With all the focus in the local scene around getting startups off the ground with seed funding and other early stage investments, a gap is growing in the Australian landscape when it comes to later stage capital.
Currently, the venture capital investment is focusing on what’s called the “valley of death”, or that period between an idea’s conception and a first major investment. This is the time in the startup’s life where it bleeds money before real customers begin buying the product or using the service. And with that comes a 90% failure rate, hence the name.
But local VC firm OneVentures, which launched a $100 million fund for later stage companies at the end of last year, believes that in Australia a second valley of death has emerged in the later stage of the company.
Later stage startups are those that have already got a product on the market and are perhaps even making money, but need significant capital to build their business further.
In 2007, later stage investment peaked at around $90 million in Australia, but in 2015 that figure was halved. Without that funding, it forces companies to search offshore for opportunities or go for premature ASX listings.
Shifting the focus
OneVentures CEO and managing director Dr Michelle Deaker said today that, “it is terrific to see the recent focus on the start-up community and on innovation more broadly – these are the first steps in creating a vibrant innovation economy in Australia.
“What’s needed now is a broader focus on providing the capital and expertise to traverse the second valley of death if Australia is to build real businesses that make sustainable contributions to our economy. This is arguably most critical stage where ideas become products that are commercialised resulting in significant job creation and shareholder value.”
Deaker added that the investors need to move away from the idea of trying to find the next “unicorn”, and need to build towards backing companies that can have a highly successful business.
“Success stories such as Uber and Facebook are exceptions that prove the rule,” she said.
“Rather than trying to find a unicorn, we focus on hunting ‘dragons’ – companies that ideally return the whole of a fund to investors.”