Victorian startups need more founders to “take the plunge” as local startups struggle for angel investment
Wednesday, October 24, 2018/
Victoria’s startup ecosystem is growing, according to LaunchVic’s 2018 Mapping Victoria’s Startup Ecosystem report. But, while diversity stats are moving in the right direction, there is still more work to be done, and early-stage startups may not be getting the breaks they need.
The report surveys 2,771 startups in Victoria, a leap from the 1,600 surveyed last year, finding since 2010 the ecosystem has been growing at a rate of 23% per annum.
The majority — just over 2,000 — are seed- and early-stage startups, while 42 are late-stage startups with either over 100 employees or revenues of between $100 million and $1 billion.
Also included in the figures are 540 startups that have either gone public or been acquired.
The largest startup sector is health, accounting for 13% of startups, followed by media and entertainment (11%), enterprise (10%) and commerce (10%).
Speaking to StartupSmart, LaunchVic chief executive Kate Cornick notes education startups also account for 8% of all Victorian startups, making it the fastest-growing sector.
That’s “really exciting to see”, Cornick says.
With a population of 4.9 million, Melbourne has 508 startups per million people. By comparison, Seattle, a city of 3.7 million, has 1,435 startups per million people.
Sydney’s lead on Melbourne is a little more modest — but still significant. The New South Wales capital boasts 743 startups per million people.
Melbourne’s relatively low startup density can partly be attributed to the youth of Victoria’s startup ecosystem.
“It shows that we’ve got a lot more potential for growth … there’s a lot of work to do to tap into the entrepreneurs in our community who have not yet taken the plunge,” she says.
It also means “we’re able to create a different form of ecosystem”, Cornick says, free from the ‘bro culture’ found in some more traditional startup hubs.
“We’re seeing founders that may not be traditional founders … are stepping up and creating companies,” she adds.
The report shows some 28% of Victorian startup founders are women, up slightly from 25% last year.
That said, while sectors such as design, social enterprise and education have an almost equal gender split, 90% of financial services and data analytics startup founders are men, as well as 100% of energy startup founders.
Founders born outside of Australia make up 34% of the total, and 55% have at least one parent born outside of Australia.
However, only 2% of Victorian founders are of Aboriginal or Torres Strait Islander descent.
While there is clearly room to improve in terms of diversity in Victorian startups, “we’re really punching above our weight, globally”, Cornick says.
“We’re proud of the fact that we’re seeing these improvements,” she adds.
Angel investors aren’t keeping up
The report also looked at startup investment activity over the past five years, finding $1.73 billion has been invested across 766 deals, something Cornick says is a “positive sign that the landscape continues to grow”.
While growth in seed-stage investing peaked in 2014 with nearly $100 million invested, the numbers have dropped to sit at the $60 million mark for the last two years. This includes all form of investment — such as seed or angel investment, equity crowdfunding, and accelerator and incubator money.
However, the number of accelerator and incubator seed-stage investments has increased steadily since 2013, coming in at 35 deals last year.
Investment into growth and later-stage startups also increased from just over $100 million to about $300 million, while the number of deals actually dropped slightly from nine to seven.
This shows average deal sizes are increasing significantly, and is in line with an overall trend in Australia, highlighted in KPMG’s Venture Pulse report released earlier this month.
Equally, although only 21% of startups said they have not been able to raise the capital they needed, of that group, 75% were looking for angel investment.
Of the 73% that said they had either raised enough or too much capital (a further 6% were currently in the process of raising), 60% were raising through venture capital or private equity.
It’s also taking startups a disproportionately long time to secure capital through angel investment.
According to the report, startups looking for angel investment have between 15 and 20 conversations, on average, and it takes them an average of 5.7 months to secure an investment.
By comparison, those raising private equity funding have about 20 conversations and raise in about five months, while those raising through private equity tend to wrap it up after just over five months with between 10 and 15 conversations.
This is a concern for Cornick.
“Angel investments, which should be the fastest rounds, are taking almost as long as it is to raise VC. There’s clearly an issue there,” she says.
“If you look at best practice, seed capital should be very quick,” she adds.
Part of the issue, Cornick suggests, is that in Victoria, and Australia as a whole, startups are not widely recognised as an asset class.
“Investors are investing, but they’re doing it out of passion, or a desire to help friends and family,” she says.
“We don’t have a large number of extremely highly skilled angel investors,” she says.
“We know that our ecosystem is growing rapidly … we also have to make sure that the investor market keeps pace with the growth,” she says.