Australian investors say this week’s global stock market volatility can be seen as an opportunity for local startups as attention turns away from commodities.
The series of crashes, which stemmed from growing concerns over the Chinese market, will hit angel investing in Australia the hardest, experts say, while publicly listed high growth tech companies should emerge relatively unscathed in the long-term.
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Since 18 August the Dow Jones Industrial Average has dropped by more than 9%, while the Nasdaq is down 10.5% with worries over global growth triggering the worse sell-off in four years. Meanwhile, the Australian dollar is currently trading at 71 US cents.
An opportunity for Australian startups
Rampersand co-founder and managing partner Jim Cassidy says startups by their very nature are well-placed to capitalise on an unstable market.
“Bouts of volatility cause investors to focus on the fundamentals and really drill down into what the business is worth,” Cassidy says.
“This could actually be a good thing for those Australian startups that are more used to capital constrained conditions and are therefore better trained at using cash wisely and focusing on the bottom line.
“Australian startups that have strong growth as well as fundamentals could be seen as stronger and less risky investments than companies which have simply demonstrated growth but no profitability.”
KPMG Australia head of innovation James Mabbott says the investors retreating from the stock exchange could provide a range of opportunities for startups.
“When people take money out of share markets they’re looking to put them into other areas. One might be venture capital,” Mabbott says.
A further move away from commodities
Starfish Ventures co-founder Michael Panaccio agrees, saying the recent market volatility can be viewed as a potential opportunity for startups, with investors turning away from the China market and commodities and looking to domestic opportunuties.
“There’s an opportunity whilst we have global uncertainty for more money to be flowing into startups to hopefully create the jobs of tomorrow,” he says.
“It’s really important for Australia to build a really vibrant startup culture with high valued jobs.
“You often hear how volatile those markets are. You have great returns but that could be wiped out overnight. You can deal with a company in the long-term in Australia.”
Blue Sky Venture Capital investment associate Ben Dunphy says the recent volatility could add momentum to a push from investors away from the mining industry and towards technology companies.
“Blue Sky strongly believes there will be continued shifts in the quantum of capital invested in different alternative asset classes in Australia,” Dunphy says.
“Historically in times of market stress we have seen alternative asset classes outperform more traditional investments, so there is the potential for a shift toward more diversified investment portfolios which include a higher portion of venture capital.”
The impact on angel investing
Panaccio says the biggest impact of this global instability will be on angel investing.
“If you think back to the tech bubble crash in 2001 – that saw a decrease in angel investing,” Panaccio says.
“They tend to invest when they feel wealthy, and although the retreat in markets might be 4 or 5%, they might have lost a lot of money, making them less likely to make investments in the future.”
This could also lead to bigger corporations reducing their investments in startups, Panaccio says.
“Corporates are a bit like the angels. When corporates get under pressure in terms of share price and profitability, the first things to disappear are venture capital and funding.”
Publicly listed startups to bear the brunt of global falls
Publicly listed Australian startups are being hit hard by stock market collapses, but Australian investors say they’re coping well compared to the rest of the world.
“The Australian ecosystem may be able to weather the storm with smaller declines in value,” Dunphy says.
“If investor uncertainty persists there is likely to be a lower appetite for risk which would logically imply that companies who have been valued by investors on future growth or other non-GAAP metrics could suffer the most.”
This is likely to be a short-term problem for these startups, Cassidy says.
“Publicly listed startups will likely see their share price fluctuate massively in these periods, which makes it harder to raise equity,” he says.
Starfish Ventures-backed wearable biotechnology company dorsaVi is listed on the ASX, and began to seek a funding boost at the worst possible time earlier this week, but still fared well.
“That was in the heart of this situation on Monday. It was definitely the worst day to have done it, but they managed to raise the money as planned,” Panaccio says.
But as the world’s stock markets continue to rapidly rise and fall, the true impact of these fluctuations in the long-term is yet to be determined, Mabbott says.
“Time will show how it plays out,” he says.