While the tech downturn here in the U.S. has many venture capitalists retrenching and tending to their wounded portfolios, VCs in the land down under feel that their industry has just about reached critical mass and not even a tech downturn could derail it from its path to maturity. To be sure, Australian fund managers have had to exercise greater caution with their portfolios and are seeing a reduction in the pace of new deals, but a confident optimism prevails.
“Actually the sentiment here is frankly stronger and more positive than in the U.S.,” said Allan Aaron, general partner at Technology Venture Partners. “The Australian market never reached quite the buoyant heights as the U.S. market, and it was never as over-hyped. [Our] public markets have remained fairly stable. We are also in the fortunate position here to learn from the experience of investors in the U.S. markets. We didn’t have the same degree [of fallout] and have had much fewer casualties. I’d like to think it’s good judgment.”
Whether it’s due to good judgment or fortuitous timing, the Australian venture capital industry seems to be faring pretty well in the current storm. “We probably didn’t have as many dotcoms or pure retail-type plays,” noted Roger Allen, chairman and founding partner of Allen & Buckeridge. “A lot of the VC’s [in Australia] were fairly new and the path to taking companies public wasn’t as well worn. [We] tended to look at companies that were a bit more solid, and had more of a technology base . . . We also didn’t have anything like the excessive valuations that were being paid [in the U.S.] The whole system was a lot slower [here], and probably a lot more conservative.”
The Australian VC industry has made great strides especially since the Australian government introduced the Innovation Investment Fund (IIF) program in 1997 in order to spur early-stage investments in the high-tech sector. Much like the U.S.’s Small Business Investment Company program, the IIF program licensed private fund managers to administer a pool of capital from the government which is matched by private sector capital up to a two-to-one basis. These funds ranged in size between A$30 million ($15.5 million) and A$50 million and in focus from information technology to bioscience to general investments.
Since the introduction of the IIF, the industry has reached new heights. According to a recent joint study by the Australian Venture Capital Association Ltd. (AVCAL) and Venture Capital Journal publisher Venture Economics, the industry raised a record A$1.2 billion and disbursed more than A$831 million in the fiscal year ending June 30, 2000. A record 42 funds were raised in 2000, almost double the amount raised in 1999. Australian funds formed between 1986 and 1999 generated an 18.3% IRR as of Dec. 31, 1999, while funds in the upper quartile generated IRRs between 19.7% and 71.5%.
A Benchmark Year
For Australian VCs, these signs show the industry has begun to achieve a sustainable critical mass, on the way to full maturity.
“I think 2000 was a landmark year because it achieved, not necessarily critical mass, but the first stage of critical mass,” said Stuart Wardman-Browne, chief operating officer of AMWIN Management.
Sam Armstrong, managing partner of Quay Partners agreed. “[Although] the market is still a long way from maturing, the various pieces are starting to work into place. The venture capital industry has matured in that now there is a core group of managers who manage more than one fund who arguably know what they are doing.”
Encouraged by the success of the industry so far, the Australian government passed a number of regulatory reforms such as major capital gains tax reform, roll-over relief and zero taxation for U.S. and certain other pension funds. While many VCs recognize that this is a good start, they are pushing for more. Armstrong noted that while European and U.S. pension funds are not taxed on investments in Australia, “the conditions under which they can [meet this status] are kind of restrictive and don’t fit in U.S. pension fund’s model of investing and would require a special structure.” He noted that foreign investments usually occur through fund-of-funds, but under the current legislation, special tax treatment is only granted to pure pension fund money.
For the foreign investor, the Australian VC industry presents “good hunting ground,” according to Wardman-Browne, for investors who would want to diversify from concentrated holdings in American and European markets. In many ways, Australia’s VC market draws comparison with Israel’s. While Australia offers high-caliber R&D technology, VCs seek to commercialize these start-ups by bringing them to international markets, especially U.S. markets. For example, Radiata Communications, a wireless company whose technology enables high-speed shared multimedia access to the Internet, was founded by professors at Macquarie University in conjunction with the government’s Commonwealth Scientific and Industrial Research Organization (CSIRO) and was recently acquired by Cisco Systems Inc. for A$567 million.
“If you have these technology companies, you just got to get them into the international marketplace,” observed Allen, “because you’ve got to be competitive in terms of distribution, partnerships and recruiting the right people.”
With the current market downturn, have Australian VCs seen the industry plateau in 2000?
“I don’t think Australian venture capital is anywhere near its high point,” said Armstrong.
“I would expect 2001 to be very similar [to 2000],” said Wardman-Browne. He noted that there will probably be some downturn, “but I wouldn’t expect it to be significantly less. We’re about to go out and raise funds, [and] we’re quite confident about raising that fund.”
“I expect [disbursements] will plateau or perhaps fall off a little bit [in 2001],” said Aaron, “but in terms of fund raising I expect it to grow.”
With major international investors such as J.P. Morgan Chase, ABN AMRO and Ericsson Deutsche Technology Fund just beginning to enter the Australian market, “the outlook is good” declared Andrew Green, executive director of Australian VC Association. “If you look back historically, we didn’t have the capital and skills, but we now have both. [As a result], stronger networks and more deals will be generated.”