This 2005 report provides analysis of the economic outcomes over time, and assists benchmarking the current early-stage venture capital industry in Australia.
Due to the Commercial-in-Confidence nature of the report, a summary has been provided.
Purpose
Howard Partners were contracted to report on early stage venture capital investments in Australia to:
- Provide a longitudinal analysis of the economic outcomes from early stage Australian venture capital investments;
- Identify the magnitude and type of economic outcomes generated over time: and
- Provide a benchmark, allowing the impact of the IIF and PSF programs to be determined.
Key Findings
In the seven year period, 1995-96 to 2003-04, 175 venture capital investors allocated $1528m to 723 early stage companies.
Whilst the early stage venture capital sector attracted almost 50% of the total number of investments over the period, the value of the investments represents 26% of the total. The early stage venture capital industry is also relatively concentrated as, between 1995-96 and 2003-04, only 52 funds invested more than $10 million in total or invested in 10 or more companies.
There was a drop in the number and value of seed investments from 47 or $70.8 million in 2002-03 to 38 or $53.3 million in 2003-04. The number of investments in the start-up stage increased from 30 in 2002-03 to 32 in 2003-04, the value of the investments dropped by $10.2 million. The early expansion stage remained relatively consistent in terms of numbers and value.
The investment trend shows that there was a peak in 2000-01 in early-stage and expansion investments. This is consistent with overseas trends and the connection between early stage venture capital and the technology bubble in the later 1990’s. The venture sector is currently going through resurgence, but at the later stages of the investment cycle.
The main industries attracting investments remained fairly consistent. In 2003-04 the health and biosciences sectors attracted the highest value of investments, followed by information and communications technologies and resources and mining. Thirty percent of investments in terms of number were made in health and biosciences and 24% were in information and communication technologies. Business and financial services also attracted a significant number of investments.
The analysis found that a significant number of venture backed companies have exited through ‘trade sale’ to another company or through public listing. There are also many companies that are still operating as early stage companies and fall within the category of small-to-medium sized enterprises (SMEs), and are likely to continue on that basis – providing they keep innovating and marketing their product and/or service. Some venture backed SMEs are undertaking research and development and generating income from research grants and the provision of research and development services to larger companies. The report noted that companies are entering into supply and/or distribution relationships with larger companies, providing specialised products and services in niche areas. Whilst these venture SMEs are performing an important service, the economic impact will be reflected in the economic indicators flowing from the larger businesses. This points to the difficulty in assessing the economic performance of venture backed companies.
The report suggests that early stage venture capital should be seen in a broader context of industrial innovation involving purchases, partnerships and alliances along a value chain rather than a ‘linear flow’ of research to start-up global enterprises. Similarly, the economic impact of venture capital should be assessed in terms of the broader involvement in industrial innovation through partnerships and alliances than in terms of the growth of a single enterprise. As such, the economic impacts of early stage venture backed companies are predominately reflected in their contribution to the performance of larger companies. Larger companies rely on small start-ups for innovation and the provision of specialised products and applications. It is believed that in this process, both public research and early stage venture capital have important roles, particularly in shifting costs and risks out of the corporate entity and this allows corporations to access a broader range of innovation opportunities and options.
The report found that in 2003-04 the majority of investments were made by independent venture capital investors followed by public sector supported investors. It appears that the relative importance of independent and public sector investors has increased over the period while the involvement of captive and corporate investors has declined. Independent investors represent fund managers with a broad range of limited partners and no specific affiliation to a financial institution or corporation. Captive investors are fund managers owned by or with strong linkages to investment banks, retail banks or other financial institutions.