Jeremy Colless, managing partner of Artesian – which is behind the Sydney Angels Sidecar Fund and the new Slingshot program – explains why Australia’s start-up and investment culture needs to be rebuilt “from the bottom up”.
Freelancer.com founder Matt Barrie has courted controversy this week by claiming Australia’s venture capital industry is “dead”.
The Australian VC industry has never successfully reached critical mass in terms of assets under management. As an interesting comparison, US GDP is 10 times larger than Australia.
However, since 2002, VC funds raised in the US are 100 times larger than in Australia – and that is despite the Australian VC industry being heavily subsidised by government matched-funding programs.
Without critical mass in VC funds, and with a relatively small domestic market, there just haven’t been enough tech success stories and exits in Australia to kick-start the virtuous cycle of start-up, growth, exit, reinvestment, start-up, growth, exit … and so on.
In what I call VC version 1.0, the business model for early stage VC firms was a team of a few partners with a group of financial/business analysts investing $5 million+ as their first investment in a company with customers, traction and revenue.
With the cost of starting up falling dramatically, early stage VC firms must now make a much larger number of smaller bets at an earlier pre-revenue stage of a venture or risk missing out on rapidly scaling start-ups.
However, the traditional VC investment process is not attuned to the volume of seed stage deals they are now required to access and screen.
With less capital required to accelerate the growth of a start-up, VCs now face stiff competition from a broad range of much more nimble individual angels, super angels and VC 2.0 firms.
To adjust to the new paradigm of low cost, rapidly scaling start-ups a new breed of VC firm, or VC version 2.0, is emerging.
The key features of these firms tend to be:
- they are investing earlier in more start-ups;
- they are crowdsourcing deal flow, filters and due diligence; and
- they are crowdfunding from, or co-investing with, nimble individual investors.
Another feature of the new model is that venture capital is going global. Although Silicon Valley is still king, start-ups and VCs must now pay attention to emerging markets for both customers and investors.
So how can the Australian VC market make itself relevant to the start-up community and optimise the health of the Australian early stage ecosystem?
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