Data on the past 12 months of capital raising in Australia has reflected a startup ecosystem imbued with a “broad sense of optimism”, but the numbers also come with warnings that exponential growth can’t last forever.
The Australian Private Equity and Venture Capital Association (AVCAL) has today revealed its annual yearbook report into the private equity and venture capital scene in Australia, showing the sort of growth in investment not seen since the years before the 2008-09 financial crisis.
Total fundraising across both private equity and venture capital increased to $3.35 billion in total, up from $2.74 billion in 2016. This was largely by a huge year in venture capital raising, which hit $1.32 billion, more than double the 2016 figure.
Total venture capital investment in Australian businesses was up 24%, the report reveals, with a record-breaking 117 startups receiving capital mostly at a seed or Series A round. The sectors which received the most investment were the digital and ICT space with 42% of investment being in these sectors, while the healthcare and life sciences space received 33%.
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A diverse range of institutional investors ponied up the billions in venture capital, including superannuation funds, corporate and financial institutions, and private individuals, which AVCAL chief executive Yasser El-Ansary says shows a lot of “optimism and confidence” in ecosystem’s outlook.
“The fact we have large institutional investors looking at the opportunity venture capital presents provides access to that part of the market that for many years we have not been able to access,” El-Ansary told StartupSmart.
“Generally you don’t see these investors taking a gamble on something untested, and they’ve only made the decision to allocate a larger amount of capital to VC over the last year or two.
“We have a well-rounded cause to be optimistic about the outlook.”
Despite there having been criticisms of the policy, the government’s “Innovation Agenda” went a long way towards encouraging investment in the startup space, believes El-Ansary, and while the policy itself didn’t specifically call investors to arms, the display of confidence from the government did, he says.
“The overall policy outlook in this part of the market and the signals sent over the past couple of years has been really important,” he says.
While the overall investment landscape is developing at a cracking pace, Australia still has a long way to go until it can comfortably benchmark itself against other comparable countries. El-Ansary says AVCAL’s benchmarks put Australia at half the overall size of other markets and says we are “very far away” from a point where the VC market is in line with the size of the economy.
And most types of rapid growth, the view is this has to slow down eventually. Al-Ansary says it’s hard to pinpoint when exactly that might be, but estimates another two or three years before numbers start to dip.
The number of entrepreneurs creating strong businesses is ever-increasing, and at a rate faster than investment can keep up, boiling to a point where “availability in capital starts to fall compared to demand for capital”, he says.
“It’s the reality of any venture or private investment market around the world, they have a cyclic nature. They cannot continue at the same level indefinitely, and it will come to a point where the numbers contract.
“We’re seeing a significant ramping up of investment activity, and then we’ll see a significant amount of divestment activity.
“Since the economic downturn we’ve really been making up for lost ground, so we’re really starting to build out the size of our venture systems.”