The breakneck speed of technology-driven change is resulting in a growing
appetite for venture capital. But a number of other changes is also driving
the attraction.
Deborah Johns, Partner at Gilbert + Tobin, who moderated a panel on venture
capital at the Australian Investment Conference 2022, says in recent years,
many companies have been trying to access cash at enormous rates in order
to grow their businesses. “This has collided with a large number of
investors with cash who are trying to find alternative ways to grow their
money,” she says. “This has led to an absolute explosion in the number of
venture capital funds set up around the world.”
A changing opportunity set
Panellist Phil Cummins, Managing Director, StepStone, says one fundamental
change with venture capital that he’s noticed, is the opportunity set is
not what it used to be. “Companies are staying private for longer,” he
says. “In 2000, they stayed private for about three years, but now it’s
about eight to 10 years.”
He adds, back in 2000, 90% of the companies funded by venture capital were
in northern California, whereas today that’s less than 50% – with half of
those being in China. This is something he attributes to changing
technology, such as the ability to access cloud services.
“This means companies don’t need to add a lot of upfront investment; they
can start businesses in all parts of the world that have access to things
like Amazon Web Services,” he says. “While there's been a structural change
in technology and the technologies that are being funded, the change around
venture is also capital driven. Previously, when companies hit milestones
and went public, it was the public investors who were capturing most of the
future gain. Now private investors want to capture that value and not give
it away to public investors.”
Fellow panellist Elicia McDonald, Partner, AirTree Ventures, says people’s
technology expectations have changed a lot over time, especially since the
pandemic. “The rate of change has been immense,” she says. “The pandemic
accelerated adoptions, particularly in areas like e-commerce where we have
been lagging internationally, and telehealth, where things that may have
once taken five years to get through the regulatory burdens and hurdles are
now only taking a matter of weeks. The pandemic has been a massive tailwind
for our industry.”
Meanwhile, Neil Stanford, Managing Director, V-Ignite, says the problem now
is that there are so many start-ups wasting so much time just trying to
find capital. “It takes time to find the right investors,” he says.
While technology is fast-tracking change, so too are the business models.
“Advertising is dramatically changing the ability for individuals and
influencers to produce content that's then being transmitted across social
media,” Cummins says. “That will continue to evolve as people develop their
own platforms, but also Web3 platforms are going to develop, and those
advertising dollars that are currently going to traditional Web2 are going
to go away.”
The democratisation of venture capital
Venture capital investors and companies seeking places to invest are
finding plenty to like about Australia. McDonald believes Australia is the
most capital-efficient producer of unicorns in the world. “If you stack our
number of unicorns and the amount of capital we’ve had flowing into those
businesses, we rank first,” she says, “particularly in the last few years
when global investors have been looking for value. When you hear the
success stories like Canva and Go1 that are spinning out of Australia, it’s
no wonder we’ve had international investors showing interest.”
Stanford says his firm has had a number of inbound inquiries from US
venture firms looking to see if it can be a partner and help some of their
portfolio companies expand into Australia from the US. “I do think there's
a geopolitical element around that where maybe some of those companies in
the past would have gone straight to China,” he says. “There's a lot of
adaption going on in the marketplace about other avenues, that is, to use
Australia as a springboard into Southeast Asia. They still pick up on the
demand element from China but are trying to access it in different manner,
whether it's via Australia or through Singapore. I think there's a lot of
dynamics playing out there, too.”
Meanwhile, Cummins says the sector is opening up more to
ultra-high-net-worth and high-net-worth investors. “This is something that
is growing very fast,” he says. “When people talk about the democratisation
of venture capital, it's really about how do other investors access it.
It’s not simple; you can't necessarily invest in the traditional way. The
10-year limited partnership model is something which has been around since
the 1960s when it was first developed and that hasn't really changed, and
that's a very difficult vehicle for individual investors to manage.”
As a result, he says, the sector is seeing the emergence of new structures
and new ways for the market to access venture capital.
Meanwhile, Johns says venture capital will have to deal with regulations
once the market gets bigger – it doesn’t need to deal with them so much
now, she says. “We’re seeing more opportunities for wealth platforms, and
more creative developments where fund managers have been trying to give
investors a return, rather than have the founders only plough money back
into the business.”