In Australia, venture capital has helped create and grow many innovative firms, including Austral, a leading manufacturer of fast ferries and passenger watercraft, medical device company Cochlear, and internet job-advertising service Seek. However, relative to other countries, it is clear that VC can have a much larger impact on innovation, job creation, and economic growth.
For example, available data shows that from 1999 to 2013, excluding mining and resource exploration companies, there have been 117 VC-backed IPOs on the Australian Securities Exchange (ASX) compared with 637 by non-VC-backed companies.
One critical difference between the Australian and US markets relates to the sectors in which VC firms invest. In Australia, information media, telecoms, healthcare and social assistance had the highest number of investments in the period 2014-15. Activity in the US spans many more sectors, truly contributing to fuelling the country’s economic growth.
Prospects for the future appear promising. The Australian VC market raised $568m in fiscal year 2016, according to Australian Private Equity and Venture Capital Association data, while since July 2016, around another $1bn of funding has been raised, including $500m for the Biomedical Translation Fund, to be managed by Brandon Capital, Bioscience Managers and One Ventures, $250m by Airtree Ventures, $100m allocated by the government to the Csiro Innovation Fund with another $100m expected from private investors, and $75m by IAG Ventures, a new corporate venturing fund, all of which we can expect to be deployed in the next few years.
In addition to increases in available capital, there has been an increase in the establishment of corporate venturing as well as corporate accelerators and incubators that nurture and invest in startups. Qantas, Seek, National Roads and Motorists’ Association, health insurer HCF and many others have an arm that engages with startups and scale-ups, providing fresh opportunities for the Australian ecosystem.
Corporate engagement with new ideas and startups has been found to benefit from longer investment horizons and less performance-driven compensation compared with typical VC funding. Companies also bring very specialised industry and technology expertise to startups.
However, there is still some way to go. Research on ASX50 companies, using publicly available information from 2015, showed that only 38% of the listed companies are participating in startup ecosystems through direct investments or other fluid forms of collaboration through incubators, accelerators and co-working spaces. Further, these activities are largely concentrated in three industries – telecoms, banking and insurance – accounting for 67% of all activities by the ASX50. Telstra alone accounted for 18% of this activity.
Comparing this data to the situation in Singapore – Straits Times Index (STI) Top 30 companies – we see the amount of activity is somewhat similar in 2015 – 38% of the companies in the ASX50 versus 43% of those on the STI – but the market cap of Australian companies is 3.7 times higher than that of their counterparts in Singapore. Companies in Singapore are doing much more with fewer resources.
One aspect that needs improvement in Australia is greater diversity, a key driver of innovation and effective decision-making. This refers to gender diversity as well as background diversity – such as university degrees and career histories – of key executives and directors of incubators, accelerators and co-working spaces.
For example, only 26% of these key individuals at the board and executive level in accelerators, incubators and similar institutions are women, only 22% have at least one degree from overseas, and only 28% have a degree in a science, technology, engineering and mathematics field. Experience affects the type of innovation executives will pay attention to and the shape that the startup ecosystem will take in Australia.
This is an edited version of an article first published as part of The Venture Capital Effect: A report on the industry’s impact on the Australian economy by Australian Private Equity and Venture Capital Association Limited (Avcal), prepared by Massimo Garbuio and Avcal