Reading about the start-ups that get investment in Australia, they all seem to be tech businesses. Is there any money for businesses in sectors such as retail or manufacturing? Or are these industries toast?
It is true that the vast majority of venture capital funding is invested in tech businesses, but not all.
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Starfish Ventures specialises in tech investments, including technology driven retail and manufacturing sectors, so we do not have the insight on VC investments into other traditional business sectors.
However, we can offer an explanation why the majority of funds are invested in to tech businesses.
Venture capitalists prefer to invest in “entrepreneurial businesses”.
Regardless of their size it is more about potential for growth. As a general rule, unless a business can offer the prospect of significant turnover and capital growth within five years, it is unlikely to be of interest to a venture capital firm.
Venture capital firms are fund managers for institutional investors such as superannuation funds.
The institutional investors are interested in seeing a return on investment which is better than the return on an alternative investment.
Technology businesses have historically been the higher growth sectors than retail or manufacturing, so institutional investors are less likely to want to invest in these areas.
Just looking at the BRW Young Rich and Fastest Growing Companies lists, it’s clear that it is the technology companies who are defying the gloomy results and forecasts of other sectors, making it the obvious choice for the investor dollar.
Yes, the tech sector has traditionally received a large portion of investments – web technology, business software, energy efficiency, semi-conductors, etc.
However, there have been tech-based investments in the retail and manufacturing industry in Australia.
To clarify, VC does not invest directly in retail chains like PE investments in Witchery or Myer.
Rather, VC has invested in technology that are found within the retail space and manufacturing space.
Dealised, Our Deal, and travel.com.au are examples of investments in the retail space. Another example is the Starfish Ventures investment in Zoom Systems which is a retail platform provider.
There have also been VC investments in industrials and manufacturing.
Starfish Venture portfolio company MIGfast produces a consumable MIG welding contact tip that offers a quantum change in welding speed.
Traditional bricks and mortar retail and manufacturing will never be toast, they are just going through a transition period that is forcing them to adopt more efficient models and are forcing out businesses that do not make the necessary adjustments.
At the end of the day, people will still need cars, furniture, food, and clothing. Entrepreneurs looking to get into these industries should look at sources of funding from angel investors, incubators, family and friends, and of course banks are an option.
This question was answered in consultation with Australian Private Equity and Venture Capital Association (AVCAL).