen the disappearance of
many international investment banks from
Australian shores, less in-house resources
devoted to private equity investment, and

innovation in Australia. This is a

much less risk appetite. Yet the anticipation

sad indictment on the foresight

of greater M&A activity this year as a

and long-term vision of Australian

result of an estimated $4 billion of unused

investors and why our talent,

committed investor funds will no doubt see

intellectual property, our creativity
and ability to innovate are
progressively being transferred
overseas. “

the banks heavily involved. There’s also an
expectation by market analysts there’ll be
quite a few IPO exits in 2014 as funds seek
to realise long awaited returns. You can
be sure the banks will be there front and
centre.

Essential for PE buy-outs is the leverage
required from major Australian banks and

In the 2009 fiscal year, VC and PE funds were

highly liquid offshore Asian banks, whether

severely affected by the GFC. In Australia,

as a syndicate or as a club, whether having

the total funds raised fell to $1.54 billion,

a local or offshore presence. PE buy-out

similar to FY2004 levels. Investments

funds rely on leverage to drive returns to

involved the supply of capital to existing

equity. There’s no doubt prior to the GFC

investees for follow-on investments

we witnessed banks unrealistically exposed

and capital restructures. VC funds in

to risk with respect to private equity buy-

Australia mainly invested in life sciences,

outs. This has moderated compared to 2008

computer and computer electronics and

where debt was 8 to 10 times cash flows.

communication. PE funds invested mainly in

Nowadays, you’re more likely to get 50%

business and industrial products. VC funds

debt and 50% equity. That is, if the equity is

fundraising efforts fell by 19% to only $263
million. This reflected how difficult

14


the fundraising environment was. There was
no commitment for seed investments. Most
of the $180 million investments made in
FY2009 concentrated on start-up to early
stage with only 7% in seed and 26% in later
stage expansion/growth.
The significance of what occurred in 2009
is that it highlights a recurring theme;
as soon as there is any sign of adverse
conditions in the global economy, funding in
innovation initiatives is negatively impacted.
The decrease in committed VC funds was

Is there a place for Private
Equity investment and Venture
Capital funds In Australia?

swift and dramatic, demonstrating investors’
sensitivity to risk. What is evident is that

From a global perspective the past three

innovative start-up ventures can’t rely and

years15 has seen a lethargic and flat period

depend wholly on non-government sources

for the private equity buy-out market. This

of funding to support future innovation in

coincides with problems faced by global

Australia. This is a sad indictment on the

capital markets post-GFC and due to the

foresight and long-term vision of Australian

ongoing sovereign debt crisis and USA’s

investors and why our talent, intellectual

economic woes. Locally, Australia faired

property, our creativity and ability to

better with a relatively well performing

innovate are progressively being transferred

economy and growth rate, buoyed by the

overseas. Perhaps rather than the headline

mining boom and China’s demand for

concerns over foreign ownership of large

exports from Australia.

iconic businesses and mining resources that
are old world assets we can’t rely on in the

201016

future for our economic prosperity anyway,

After a period of consolidation the 2010

we should be more worried more about the

fiscal year showed signs of gradual

insidious loss of our new world assets. If

improvement. The Australian private equity

nothing else FY2009, the peak of the GFC,

and venture capital funds saw more invested

highlighted this ongoing problem we still

companies than funds raised. After 2008

see today.

and 2009, in an environment where capital
was hard to get, this was very welcome.
Nevertheless, post-GFC and in the light of
the tax treatment17 of private equity firms,
investors remained very cautious during this

15. This white paper was written at the end of CY2013 and start of CY 2014.
16. Refer to ‘The Australian Private Equity & Venture Capital Association’s 2010 Yearbook, released in October 2010.
17. In Australia moves were made to change the ‘Thin Capitalisation’ rules to reduce the safe harbor debt-to-equity ratio from 3:1 to 1.5:1 for non-financial entities. This limits interest deductions on
shareholder debt for Australian investments. This will be put into effect on 1 July 2014. This will have impact on overseas PE funds and their continued investment in private equity in Australia. This
is coupled with future possible tax reforms seeking to address instances of double non-taxation i.e. when exit gains aren’t taxable in Australia due to protection under a double tax treaty and are
also exempt in the vendor’s residing jurisdiction. The issue was raised in 2009 with TPG’s tax-free disposal of Myer Retail and the ATO’s pursuit through the courts to recover tax realised by TPG from
the sale.


15

time, reflected in less new commitments in

The general exit environment showed a

fundraising activity. This was highlighted

gradual improvement with a number of

in the case of VC firms throughout the

divestments. Divestments were up on the

world where they were only able to raise

previous year with trade sales dominating,

half of the previous year’s commitments. In

and public offerings reappearing with 3 IPOs

Australia, what VC funds did raise basically

and 7 sales of quoted equity.

came in conjunction with the release of
Round 3 of the Innovation Investment
Fund program and IIF follow-on fund.
The IIF matching fund for the appointed
VCs was critical to ensure innovation was
not killed off during this time. The whole
aim of the IIF was to address the lack of
capital available to promising innovative
companies post the GFC. In 2010, of the 14
VC funds that raised new capital, nine were
funded under the IIFF program and two
raised matching commitments as part of
the IIF co-investment program. The IIF and
IIFF represented 82% of new VC funding
commitments in FY2010.

201118
In FY2011, the combined effort of the
Australian PE and VC industry improved
across the board in fundraising, investments
and divestments. However, there was a
demonstrable trend towards a higher
concentration of fundraising and investment.
There were a smaller number of funds and
completed deals. Although we witnessed
improvement in the sector it wasn’t a
bounce. This was even though the Australian
economy had a strong performance
compared to the rest of the world. With
the global economic volatility continuing,

Investment by private equity firms was up

a persistently strong Australian dollar, and

on the previous year, while VC funds were

unresolved tax issues lingering, any strong

slightly down. Most of it was follow-on

rebound in PE and VC activity was severely

investment not new deals, demonstrating

constrained.

the industry ‘s steady line of support for
existing investee companies. Interestingly,
PE fund managers significantly increased
their focus on listed companies such as
PEP’s investment in Energy Developments
(ASX:ENE), Investec Wentworth Private Equity
minority equity stake in ClearView Wealth
(ASX:CVW) and Navis Capital’s acquisition of
remaining shares in Peoplebank, (formerly
ASX:PBA).

18. Refer to AVCAL’s 2011 Yearbook, released in November 2011.

Although fundraising was significantly up
on the previous year, the environment for
fundraising remained challenging with most
General Partners (GPs) deferring or shelving
fundraising plans. The number of funds with
new commitments decreased 39% from the
previous year. It should be said that half of
those came from overseas investors and
40% from funds-of-funds.

16


New funding commitments to Australian VCs

Divestments were up on 2010 with trade

continued to decline with three VC funds

sales still remaining the most popular

raising $120 million, down 24% on the

method of exit. Interestingly, secondary sales

previous year. Similar to the previous year,

to PE firms represented 11% of divestments,

they mainly involved IIF programs. In the PE

and there were no full exits in PE funds

space $2.2 billion was raised, up 84% on the

through IPOs. VC funds generally performed

previous year mainly due to Champ III and

well and had higher net proceeds from

the Quadrant PE Fund 3 final closings. Very

divestments compared to the previous 2

little was in new commitments but rather

years.

reinvested gains from older funds, or 2010
and older vintage years, demonstrating the

At the end of FY2011, Australian PE and

longer fundraising periods faced by GPs.

VC investment in Australian companies
over the previous 4 years outweighed any

Investments were up with the top 10

fundraising by Australian GPs. This reflected

deals representing three-quarters of the

the difficultly in the local fundraising

investment amount. However the number of

climate and at the same time highlighted

companies receiving investments declined

the importance of continuing private equity

with most being follow-on investments. PE

investment in Australian companies.

investments grew by 50% from the previous
year to $3.5 billion. This was mainly due to
the Healthscope transaction19, representing
43%. The fall in VC fundraising on the other
hand reflected an uncertain fundraising
outlook and an aging profile of existing
funds. Around 75% invested was from funds
with vintage years of 2008, and 16% from
funds 9 years and older.
In FY2011, we saw increased investment
activity among international VCs and
investors for high growth Australian
technology companies. Notable was
Accel Partners’ investment in software
development platform provider Atlassian,
crowdsource website 99Designs, and online
FOREX service provider, OzForex along with
The Carlyle Group.

201220
Unlike the rest of the world private equity
in FY2012 was quite buoyant in Australia.
We saw a large increase in fundraising and
investment activity, continuing into FY2013
and H1 FY2014.
Like the previous year, there was a
continuing trend in FY2012 in regards to a
concentration of a smaller number of GPs
successfully raising funds. Nevertheless,
there was an increase in committed funds
compared to the previous year. On the other
hand investments and divestments remained
cautious due to the predicted slowing down
of China’s GDP growth rate, global economic
uncertainty, a continued high

19. Public to private takeover of Healthscope by TPG Capital and The Carlyle Group.
20. Refer to AVCAL’s 2012 Yearbook, released in November 2012.


17

Australian dollar, as well as challenging

the global economic crisis. It was also a

M&A and IPO market conditions.

product of easing of growth in the Chinese
economy and the predicted negative impact

The increase in fundraising was around

it would have on the performance of the

59% up on FY2011, totalling $3.34 billion,

heavily relied on Australian export mining

the highest since the GFC21. This positive

industry. These factors greatly reduced

result was tempered by a plethora of

business, consumer and investor confidence.

deferred fundraising commitments and a
concentration of fewer new PE managers

Three main deals dominated, representing

being successful in their fundraising

41% of PE fund investments. They included

commitments. Most of the funds committed

Bain Capital’s acquisition of MYOB from

to were from overseas investors, reflecting

Archer Capital, Affinity Equity Partners

the continued subdued sentiment by local

purchase of Primo Smallgoods, Champ

participants.

Private Equity’s acquisition of oOh! Media,
and the acquisition of SGA Hygiene by

Australian VC funds had a major increase on

PEP. With respect to VC funds, investments

the previous years. Most of this was under

remained steady with 42 investments in

the Government’s Renewable Energy Venture

new companies and 45 in existing investee

Capital Fund co-investment program. This

companies. Competition for VC funds

amounted to $200 million out of the $240

remained tight with only 12 VCs investing.

million total funds raised. The Government
backed programs remained the main source

What came to the fore was the depth of

of new commitments for VC funds, as

start-up and early stage ventures competing

fundraising remained difficult for VCs.

for scarce local funding. Foreign VCs were
active, seeing Australia as an attractive

A continuing trend in FY2012 was most

market for technology start-ups with global

VC and PE commitments were raised

VC heavyweights such as Khoshla Ventures,

from overseas Limited Partnerships (LP),

Index Ventures and General Catalyst Partners

representing 36% of total new commitments.

attracted to invest in start-ups such as

Almost no funding was raised from the

Kaggle and Big Commerce.

domestic private sector by Australian VC
funds.
As mentioned above, investments by PE and
VCs fell during the period. This reflected the
subdued climate as a result of continuing
investor worries and uncertainty concerning

21. Archer Capital Fund 5 raised half of the FY2012 PE committed funds.

18

201322


This was followed up with a listing in
December 2013.

In the 2013 fiscal year, there was moderate
activity overall in the PE and VC sector,

Investment by VC funds fell 20% to $111

slightly down from 2012. However, there

million. However corporate VCs like Telstra

were promising signs for improvement for

Ventures, super angels, and funds backed

2014 as we witnessed improved business

by successful business founders were active

confidence and a fairly buoyant IPO market.

in backing early stage companies. This
included start-up online graphic design tool

Fundraising by Australian PE and VC funds

provider Canva (Blackbird Ventures) with

fell to $867 million in FY2013, reversing the

$3 million seed capital, asset management

upward trend in FY2012. Most fundraising

solution provider Assetic (M.H. Carnegie &

was from PE funds, raising $711 million.

Co.) and SaaS provider Whispir involved in

This was a sharp decline from the $3 billion

communication management systems who

raised in the previous year. Anchorage

have been funded by Telstra Ventures.

Capital Partners Fund II, Advent 6 and
Anacacia Fund II were the largest domestic

Exits from PE funds continued to be

funds, raising 80% of all fundraising

dominated by trade sales including Exego

commitment to PE funds.

sale by Unitas Capital to Genuine Parts in
the USA and the sale of Southern Cross

VC funds raised $155 million, 35% lower

Venture partner’s Virsto Software to VMware.

than FY2012. This came from just three

However there were some good signs for

funds. Notable VC funds included the

exits via IPOs with the listing of Virtus

IIF Carnegie Innovation Fund No. 2 and

Health by Quadrant Private Equity. We also

Bioscience Manager’s Asia Pacific Healthcare

saw some major write-offs by PE funds,

Fund II, mentioned above.

notably Nine Entertainment.

Investments were slightly down, reflecting

Even though FY2013 was fairly benign,

an overall softening of M&A activity.

we did see some positive signs with an

Investments by PE funds were 7% down

indication that PE and VC funds will look to

on the previous year. Notable investments

clear a backlog of exits to make room for a

by PE funds included the private to public

new cycle of fundraising and investment.

takeover of Spotless by PEP, KKR’s buyout of
GensisCare from Advent Private Capital and
TPG’s acquisition of Inghams Enterprises. The
turnaround deal of Dick Smith by Anchorage
Capital who acquired them from Woolworths
featured prominently in in September 2012.

22. Refer to AVCAL’s 2013 Yearbook, released in December 2013.


19

Smith in November 2012 from Woolworths
for $94 million. At the IPO it was valued at
$520.3 million.
Disappointing listings included the CoverMore Group owned by PE firm Crescent
Capital Partners, Nine Entertainment
Co., and packaging business Pact Group,
all demonstrating lack lustre results
since their floats late December 2013.

Today and Tomorrow, what’s in
store?

This has signalled mix messages to the
market regarding the much-heralded list
of upcoming floats around February and

With a steady return to business confidence
and strong demand by institutional
investors, buoyed by the success of the
Virtus Health listing, some large and notable
IPOs occurred in the first half of FY2014.
This included the breathtaking floats of
Freelancer23 and Indoor Skydiving Centre.
PE funds had a few notable IPOs during the
same period who’ve continued to perform
well post listing. These included credit-

March 2014. This includes the listing of
Healthscope by PE funds TPG and The
Carlyle Group for around $4 billion. It also
possibly includes Medibank Private, fleet
management company SG Fleet (owned by
Super Group and Champ Ventures), the large
retirement home operator RetireAustralia
tipped to IPO at $400 million, and a quick
turnaround by PEP with the return of the
catering and cleaning company Spotless27

checking company Veda Group and online

to the ASX through an IPO. This is predicted

foreign currency company Ozforex25.

to be worth $1.5 to $2 billion. In addition

24

However, even with the success of
Freelancer, Veda and Ozforex, there have also
been some equally disappointing results and
share performance after their IPOs. Take the
rocky start for electronic goods retail chain

other IPOs mooted for FY2014 include
Smartgroup’s Smartsalary ($200 million)
and Sterling Education ($200 million). All in
all the market anticipates a busy time with
around $7 to $8 billion worth of IPOs.

Dick Smith Holdings26. It opened as high as

This renewed activity is a result of growing

5.5% above the IPO share price of $2.20 but

business and investor confidence. Even

then fell flat by the end of the day to $2.16.

though global economic and political

It’s now trading around par but fell below

concerns persist, institutional investors

$2 in late December before recovering.

in Australia are showing some sign of

Turnaround PE firm Anchorage acquired Dick

investment appetite, albeit with ‘under-

23. ASX:FLN) The online job outsourcing platform Freelancer’s successful listing in November 2013 surprised the market. It was of the few stocks that have continued to be strongly supported by
investors post listing. On January 8, 2014 FLN demonstrated a gain since its IPO of 170%.
24. (ASX:VED) The Veda Group is a credit reporting and data services company and returned to ASX after 6 years away. VED listed on 5 December 2013 at 50 cents per share. As at 7 February 2014
share price is $1.90.
25. (ASX:OFX) The online foreign currency and international payment services company listed on 11 October 2013 for $2 per share for a $480M float. It’s currently trading at $3 per share 7 February
2014.
26. (ASX:DSH)
27. PE Fund, Pacific Equity Partners (PEP) acquired Spotless for $723M in August 2012.

20


whelming exuberance’. Still there is appetite

world that arrived years ago. This is in the

to invest in private equity that’s exiting

face of the great innovative successes we are

via public markets. With more sensible

witnessing around the world such as Google,

valuations and hard fought book-builds, PE

Facebook, Twitter and now a plethora

firms have been keen to exit investments

of SaaS platforms, cloud technologies,

they’ve been holding longer than they

proliferation of API plug-ins, online enabling

normally would, to make room for new

platforms, eCommerce platforms, interactive

committed funds and new investments.

ecosystems, big data and analytics, and the
list goes on. Coupled with the enormous

“Coupled with the

activity by technology based companies

enormous activity

and investments being made, one only has

by technology based

to see the amount of sustained activity by

companies and

“It has become a

investments being made, one only
has to see the amount of sustained
activity by US private equity &
venture capital funds, as well as
angel investors and syndicated
angel investor groups over the

structural change in
the way business will be
conducted in the future, or
more to the point, how it’s
being conducted now.“

last two years to know where the
world is heading. To support this
it’s worth noting in 2013 US private
equity fundraising totalled around
US$193.7 billion.28“

US private equity & venture capital funds,
as well as angel investors and syndicated
angel investor groups over the last two
years to know where the world is heading.
To support this it’s worth noting in 2013 US
private equity fundraising totalled around

However, investor interest in start-up and

US$193.7 billion28. Although there were 12

early stage companies still remains low. Even

funds there were in excess of US$5 billion,

with the success of Freelancer and Atlassian

the average was around US$100 million,

(supported by overseas VC fund, Accel

accounting for 32% of the fundraising. VC

Partners), mainstream investors in Australia

funds in 2013 raised less in aggregate than

stay sceptical and risk averse. They remain

2012, preferring to focus on smaller vehicles

stuck on resources, banks, property and

where capital raised flowed into smaller

infrastructure, retail and manufacturing. That

early stage funds with the likelihood of

is, “old world” businesses who’re struggling

greater gains. There is plenty of dry powder

themselves to survive in a brave new global

for later stage

23. Pitchbook Data Inc. 1H 2014 U.S. PE & VC Fundraising and Capital Overhang Report p3


“If it wasn’t evident before

21

funding locally is close to impossible. Local
investors will want the start-up to first have

it is now, start-up ventures are

market traction and be making profit before

leaving our shores in droves to find

they’ll consider it. They’ll want a sizeable

sources of funds and gain access

chunk of the company, want to be in control

to dynamic and global markets.“

in regards to the business strategies and

investment with a PE capital overhang of

onerous conditions on the founders. They

around US$465.5 billion.

will spend a ridiculous amount of time to do

commercial decision making, while imposing

their ‘due diligence’ and commit to meagre
In the case of early stage investments, more

funding.

is being spent than is being raised and as
a result the capital overhang is declining

This approach by Australian investors is at

each year, currently at US$57.9 billion. This

odds with the rest of the world. More to the

is occurring in light of VC deal-making

point it has badly frustrated and stifled our

occurring at break neck speed as many start-

progress as a nation of smart innovators

up companies come out of their seed, pre-

over the last decade, and continues to do so.

series A phases. The ‘series A crunch’ as it’s

Many of the bright minds in the information

come to be known is a product of a rapidly

technology sector are now taking their

changing investment environment and is a

destiny into their own hands, and looking to

sustained trend. It’s unlike the previous dot

greener pastures where getting funding is

com boom experienced between 1995 and

easier, and the environment is conducive to

2000. It has become a structural change in

being successful. If it wasn’t evident before

the way business will be conducted in the

it is now, start-up ventures are leaving our

future, or more to the point, how it’s being

shores in droves to find sources of funds and

conducted now.

gain access to dynamic and global markets.

In Australia, unlike in the USA and Asia, PE
& VC fund managers continue to be risk
averse, even in light of the success of tech
businesses such as Freelancer and Atlassian.
Ask any start-up company, whether it’s a
cloud-based software as a solution, an
online eCommerce venture, mobile device
app, or a scientific technological solution
in health, communications, or engineering
needing to be commercialised. Getting

22


The world has changed, but
no one has told Australian
investors...

this limited environment start-ups had to
first come with a product and business
model, raise money and hope for traction.

In a poignant special report on tech startups in The Economist29, it’s argued that we

“Here lies the real difference;

have reached a “Cambrian moment”. It has

you can start-up quickly, with

taken the last couple of decades and a few

limited seed funding required. You

false starts to form, but the framework and
platform has arrived and the planets are
all aligned. To the risk averse, and you hear
this constantly from Australian investors,
they argue its all too risky and similar to

can do it cheaply and with less risk
exposure. The mantra is if you’re
going to fail, fail quickly and move
on. “

the dot com bubble a decade ago. To the
ignorant, I guess a simplistic and uneducated

So what’s different? Start-ups are now being

conclusion like that could be reached.

built on solid foundations enabling them

However I’m surprised (or may be I shouldn’t

to get to market with lower costs, faster

be), I would have thought that a little more

and with lower funding requirements. The

thought and understanding, and foresight

Internet is fast, universal, and wireless. Major

would be put into making investment

infrastructure around the globe has been

decisions. Evidently not!

created to make it affordable and ubiquitous.
Not only for start-ups, but those that will

In the special report, it points out a number

consume their products and services. For

of things that have changed the game and

start-ups all the building blocks now exist

indicate a lasting and permanent trend.

and are easily accessible. It includes easy-

It’s different to last time for a couple of

to-learn programming frameworks, available

reasons. A decade ago it was early days

online platforms to find and gain access

in the commercial use of the Internet

to developers, the ability to easily share

and the web. There wasn’t such a general

code, or even outsource testing usability. A

acceptance of the web as there is today. The

major advancement has been the creation

technologies and tools were in their embryo

of a large volume of APIs, multiplying and

stage. They were limited and predominately

growing in number as we speak, allowing

only accessible by techies with commercial

one service to use another. Probably the

acumen. In addition, there weren’t iPhones

most important difference is the arrival of

and iPads with wireless connectivity and

platform services including affordable cloud-

infrastructure to support highly efficient

based hosting infrastructure with virtual

data communication and data storage. In

servers. You can now basically rent

29. Refer to an article titled ‘A Cambrian Moment’, 18 January 2014, The Economist, Tech Start-ups. It refers to the beginning of life forms beginning to multiply in an explosion leading a wide variety
of animals on earth around 540 million years ago. This used as an analogy of what is occurring in the entrepreneurial space and digital realm today. A major shift, permanently changing the world as
we know it today.


23

on-demand and pay-as-you-go, enabling

Let’s be clear, the explosion of start-up

start-ups to avoid large upfront capital

technology ventures using the building

expenditure on development environments,

blocks outlined above has created a major

allowing them to move quickly to

shift in the way business is done now and

commercialisation. There are platforms

in the future. It’s structurally, socially, and

enabling start-ups to quickly distribute their

culturally changing the way we do business,

products and services to market, eCommerce

replacing traditional structures of doing

enabled with plug-in billing and payment

business for good. The Economist in its

systems integrated to online fulfilment

article points this out by giving examples

systems and accounting platforms. Marketing

such as the social network LinkedIn

has become so much easier with the

fundamentally changing the recruitment

advent of social media and a high degree

business, Airbnb disrupting the traditional

of interactivity happening on a global basis.

hotel business, and Uber connecting would-

The world has never been so connected.

be passengers with drivers – changing the
taxi business. This is just the tip of the

Here lies the real difference; you can

iceberg and why investors in Australia need

start-up quickly, with limited seed funding

to change the way they think.

required. You can do it cheaply and with less
risk exposure. The mantra is if you’re going
to fail, fail quickly and move on. Terms like
“MVP” and “Pivot” coined in the ‘The Lean
Start-up’ by Eric Ries30.
The proliferation of start-ups at seed stage
and their speed to early stage funding
is the reason for the series A funding
crunch. The framework and environment
enables start-ups to take a much different
approach. Start-ups can spend their time
‘tinkering’ to develop a good idea, working

Who’s feeding the start-ups?

in interconnected ecosystems. Once found

Start-ups nowadays don’t just rely on family,

they can then look for a business model to

friends and maxed out credit cards to get

allow for fast profitable growth. This is the

started. If they did, “tinkering” wouldn’t

opposite of the dot com bubble a decade

be an option. In the US, a movement has

before where investors and entrepreneurs

gained momentum due to the efforts of past

alike made their bet on a business plan and

entrepreneurs, universities, some corporate

then tried to execute it.

venturers, and a few VCs with foresight.

30. The lean Startup Book by Eric Ries, published by Crown Publishing Group October 2011. “MVP” stands for Minimal Viable Product to prove up an idea and get to market. It’s a core component of
Lean Start-up methodology in the build-measure-learn feedback loop. “Pivot” is the term used to describe the iterative nature of start-ups nowadays where one foot is planted while the other may
have to shift stay still to preserve.

24


We are now witnessing an explosion in start-

Accelerators are known as “schools for

ups due to a growing list of accelerators,

start-ups”. One of the first seed accelerators

co-working spaces, and studio like holding

to start back in 2005 was Y Combinator.

operations. These start-up schools have also

This was set-up by Paul Graham, a former

attracted angel investors, syndicated angel

software entrepreneur and angel investor.

investors, and early stage VC funds, which

If you have a good idea you want to move

actively seek to invest in start-ups.

to a product you can apply to Y Combinator.
If successful you’ll receive seed funding of

The formation of these start-up schools

around US$20,000 and relocate to their

has spawned an interconnected global

facilities in Silicon Valley for 3 months.

ecosystem. Accelerators alone throughout

During this time you’ll work intensely to

the world total in excess of 2,000 and

get your small start-up in shape to pitch

growing. In addition there are a raft of

to investors, culminating in a Demo Day of

platforms that service the start-ups in these

specially selected investors. In return the

accelerators.

start-ups provide Y Combinator with around

In the past technology incubators were
formed to foster young entrepreneurs.
The idea came out of SOHO in New York
and was more about increasing the price
of property by housing dot coms. They
provided entrepreneurs with a workspace
and business facilities, the ability to mix
with other entrepreneurs and share their

8% of their companies. Y Combinator has
had notable successes such as Dropbox
and Airbnb. Other well-known accelerators
include TechStars and Startupbootcamp
who’ve set up international networks.
Accelerators are now operating
independently around the world, but in many
cases remain inter-connected.

experiences, receive mentoring from

As well as accelerators, another development

commercial professionals on how to get

is the proliferation of co-working spaces.

grants, commercialise and pitch for funding.

These facilities host entrepreneurs and

Although they had some merit they had

start-ups in one location. They get all the

limited success. The reality was small teams

essential facilities such as high speed

of developers tended to work in isolation,

internet, a desk and chair, printing services,

gaining free rent and access to technology

board rooms and meeting rooms. They also

allowing them to continue coding. Once in

get the opportunity to collaborate with

the incubator it was hard to move them on

other start-ups, gain access to mentors and

and difficult to commercialise them.

advisors, and in regular intervals, investors.

Accelerators may be considered the
antecedents of the early incubators but
in fact they are structured very differently.

This is all for a small monthly fee.
Another option available to start-ups, where


25

entrepreneurs have turned investor, is

develop a concept for free. Then you have

the studio-like holding operations. These

to get lots of followers through your social

technology studios provide an opportunity

network, get hold of some initial seed money

for rapid experimentation and company

(albeit a small amount) to get your product

development. Technology studios have

offering (or concept) and website up and

sprung up such as ‘Betaworks’, ‘Obvious Corp.’,

running. Then if it’s something the crowd

‘Monkey Inferno’, ‘Lightbank’ and ‘HVF’. Each

likes, money will come in with the promise

has a slightly different model. Generally

of some type of reward such as discounted

studio creators provide the facilities and

pre-sold product if it eventuates. There’s

usually take large chunks of equity and

no doubt there has be some really sizeable

co-founder status. They actively participate,

successes. In the US the JOBS Act is opening

creating and incubating ideas in-house. They

up the way for donators to become retail

may provide seed-stage funding but most of

based investors in the company and gain

all provide their entrepreneurial expertise

equity. There’s similar pressure in Australia

and resources to help generate and build

to make changes to restrictive rules

companies at scale. Start-ups within the

pertaining to retail investors. The belief

technology studios are able to leverage

is by offering equity it will stimulate a lot

functions such as sales and marketing,

more seed funding for start-up ventures and

hiring, and legal advice. This is ‘parallel

ratchet up crowd funding investments.

entrepreneurship’ where experienced
entrepreneurs can work in tandem with
talent in-house and help new entrepreneurs
turn ideas into actual businesses. It
effectively leverages repeatable services
across the studio’s start-ups, enabling them
to scale quickly with less capital required.
Of course the latest trend is crowd funding.
At this stage and to this writer it sounds a
lot like promoting and getting discounted
pre-sales. It’s a great way to raise some
seed money and get traction. Noticeably, the
best results come if you’ve got a really cool

Support for technology startups in Australia.

gadget, something tangible like what Ninja
Blocks has created. To be successful, you

A large Silicon Valley VC firm with $7.5

have to first form a team who’re willing to

billion under management, Technology
Crossover Ventures (TCV) who’ve invested

26


considerable funds into growth stage media

go offshore, taking the potential for jobs and

and technology companies such as Netflix,

Australia’s economic future.

Facebook, Groupon and recently Spotify,
injected $30 million into an Australian

However, in recent times we’re starting to

online hotel distribution platform SiteMinder

see renewed hope. Not from traditional

in January 2014. This is significant in itself

funding sources, but from entrepreneurs

but what is more interesting is what TCV had

who’ve enjoyed previous success and are

to say about Australia’s wealth of pragmatic

willing to not only invest in tech start-

entrepreneurs who they see as global market

ups, but will offer their time to mentor

players with compelling products.

those with good ideas. In a short while,
throughout Australia we have seen the rise

These aren’t isolated views. The rest of the

of co-working spaces such as ‘Fishburners’

world admires the innovation and creativity

in Sydney, ‘Inspire9’ based in Melbourne and

by small start-ups in Australia. Apart from

home to ‘AngelCube’ accelerator, ‘York Butter

the level of innovation, they possess strong

Factory’ also in Melbourne is home to 50

development and commercial disciplines

companies, over 200 start-up events a year

seldom seen in start-ups. It makes them

and is helped by VC firm Adventure Capital,

an attractive proposition for VCs and angel

and ‘HUB’ based in Melbourne, Sydney and

investors. The fact that they sit in the Asian

Adelaide. In addition there is ‘Sync Labs’, and

region makes them even more attractive

‘Space Cubed’ in Perth.

to US investors. The problem is many startups toil for many years without receiving

Accelerators have also started to pop up

funding. Finally, through fatigue and

throughout Australia. ‘Startmate’ is a group

necessity they give up. This is due to a lack

of start-up executives who offer mentorship

of he capital needed to survive and to take it

and seed financing to founders of Internet

to the next level.

and software businesses. This is a five-month
program of where each start-up receives

Little help has been offered by the

$50,000 investment. At the conclusion of

Government to date and this could soon

the program founders pitch to early stage

become even less as the current Australian

investors at demo days (one in Sydney and

Federal Government promotes small

one in Silicon Valley). Other accelerators for

government and greater reliance on private

start-up tech companies include the Founder

market forces. Given the unchanging nature

Institute, Slingshot, Ignition Labs, Pollenizer,

of risk averse Australian private equity

PushStart, Blue Chilli, ATP Innovations,

investors as history has shown, this could

AngelCube as mentioned above, and the

spell disaster. At the very least it will force

Telstra backed Muru-D.

even greater numbers of tech start-ups to


27

We’re also seeing the rise of Australian VC

and guiding early-stage tech companies that

funds that focus on global Internet start-

are highly capital efficient and have global

ups in Australia. One such firm is ‘Blackbird

ambition and scope. They are seeking to

Ventures’ with a $30 million fund. The

increase the fund’s size to $100 million.

“The rest of the world admires

‘Square Peg Capital’ was recently formed

the innovation and creativity by

by a group of successful entrepreneurs

small start-ups in Australia. Apart
from the level of innovation, they
possess strong development and
commercial disciplines seldom

and technology investors. It came about
through the merger of two funds31 and
was orchestrated by Paul Bassat (Seek
co-founder), former banker Tony Holt, and
Justin Liberman. They’ve invested their own

seen in start-ups. It makes them an

money as well as money from James Packer

attractive proposition for VCs and

to set up a sizeable fund to invest in early

angel investors. “

stage to growth stage technology companies.

company is made up of successful start-up
founders in Australia including the founders
of Atlassian, Campaign Monitor and Aconex.
It also has some of Silicon Valley’s top
investors (Bill Tai and 500 Startups chief
Dave McClure) and access to a network of
investors in Silicon Valley. They provide
equity capital for all stages from seed, to
early stage to growth capital. To date they’ve
invested in Canva, Shoes of Prey, Ninja
Blocks, and Coinjar.

A recent new Australian VC firm is the
‘Snowball Group’ situated in Melbourne.
Two veterans in the sector, John Dowell
and Anoosh Manzoori, head Snowball
Group. They directly invest and co-invest
in technology start-ups to early stage
companies in the Asia Pacific region.
Snowball Group has strict investment criteria
focusing on the core proposition of the
start-up business, the quality of the people,
and the risk and reward of the venture. In
particular they have a penchant for online

Another Australian VC Fund is ‘Adventure

businesses with large ecosystems, conducive

Capital’ focused on advancing digital and

to Big Data and analytic technologies.

online technology ecosystems built by

Snowball Group sources their VC funds

Australian talent and their IP in innovation

from the USA and Asia. They’re currently

and entrepreneurship. Adventure Capital’s

establishing a $30-$50 million VC fund for

current fund, the ‘Digital Accelerator LP’ with

pre series A tech companies operating in

committed funds of $20 million is a super-

Australia and Asia.

angel style venture fund focused on finding

31. The merger was between Square Peg Ventures and Victoria Capital to form Square Peg Capital in 2013.

28


‘Southern Cross Venture Partners’ was

and water utilities. They’ve also extended

launched in 2006 by targeting early stage

their portfolio recently to biomedical and

technology companies with the potential for

pharmaceutical companies. In September

exceptional growth and market leadership.

2013 the company launched a $10 million

Their team has a strong record of utilizing

VC fund for start-up and early stage

their start-up and management experience,

investments. They’re not targeting specific

industry knowledge, network of business/

industries with the fund, but see many

customer relationships, and recruiting skills

opportunities coming from healthcare and

to assist in building significant shareholder

digital sectors. It also is looking at resources

value. They prefer to act as lead or co-lead

and agriculture sectors.

in the early stages where they have the
experience to build value rapidly. A typical

‘Blue Chilli’ is a software development

initial investment is $2 million to $5 million

company creating online web applications.

with an ability to invest more money in

It invests in online start-ups by contributing

later rounds. A notable success has been the

software development. They call this

recent sale of Virsto to VMware.

‘Venture Technology’. They’re also an
accelerator, or rather a studio-like operation.

‘Starfish Ventures’ is an experienced

Last year they announced a $10 million fund

venture capital manager seeding, building

to invest in early stage tech companies. The

and managing high growth technology

fund will match any angel investment over

companies from an Australian base. Their

$100,000 made by three or more investors

investment focus includes high growth

to a Blue Chilli company.

information technology, life sciences, and
clean technology companies. The team

‘OneVentures’ has been operating for some

has invested in over 60 companies to

years, investing in emerging Australian

date with 14 trade sales and IPOs. Recent

technology companies with differentiated

investments include Audinate32, Nitro33 and

technology and compelling business models.

DesignCrowd34.

They focus on clean technology, information
technology and life sciences. OneVentures

Another active PE firm investing in

invests in small high tech companies at the

Australian businesses is ‘Blue Sky Private

seed, start up and early expansion stages. As

Equity’, the only listed VC fund manager

mentioned previously, OneVentures manages

in Australia. Blue Sky invests in private

an IIF fund of $40 million.

companies taking significant but noncontrolling stakes in its investees. They

Led by Mark Carnegie of the Carnegie Wylie

focus on long-term investment in real

fame, ‘M.H.Carnegie & Co.’ is a venture

estate, industrials, hedge funding activity

capital, private equity and alternative asset

32. Audinate is a media networking solution enabling the transport of high quality media over standard IT networks.
33. Nitro develops PDF software and cloud collaboration tools.
34. DesignCrowd is an online marketplace providing logo, website, print and graphic design services by providing access to freelance graphic designers and design studios around the world. DesignCrowd has recently acquired US based BrandStack and launched BrandCrowd, a marketplace for ready-made brands and logos.


29

manager in Sydney. They manage over $200

in the press is great, but that’s all it is. To

million worth of committed funds from

date, the Government has in reality only

institutional, wholesale and HNW individuals

contributed limited funding to support

over several funds. Of interest, they’ve been

information technology, life sciences and

granted $40 million in the latest round of

renewable energy companies. The lack of

the IIF program. Due to having to match the

commitment by Government, coupled with

Government’s contribution as part of the IIF

the continuing disinterest by private equity

program requirement, this totals $80 million.

investors is resulting in companies leaving

In September 2013 this was reported to be

our shores in droves and seeking private

a lot more, totalling $120 million. They’re

equity investment in more liquid markets.

also collaborating with Vivant, an Australian

With them we are losing our innovation,

user interface and digital marketing

our talent, our commercial future. There is

firm, creating an incubation facility.

no doubt Australian companies are capable

The collaboration is aimed at fostering

of being successful on the global stage.

innovative technology providing a launching

Unfortunately overseas investor recognise

pad for those that pass their development

this more than risk averse Australian

and commercialisation process.

investors.

Conclusion

The efforts of the few, made up of
entrepreneurs and investors who’ve

There’s no doubt investment in private

forged their past successes in spite of the

equity in Australia has had an up and down

limitations they faced in gaining adequate

history. What’s evident is throughout its

funding are out their fighting the good fight.

evolution there’s been a lack of support due

The appearance of local VC funds supporting

to the risk averse nature of institutional

start-up tech companies, the proliferation of

investors. When private equity investment

accelerators, co-working spaces, and studio

has gained some momentum, it’s been

operations connected to global ecosystems

quickly dashed, caught up in the roller

provides hope. Whether it’s enough only time

coaster ride as each economic cycle comes

will tell. For Australia sitting at the edge of

around. Investment in innovation and start-

the Asian frontier, there’s a lot at stake.

up companies has faired far worse. There has
been some recognition of the importance of
supporting innovative start-up companies
in Australia. There is a general consensus of
the need to generate ‘new world’ industries
to support the job market in Australia as
old world industries disappear. The rhetoric


30

This document is provided by Snowball

advisors. Before making any decision or

Group Pty Ltd for general guidance only,

taking any action, you should consult with a

and does not constitute the provision of

professional advisor who has been provided

legal advice, accounting services, investment

with all pertinent facts relevant to your

advice, written tax advice under Circular

particular situation. The information is

230 or professional advice of any kind. The

provided ‘as is’ with no assurance or guarantee

information provided herein should not be

of completeness, accuracy, or timeliness of the

used as a substitute for consultation with

information, and without warranty of any kind,

qualified technology specialists, professional

express or implied, including but not limited

financial and investment adviors, professional

to warranties or performance, merchantability

tax, accounting, legal, or other competent

and fitness for a particular purpose.

PRIVATE EQUITY INVESTMENT FIRM
GLOBAL CORPORATE ADVISORY SERVICE

Author:
John Dowell
Executive Director and Co-founder at Snowball Group
John Dowell has over 30 years of experience in corporate finance, venture capital and the ICT
sector. He’s a leader in areas of e-commerce, IT infrastructure, and business intelligence. He has
had extensive experience leading top global technology companies.

Level 3, 296 Collins Street
Melbourne Victoria 3000
Phone: (613) 9005 2124
Email: contact@snowballgroup.com.au

www.snowballgroup.com.au

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