the future of venture capital in australia
DESCRIPTION
How can innovative venture capital models assist to grow venture capital in Australia? We look at co-investment strategies for early stage vc and "pull" rather than "push" models to cover the technology risk gap in the commercialisation cycle.TRANSCRIPT
alternative investment manager
@protoinvestartesianinvest.com
venture capital investment in australia
Venture Capital Funds …
make money by owning equity in the companies they invest in, which usually have a novel technology or business model in high technology industries, such as IT, software, biotechnology, etc.
Venture Capital …
is financial capital provided to early-stage, high-potential, high risk, growth startup companies.
alternative investment manager who are we?
global alternative investment manager
invest in early stage ventures, in Australia and China
$10M sydney angels sidecar fund
$10M slingshot venture fund
as principal investors we are uniquely placed to extend our platform of niche early stage innovation & venture funds
@artesianvc
artesianinvest.com
alternative investment manager
The traditional venture capital model does not scale to cope with a new paradigm of capital-efficient technology companies
Challenges:
VC must be …as revolutionary as the businesses in which they invest
In Australia venture capital is under funded because as an asset class it is currently too small for institutional $
Money scales … time spent on analysis does not
1
2
alternative investment manager
Later StageExpansion StageEarly ExpansionSeed/Start-Up Stage
Ris
k
Founder, friends & family
Equity Markets
$200K $2M $20M $200M+Avg. Raising
Retu
rn
30x
10x
5x
2x
$50K $100K $1M $5M $100M$500K $10M $50M
Accelerators
Venture Capital
$Private Equity
Commercial Banks
VC
Angel Investors
stages of growth for an entrepreneurial company
alternative investment manager state of traditional vc
US venture dollars raised in $B1:
vc industry has been experiencing its second period of contraction since 2000
2000-2003 vintage funds2004-2007 vintage funds2008-2010 vintage funds
time
total value to paid in multiple2:
TVPI1X
1. NVCA2. Cambridge Associates
median annual raise: $22B
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011$0B
$10B
$20B
$30B
$40B
$50B
$60B
$70B
$80B
$90B
$100B
alternative investment manager australia versus the world
@protoinvestartesianinvest.com
1. FUNDING Israel US Canada UK France Germany Australia
2012 GDP ($trillion) 0.24 15.09 1.76 2.43 2.77 3.57 1.37
2012 VC Capital raised ($billion) 0.60 20.6 1.80 1.40 0.72 0.82 0.24
VC Capital raised as % of GDP 0.245% 0.137% 0.102% 0.058% 0.026% 0.023% 0.018%
Global VC indexed vs Australia 14.1x 7.8x 5.8x 3.3x 1.5x 1.3x 1.0x
Sources: Dow Jones Venture Source, Thomson Reuters
2. CUSTOMERS Asia Africa EuropeLatin
AmericaNorth
AmericaMiddle East
Oceania/Australia
Population (million) 3,922 1,073 820 593 348 223 36
Internet Users (million) 1,076 167 518 255 273 90 24
Penetration % 27.5% 15.6% 63.2% 42.9% 78.6% 40.2% 67.6%
Source: InternetWorldStats
alternative investment manager australian vc is dead long live vc
$2B
$200B
Aust
ralia
US
A
vc funds raised since 2002
vc 1.0 is dead …
traditional australian vc can’t go big & can’t go small
cost to startup has fallen dramatically traditional vc model not easily exported to early stage local vc can’t compete with global vc at growth/late stage
… long live vc 2.0
early stage local & later stage global
local vc will invest earlier in more startups target emerging markets for customers and investment crowd-source: funnel & due diligence crowd-fund: co-investment funds
australian vc …
was it ever alive?
alternative investment manager great time to be an entrepreneur
Great time to be an entrepreneur:
now costs significantly less to launch, iterate, and scale companies
sweeping changes in technology and consumer internet adoption have enabled dramatically reduced capital requirements for building new software companies
accelerated access to customers via search, social, and mobile platforms. 0.36
billion
2000 2011
global internet users:
2.20 billion
alternative investment manager challenges facing traditional vc
consequences:
vcs rushing to add smaller early stage investments to their larger/later investments
increasing valuations:
Y Combinator average pre-money $2-4M 2010, $6-8M 2011, $10M 2012
median Series A pre-money (US$11M) at an 8-year high in Q2 20121
bifurcation of market - web/ICT vs. rest
1 Cooley Venture Financing Report Q2 2012
40% 34%30%19%
2007 2011
early stage
late stage
vc investment allocation2:
2007 2011
2 PwC MoneyTree report
There is a massive opportunity for new, disruptive venture capital models
alternative investment manager
government
policy
computer science, coding
meetups, hackathons, co-working
expat
diasporahealthy
grass roots community
regional
centres
universitiesmba 2.0
incubatorsangel groups
acceleratorscrowd
fundinghealthy
early stage:seed & angel
sustainabilit
y
co-investment funds
rebuilding australian vc bottom up
australian vc health report
weak<$50
million
m&a/
trade sales
australian vc 2.0focus away
from silicon
valleyasia &
emerging
market
focus
corporate venturing
series A &small trade sales multiple exits
source local
source
global
asset class
track record
globalization of vc big exits
re-invested iposlife support
late stage:series B, C … ipo institutional
investmentprivate
equity
alternative investment manager influx of new participants in early stage vc
ACCELERATORSINCUBATORS EARLY STAGE VC CO-INVESTMENT
FUNDS
US
AUS
ANGEL GROUPS VC
SA Angels
VC
Stage 1 of disruption Stage 2 : VC 2.0
alternative investment manager traditional vc model failure to scale
Challenges for traditional VCs:
• Traditional VCs are finding it increasingly challenging to scale because the declining cost to start a business means that they must invest in more companies just to deploy the same amount of capital.
• In response, they can choose to participate in more deals or bigger deals.
• Often, the latter wins because most VCs will spend a substantial amount of time evaluating a deal, regardless of deal size.
Early stage deal flow
Screening
Due diligence & investment
Money scales, time spent on analysis does not.
alternative investment manager picking winners avoiding losers
Later Stage Investing: Picking Winners
• Active investors / stock-picker• Domain knowledge• Effective due diligence• Working with known
entrepreneurs & investors• Involved in
strategy/management• Insider can react quickly to
good/bad events to guide venture
• More relevant as investment matures and more performance data available
Early Stage Investing: Avoiding Losers
• Diversification/Portfolio approach• Due diligence difficult due to
lack of information • Outsource deal flow & due
diligence• Guild of entrepreneurs/mentors• Co-invest with other early stage
investors• Buying ‘options’ to make
concentrated follow on investments at later rounds when more information/traction
“You need at least 15 early stage investments to have a 90% confidence of getting your money back” 1
“The production of cash is highly concentrated in winners; 90% of all cash returns are produced by 10% of exits” 2
1. Kevin Dick (Rightside Capital) “How Many Angel Investments?”
2. Professor Robert Wiltbank (Kaufman Foundation)
alternative investment manager
$10M invested in 100 Startups (selected from 1,000 applicants)
Exit at $100M
Exit at $75M
Exit at $25M
Exit at $50M
4 exits in 10yrs: ~ 5x capital, 20% IRR 1
1. Assumes $50K invested at $450K valuation in accelerator round & follow on investment of $200K at $1.8M investment at angel round
asymmetrical risk distribution
alternative investment manager
100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50% > 0.5x > 0.75x > 1.0x > 1.5x > 2.0x > 2.5x > 3.0x
800 investments
400 investments
200 investments
100 investments
50 investments
25 investments
Number of investments in portfolio
effect of portfolio size on return probability
Source: Kevin Dick, Rightside Capital
With 25 investments you have a 65% probability of achieving a 2.5x return on your portfolio
With 200 investments you have almost a 95% probability of achieving a 2.5x return on your portfolio
Return
Probability
alternative investment manager
• Angel Group• Incubator• Accelerator• AngelList
• Fund Manager• Platform• Capital• AFSL
CO-INVESTMENT FUNDSustainable & scalable early stage VC fund
Co-investment Funds - a scalable and sustainable solution for early stage VC
vc 2.0 co-investment funds
ESVCLP STRUCTURETax free returns
alternative investment manager seed/early stage co-investment funds
sydney angels sidecar fund:
$10M ESVCLP combination of sydney angels &
sidecar fund invested $4M in 14 early stage ventures during 2012
+ =
slingshot venture fund:
$10M ESVCLP partners include University of
Newcastle, Hunter TAFE, Newcastle Innovation, PwC
+ =
network, deal flow, filter, due diligence,
mentors
investment management, capital raise,
compliance, legal
co-investment fund:ESVCLP - Australian investors
have no tax liability on income or capital gains
may be an accelerator, incubator, angel group, university, professional
services firm
alternative investment manager
Traditional VCs
Accelerators Incubators
Angel Groups
Early Stage VC Co-investment
Funds
Early Stage VC Fund of Funds
No of companies screened per year
100-200 200-300 200-300 1,000-1,500
No of companies invested in per year
5-6 10-20 10-20 50-100
Number of companies in typical portfolio
25-30 50-100 50-100 250-500
65% 75-85% 75-85% 95%
Typical investment per company
$2-10M $25-250K $100-600K $25-$600K
Capacity to make follow-on investments
YESNO
(except Angel groups)
YES YES
MentorshipInternal
resourcesMentors aligned
with groupsOutsourced to
co-invest partnerOutsourced to
co-invest partner
Scalability by Assets Under Management
YES NO NO YES
Scalability by Portfolio Diversification
NO YES YES YES
Traditional VCs
Accelerators Incubators
Angel Groups
Early Stage VC Co-investment
Funds
Early Stage VC Fund of Funds
No of companies screened per year
100-200 200-300 200-300 1,000-1,500
No of companies invested in per year
5-6 10-20 10-20 50-100
Number of companies in typical portfolio
25-30 50-100 50-100 250-500
Probability of achieving 2.5x return
65% 75-85% 75-85% 95%
Typical investment per company
$2-10M $25-250K $100-600K $25-$600K
Capacity to make follow-on investments
YESNO
(except Angel groups)
YES YES
MentorshipInternal
resourcesMentors aligned
with groupsOutsourced to
co-invest partnerOutsourced to
co-invest partner
Scalability by Assets Under Management
YES NO NO YES
Scalability by Portfolio Diversification
NO YES YES YES
future of early stage venture capital