Where could the Australian venture capital industry be in 5 years?

VC in the US in 2018 🇺🇸

Pitchbook, a data tracking service that attempts to track each and every investment made in the VC, PE and M&A landscape recently released their 2018 summary.

It makes for interesting reading.

In 2018 there was US$131bn invested in 8,948 companies across the US.

The general trend was for larger deals than small, largely due to:

– The more exciting companies continuing to grow really fast and needing more capital;

– The emergence of more growth-focused funds in market; and

– The activity of Softbank’s $100bn Vision fund

To put the past year’s level of investment in the US in context:

– In 2017 — US$83bn was invested (up 58% to 2018);

– Way back in 2012 — US$41.5bn was invested (up 212% to 2018); and

– It was the first year investment levels surpassed the bubble year of 2000

To all that thought technology was a passing fantasy…not so much…

California continues to dominate at the #1 spot

When you look at the breakdown of investments across the US, you see just how dominant California is:

– In 2018, >50% of all $ invested in the US was in California — a cool US$77bn of the US$131bn total;

– Next in line was New York with US$14bn invested;

– Then it was Massachusetts with US$11bn;

– Then a big drop to #4 was North Carolina with US$2.9bn;

– Following this were a few states with around US$2.5bn invested; and

– Then the numbers continue to fall quite fast.

It’s interesting to note that this concentration still continues in a world where ideas can come from anywhere, and the building blocks of the new world are equally accessible to anyone anywhere in the US.

What do Australia and Ohio have in common? 🇦🇺

The latest Venture Pulse Report from KPMG notes that in 2018, close to US$1bn was invested in Australian companies by the VC community (up ~35% since 2017 and ~50%+ since 2014).

This puts us in the same place as (around) the 14th state in the US… Ohio.

(Queue the brilliant Crosby/Stills/Nash/Young song… join me “Tin soldiers and Nixon’s comin’…We’re finally on our own..This summer I hear the drummin’…”)

Comparing Australia to Ohio is probably a little unfair to Ohio. It only has around 12 million people, and my guess is that a lot of brilliant Ohio natives head to the West or East Coast. So for Ohio to be able to take on similar investment levels to Australia is more a case of well done Ohio and not so great Australia.…

Perhaps the better US state to compare Australia to is Texas — with a population of 28 million people, US$2.6bn was invested in 2018 (nearly 3x Australia). If you compare Texas to New York state with 9 million people and US$14bn invested, or Massachusetts with 8 million people and US$11bn invested — it looks like Texas isn’t gaining the level of investment that it should.

One wonders whether complacency, due to decades of prosperity as a function of massive natural reserves (oil in their case), led to a lack of drive and innovation…

Hmmm… now what other place in the world has been able to take advantage of massive natural reserves (iron ore, coal, gas and other minerals) and not really bother that much about value additive engineering, manufacturing or technology innovation ? Oh… that’s right… us… Australia.

Having said that, the work the state has done in making Austin, Texas a viable tech hub is paying off, with many global companies (including Atlassian) located there.

Texas has woken up… and while Aussie startups and VC firms are trying their best, our Government is still snoozing. And unfortunately an ecosystem does need government support to be successful.

If you compare our investments rates vs the US on a per capita basis — the stats don’t look great either:

– US = US$130bn / 325m people = US$400 per capita

– Australia = US$1bn / 25m people = US$38 per capita

What does this mean for the Australian VC industry?

Although we should be proud to acknowledge that investment in the tech sector in Australia has grown significantly over the past few years…the stats above point to the fact that the sector could take on significantly higher levels of funding, and help grow substantially more global companies.

But this won’t happen by osmosis… we need to work hard to create this success.

The key focus for the next few years should be to ensure we create an environment where the ecosystem can profitably absorb more money.

This means we need the Government to focus on:

– Helping more talented people enter the tech sector to upskill Australians and build global companies — and yes, this means more immigrants coming to Australia to transfer their skills

– Ensuring we have a helpful regulatory system that focuses on R&D and growing lots of new global companies

– Reconsidering several of their recent actions, starting with:

a) The stripping of A$2.4bn from the R&D budget, and going after small startups who in good faith have tried to use the R&D Tax Refund to grow their companies

b) The over-reaching AA Bill — which is undermining the effort and good work of those trying to create a more sustainable standard of living for Australians going forward

Putting aside the actions of the current government, and assuming we get a change of approach soon, it should be quite achievable for Australia to be absorbing >US$5bn a year in VC investment within the next five years or so.

This would suggest a more than 5x increase in jobs in the sector, and a platform that creates a long-term, sustainable future for our country.

What do we need to do about it?

The mistake would be to suggest that those with the money should just start writing cheques now…instead what we need is for behaviours, attitudes, and outcomes to develop in unison.

– The VC community has raised >A$3bn over the last 5 years, however, to get more more money in the system we’ll need to start showing a material return to investors. As some of Australia’s more mature (and LARGER) startups IPO in the coming year, I’m confident we’ll start to see the money cycle repeating

– We also need more of those with the money (specifically institutional investors) to start to accept that VC is a viable investment category, and if they don’t play others will — we’re already seeing overseas sovereign funds starting to participate in the ecosystem that has created the likes of Atlassian, Canva, Deputy, and Prospa

– Apart from the “money” side of this equation, we also need all Australians to see that R&D is the proxy for a better life going forward… it is the one metric that signals beautifully whether your country is going to do well, or not so well, in the future. (To put it mildly we are not performing well — more to say on this in an upcoming post)

– We also need our education system to continue to focus on preparing our children for the jobs of the future — they’ll need to have creativity, empathy, and the ability to problem solve, as a base set on which to build job-specific skills

In a few years time wouldn’t it be simply marvellous to note that in the Pitchbook Global Analysis for 2025, Australia ranked as a centre for innovation with truly global scale, and had the academic and industry ecosystems to support thousands of entrepreneurs making us the envy of the world?