In Australia, local venture capital firms (VCs) have raised enough to cover roughly 60% of all Aussie “venture-backed” company rounds. Meanwhile, in Europe and the USA, local VCs only cover 40–50% of deals, according to estimates based on the same methodology.
A few months ago, I said goodbye to Australia’s sun-kissed shores to invest from London for Eight Roads. I was lucky to be part of the Australian ecosystem at an amazing inflection point in its history, with record levels of VC fundraising that opened up local funding options to Aussie entrepreneurs that didn’t exist only two years before.
In Australia, the prevailing thought was always that there was not enough VC funding for startups. In 2014 and 2015, this was the case. It is not the case in 2017.
I pulled together some numbers that estimate the amount of capital ready to deploy each year, and compared that to the number of funding rounds announced. I did this for Europe, the USA, and Australia, and came up with the following numbers:
- European local VC’s raised enough to cover 42% of $’s going into European tech deals in 2017
- USA local VC’s raised enough to cover 50% of $’s going into US tech deals in 2017
- Australian VC’s raised enough to cover 66% of $’s going into Aussie tech deals in 2017
Given Australia is as rich in alternative funding sources as anywhere else (overseas VC’s, family offices, investment banks, corporates, crowdfunding), I think this is a great sign for anyone thinking of starting a company. There’s money out there ready to go.
Have we got too much? It’s hard to say. There have been a higher number of larger rounds, which may suggest we’re in balance — but is this company-led or investor-led? Do companies have an abundance of great opportunities to put the money to work, or rather is it money burning a hole in investors’ pockets?
How did I get these numbers?
1. I have assumed a deployment profile of a typical fund. For each $1 invested by limited partners (LPs):
- 20c is taken out for fees (i.e. 2% p.a., 10 years)
- 20% of the remaining 80c (i.e. 16c) is invested overseas
- 50% of the remainder is invested in first cheques, leaving 50% reserved for follow-on
- First cheques are deployed over the first 3 years of the fund’s life
- Follow-on investments are made under the following annual profile: 10%, 25%, 25%, 25%, 15% (i.e. all follow-on completed by end of Year 5)
Here’s how the profile looks:
2. I took announced fundraising done by local VC’s from AirTree’s investor Google Sheet, public announcements and conversations with investors. With this data, I then figured out the amount to deploy for each vintage based on the above profile in point 1. The aggregate of all active vintages gives you the “Supply of Capital” number in any given year. This is what it looks like for Australia:
3. Using a few of the conventional deal databases, as well as my own knowledge, I built up a list of all announced VC-backed company funding rounds in Australia larger than $US250,000. This list shows you the “Demand for Capital” (from companies that successfully closed a round).
4. I compared “Supply” from point 2 with “Demand”, converted to AUD, from point 3. The metric I’ve looked at is a simple ratio of the two (Supply divided by Demand). A ratio of less than 1 suggests that either: (a) other, non-local-VC investors (Overseas VCs, Angels, family office, PE, IBs, Pre-IPO funds, corporates) are making up the difference; or (b) local VC’s are deploying at a slower pace than “normal”; or (c) both.
Here is a link to the data.
What does this mean?
Everywhere, founders have a bevy of funding options that aren’t local VC funds. Some of these investors are more active in Europe and the US than they are in Australia, but each type of investor is well and truly represented Down Under.
In fact: some of the hottest rounds of 2017 (Culture Amp, Hyper Anna, Spaceship) had offshore leads; other amazing companies (e.g. Brighte) had local Angel/Family Office investors lead; and both strategics (SWM, Telstra) and investment banks (Macquarie, Moelis) are also quite active. Both Telstra and Macquarie, for instance, have larger global balance sheet allocations to “VC” than the largest independent manager, AirTree.
I think diversity of funding options is very important. VC’s too often trend to a “normalised” product: there is reluctance to give up on standard regional industry terms (liquidation preferences, drags/tags, anti-dilution, etc.) due to the ease of benchmarking like-for-like and for simple convention inertia. Other types of investors, or investors from other parts of the world, may think differently and offer different solutions. Also, not every founder wants to have a cap table dominated by VCs, with the growth profile that demands, and the control trade-off that tends to come hand-in-hand.
I also think that a balance between Demand and Supply of capital is very important. If Aussie VC’s over-raise today they will likely under-deliver on returns tomorrow, then the day after tomorrow there will be no VC sector. That would be a terrible outcome for everyone in the ecosystem.
It feels like the system is neither starving for money nor way out of whack. Should VC’s share be north of 60%? Probably not – or at least you’d need to articulate a good argument as to why Australia is different to the US and Europe.
Do we need to slam on the fundraising brakes and calibrate to a lower level? I’m not sure, but don’t think it’s time to ring the alarm bells yet.
Intuitively, one could expect a lag in the time between a lift in new VC funds and a bump in the number of new companies coming through the ranks.
If your new idea needs capital to get going, you’re more likely to take the plunge when you know there is capital available.
Also, if you’ve seen other entrepreneurs succeed (or potentially learnt first-hand from them as an employee), you’d be more inclined to give it a go yourself. Indeed, this paper from the Review of Economics and Statistics suggests each new US VC investment “inspires” a further 2.9 new companies to be founded within the next two years.
There remains a big question mark over whether or not we’re actually seeing this in Australia. Seed in Australia, like much of the world, isn’t pumping right now: in fact, we’ve seen fewer deals worth $3 million or less in Australia in 2017 than were closed in 2015.
You can see that trend in this blog of mine, which has more granular detail on Aussie funding rounds.
What we have seen is an increase in funding from a higher number of larger rounds. Due to this massive growth in Aussie funding rounds (+65% YoY in aggregate), my synthetic VC share of dealflow metric actually decreased between CY16 and CY17.
Assuming the “quality” of companies closing rounds has not deteriorated (a very, very important assumption), this is encouraging, and may leave room for a healthy CY18 new fund vintage. If we continue to see good companies progress to B+ rounds, or an uptick in seed finally starts to kick in, then 2018 and beyond will be very exciting for the Aussie ecosystem.
If it’s just supply-driven inflation, however, then the increased funding is a scary leading indicator of crappy fund vintages… which ultimately leads to LPs allocating to other asset classes, and thus no more local funding for Aussie startups within 5–10 years.
Notes: the methodology
This is merely another useful data point — it is not conclusive.
This analysis obviously has limitations. It’s hard to get a granular view on VC’s share of “venture-backed” deals without understanding the internal splits of a round; I have made assumptions around the deployment cycle; my data sets that, while scrubbed, are bound to be inaccurate to some extent (indeed, VC fundraising data is opaque, with plenty of people announcing their “$200 million” fund that you never see do a deal); I only include announced deals and raises, and some people fly below the radar, etc.
People are starting to talk more about the demand/supply balance in Australia, so hopefully this blog provides a useful way to put some additional structure around the conversation.
Dominic Reardon is an Aussie living in London where he invests for Eight Roads. They have backed some amazing companies, including Alibaba, Xoom, Prosper, AppsFlyer, Neo4j, Treatwell, Wallapop/LetGo, and Innogames. As well as their own Eight Roads funds, they support a number of other sector- or geo-specialist VCs as significant LPs. In all, the platform has $4.77 billion at work today. Before joining Eight Roads, he was backing standout local and global founders with AirTree.
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