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A government review has backed Australia’s venture capital tax breaks, finding investment vehicles and concessional treatment have helped $20 billion in capital commitments in the last two decades. But the report, which was completed nearly a year ago, was never released by the former federal government, and further promised investment vehicles were never introduced. According…
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Jelix Ventures founder and chief executive Andrea Gardiner says the biggest challenge for pre-revenue and early-revenue startups in Australia remains the difficulty in securing funding, despite the huge volumes of new money that has washed into the venture capital sector.
While the federal government’s Andrew (ESVCLP) program had attracted billions into the sector in recent years, a critical funding gap remained at the earliest stages of a startup’s journey to success.
The biggest challenge for startup companies in Australia right now? “For the really early ones, I think its fund raising, because of the substantial and growing funding gap,” Ms Gardiner says.
The success of the ESVCLP has meant deal sizes have grown dramatically on the back of dramatic growth in the size of the venture funds being raised.
Bridging the gap in the Australia’s startup city
Australia’s larger VC funds have beefed up and the size of the cheques they write has swelled as well. It seems like a nice problem to have, except that its has created a more dramatic hole in the funding landscape for the earliest stage companies.
“[The bigger VCs] have been forced up to food chain, in a sense, to write bigger cheques,” Ms Gardiner says. “Lots of them started with tens of millions under management and now they’ve got hundreds of millions of dollars under management, and so they can’t really afford to be writing $500k cheques.”
“They have to write millions of dollar cheques. And I think the gap that’s been created is the hardest thing [for these early-stage companies.]
It is a thorny problem for local policy makers. The ESVCLP program has enjoyed great success by offering a capital gains tax free incentive. This has been undeniably positive for the local ecosystem. The trick in the longer term will be in structuring an incentive that opens the spigots of investment dollars into the pre-revenue and early-revenue companies.
This has been the opportunity for Jelix Ventures, and where it has focused its attention.
Jelix on Monday said it had closed a $15 million early-stage tech fund under an ESVCLP structure, bringing to $26 million in total funds that the company now has under management. Up until now the company has invested $11 million in 26 startups through its investor-led syndications under a variety of structures.
The pre-revenue companies remain the focus, Ms Gardiner said.
“That’s definitely our sweet spot. That’s where we have our deal flow. And that’s where we can help the most,” she said. “But the plan is to do lots of follow-on investments in the deals that we do well.”
The new Jelix ESVCLP fund is backed by high-profile investors from the heart of the startup ecosystem, including Airtree co-founder Daniel Petre, Afterpay executive Rachel Kelly, Our Innovation Fund founder David Shein, iiNet founder Michael Malone, Inquisitive CEO and Mathletics founder Tim Power, Mumbrella founder Tim Burrowes, and Audible’s Japan-based regional chief Matthew Gain.
Jelix cut its teeth in the sector when founder and CEO Andrea Gardiner began investing into startups in 2015.
“Our original model was to source great investment opportunities and build and lead a syndicate for each investment,” Ms Gardiner said.
“There were strong appetites to invest in early-stage tech startups, but lack of deal flow and expertise to assess the opportunity and structure terms, leading to a perfect opportunity for Jelix to fill the gap.”
Jelix has already made its first investments from the new fund, including FL0 (described as Canva for engineers) alongside Blackbird and Skip Capital, as well as quantum computing firm Quantum Brilliance and computer vision AgTech startup Bitwise Ag.
Jelix expects to invest in up to 20-25 businesses from the fund, focusing on software and deep tech servicing huge global markets. Ms Gardiner said Jelix would continue to offer co-investment opportunities with first priority to fund investors.
Jelix also announced the promotion of key staff member Alon Greenspan to investment partner. Mr Greenspan has been an active investor with Jelix since early 2018.
“It was a well-earned, short path to partnership for Alon. He is truly extraordinary,” Ms Gardiner said.
The founders of a $10 million venture capital fund and accelerator who say the industry’s traditional startup funding model is too risk-averse at the early stages and isn’t built to support new-age entrepreneurs have revealed their first investments.
Claiming to be Australia’s “youngest venture capital fund and startup accelerator”, Galileo Ventures was founded in 2020 by entrepreneurs James Alexander (founder of University of Sydney startup accelerator INCUBATE) and Hugh Stephens (founder of global social media management platform Sked Social) – two 30-somethings with a passion for mentoring early-stage startups.
Galileo Ventures founders James Alexander and Hugh Stephens.
Mr Alexander said the fund, which has revealed its first eight investments that will each receive between $200,000 and $300,000, would provide a fresh take on investing in emerging founders, who he said are too frequently “underestimated” and “overlooked” by traditional VC firms.
“The world’s next biggest ideas are hidden in the next generation of emerging founders, but the current VC model isn’t built to support new-age entrepreneurs,” Mr Alexander said.
“Much of the original Australian investment community is too risk-averse at the earliest stages, often doesn’t quite grasp the next wave of tech and quite frankly lacks diversity.
“As the only millennial and openly identifying LGBTIQ+ founders of an Australian VC fund (and few globally), we’re committed to bringing world-class support and capital that later-stage VCs like A16Z or Blackbird provide, at the most crucial early stages.”
Galileo received over 500 applications in its first six months of operation and startups it has chosen to invest in include: AllyAssist, a female-founded disability-assistance platform, bringing a new workforce of therapy assistants to people with disabilities; VectorAI, a tool that uses machine learning to help implement search, recommendation, prediction and more with complex data; and Space Services, which combines technology used in games and advanced simulation software to help engineering teams make space safer and more efficient.
The other startups Galileo has invested in include Wriveted, an artificial intelligence “bookbot” (virtual reading assistant) aimed at boosting literacy rates that has signed on schools and libraries; Tixel, a ticket resale marketplace; Lemonade, a social commerce app for events; Varicon, a construction forecasting platform; and Sizle, a document sharing tool.
The eight investments comprise the first of 40 Galileo hopes to make over the next three years.
“There’s a misconception that young Australia doesn’t have the tech talent to produce more unicorns,” Mr Alexander said, referring to startups that reach $1 billion in value.
“The talent is there; we just need to get better at nurturing and prepping emerging founders to win.
“Young, inexperienced founders simply don’t get the right support from ‘angel’ investors. We rarely see successful companies emerge from short-form accelerator and education programs, and that desperately needs to change. Galileo aims to break down that model and actually help build the next Canvas and Atlassians from all walks of life.”
Galileo will begin the assessment process for its next wave of investments in the coming months. It welcomes early-stage founders, particularly minority and diverse-identifying founders.
Venture capital funding tipped into Australian startups rose to $3.4 billion ($US2.5 billion) in the past financial year, up from $2.6 billion ($US1.95 billion) in the previous year despite the COVID-19 pandemic.
That’s according to the latest KPMG Venture Pulse report, which reported a record 327 Australian venture capital investment deals over the financial year between 1 July 2020 and 1 July 2021, up from 311 over the previous 12 months. The funding information was based on data provided by the financial database Pitchbook.
There was a record quarter of VC funding, according to KPMG. Data provided by PitchBook. Note: figures in US dollars.
Amanda Price, head of KPMG High Growth Ventures, said the investment environment for Australian high-growth ventures “had never been stronger”.
“Alongside the continued progression of Australia’s new unicorns — startups that have achieved a valuation of over $1 billion — we have also seen record seed rounds raised,” Ms Price said.
During the year, startups such as insurer Honey, plant-based meat and dairy alternative Nourish Ingredients, and e-commerce company Carted attracted over $10 million of early-stage funding.
“As we look to Australia’s post-pandemic future, the emergence of these digital disruptors has massive potential to contribute to the nation’s economy,” Ms Price said.
Benjamin Chong, partner at Australian venture capital firm Right Click Capital, said the increase in investments over the past year validated decisions taken by the federal government five years ago to support innovative new companies. But he said there was a “risk that the early good work will be undone”.
“Governments at all levels need to commit to a long-term program of research and development and other incentives so we can keep and attract talented individuals,” Mr Chong said.
“Our higher education system needs to be bolstered and we should be opening our country to more skilled migrants who can fuel this growth. The current blocking of the borders is making it difficult to build a competitive Australia.”
Niki Scevak, partner at venture capital firm Blackbird, said local startups were receiving record-breaking funding “because Australian startups are creating record-breaking amounts of progress”.
“Our ecosystem has already produced three generational companies in Atlassian, Canva and Afterpay with the prospects for many more in the coming decades,” Mr Scevak said.
Despite this, Mr Scevak used the release KPMG’s report to point out a lack of proper data on early-stage startup funding.
“It is unlikely that we will produce enough companies to increase our chances of launching companies onto [the list of the 20 largest companies by market capitalisation] if we do not change the trend reported by the Startup Muster Report of 2018, which featured analysis by CSIRO’s Data61,” Liveri said.
“The report shows growth in startups in Australia until 2017 followed by a sharp decline of 12 per cent to 2018. I cannot tell what’s happened since then, because after five years of data gathering, the research is no longer funded.”
Mr Scevak said seed rounds used to be announced to the press when there were more media outlets eager to cover even the smallest of financings.
“That no longer is the case, so most rounds go unannounced and so most services that catalogue startup financings become inaccurate,” he said, pointing to the Cut Through Venture monthly newsletter, run as a personal project by corporate startup program manager Chris Gillings, as one of the few recent attempts to keep abreast of Australian and New Zealand venture funding.
James Alexander of Sydney-based startup accelerator Galileo Ventures, which invests $200,000 in early-stage companies, agreed that funding reports often didn’t paint the full picture.
“Industry-wise, we’re super cautious on data from any local or international reports, especially from services like Pitchbook, because it typically under-reports the activity,” Mr Alexander said.
“PitchBook doesn’t even have most of our 10 investments; I think it’s got one of the 10 investments we’ve done this year.”
He said Australia was seeing record funding “because there’s a record amount of very valuable businesses”.
“As long as that keeps happening, we’ll see more capital come in,” Mr Alexander said.
In recent years, Mr Alexander said he’d noticed some traditional funds had moved to later-stage investments, leaving a small gap in the market for seed investors like Galileo.
“The bigger funds, as they’ve gotten bigger, are typically signing fewer tiny, tiny cheques just by nature of the fact that they’re much bigger now and they have to deploy more capital,” he said.
Labor’s industry and innovation spokesman Ed Husic said that when you looked at what’s providing a boost to the pool of funds available for local talent, it was in large part superannuation.
“It stands in contrast to any measure or financial assistance brought forward by the Coalition,” Mr Husic said.
“It’s paradoxical that the Coalition is spending a hell of a lot of time undermining Australia’s super system while neglecting to correct shortcomings in their own supports for early-stage innovation.”
Any upward trend in venture capital investment was positive news, Mr Husic said.
“But we need government to have the same confidence,” he said.
“We have a Prime Minister who consistently maintains that we should be the best adopters of offshore technology and innovations, rather than creators, and supporters of our own.”
Industry and Innovation Minister Christian Porter was approached for comment but did not respond before deadline.
Five of the top Australian venture capital investments in financial year 2020/21
Company
Deal size ($US)
Industry
State
Airwallex
$100m
Financial Software
VIC
Brighte
$100m
Specialized Finance
NSW
Athena
$90m
Consumer Finance
NSW
SafetyCulture
$73m
Business/Productivity Software
QLD
Canva
$71m
Multimedia and Design Software
NSW
Five of the top Australian seed round startup investments in financial year 2020/21
The lack of common investment vehicles first promised by the Coalition five years ago is acting as a handbrake on foreign capital entering Australia, according to the peak investment group, which is calling for greater harmonisation with global standards.
In the 2016 budget, the federal government announced it would introduce a Corporate Collective Investment Vehicle (CCIV) and a Limited Partnership Collective Investment Vehicle (LPCIV) to encourage more foreign investment.
It followed concerns raised by the Board of Taxation, the Productivity Commission and others that Australia’s complexity in the area and its lack of similarity with global standards was dissuading overseas investors.
Yasser El-Ansary, the Australian Investment Council chief
Despite government saying both vehicles would be introduced by 2018, neither have have made it into practice. An exposure draft was released in 2018 for the CCIV, but a bill is yet to hit the Parliament, and there has been no movement on a LPCIV five years on.
The absence had created a “very direct disincentive” to international investors, according to Australian Investment Council chief executive Yasser El-Ansary.
“Australia has to continue to be at the forefront of that global race [for international investors],” Mr El-Ansary told InnovationAus.
“And making sure that we’ve got a collective investment vehicle that looks like and is consistent with the best collective investment vehicles around the world is hugely important.”
In the latest budget, the government changed the start date for allocated $2.6 million to Treasury to implement the CCIV with a revised start date of 1 July 2022.
But there was no update on a limited partnerships model. Without that vehicle, which is commonly used overseas to facilitate wholesale investment by large investors such as pension funds, Australia risks being seen as “too hard” a market by some foreign funds, Mr El-Ansary said.
“If it was a race between Australia and another market that has a limited partnership, it could be the differentiation that says Australia loses out to that other market,” he said.
For now the AIC is focused on ensuring the continuation of the venture capital tax breaks introduced in during Malcolm Turnbull’s innovation push.
Earlier this month, the government launched a review of the VC tax breaks introduced as part of the National Innovation and Science Agenda in 2015, including a 20 per cent non-refundable carry-forward tax offset and exemption from the capital gains tax.
The changes were made to enhance the concessional treatment of the Early Stage Venture Capital Limited Partnership (ESVCLP) program and target it towards ventures at the very early stages of the lifecycle of a developing startup.
The government says five years on it is now the “appropriate” time to review the changes, with Treasury and Industry Innovation and Science Australia to lead a evaluation of the ESVCLP and other programs designed to spur investment in early stage businesses.
The review will not make policy or reform recommendations, but will assess the VC concessions’ operation and impact and will likely be used as evidence for any future reforms.
Mr El-Ansary said the Turnbull-era reforms had become fundamental to Australia’s innovation sector and he is confident the review will show this.
“What we will find as we work through that process under this review is that these vehicles have been absolutely instrumental to the growth of the innovation economy in Australia,” he said.
The AIC chief said private investors are keen to see the tax breaks continue but there are also large areas for improvement to encourage local investment and to attract more international capital.
“Some of those issues are very, very simple technical amendments to clarify definitions and policy intent of the legislation in certain areas. Some are more substantive policy design questions which needs to be resolved as part of modernising frameworks,” Mr El-Ansary said.
He noted the thresholds included in some of the investment vehicles have not been changed since they were established more than a decade ago, and are now “out of date” for some high growth innovation companies, and the vehicles
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