Gravity and Growth in the Australian Venture Capital Market

The talk of never-ending growth can be worrying in investor land, as everyone knows — what goes up must come down. But in venture capital — gravity does not always apply. The rate of technological progress is so steep that it can rise above the cyclical fluctuations of the market.

Australia’s venture capital market is on its own exponential journey, but is still only just getting started. As a result, there has been no shortage of commentary on the eco-systems explosive development of late. And fair enough, we are witnessing the evolution of an industry from cottage status into one that is regularly producing intergenerational wealth. Gina Rhinehart’s net worth is $22.4 billion, Melanie Perkins is $5.89 billion. One took almost 70 years to make, the other took just eight.

Australia, long been a market of huge potential, is finally starting to grow and be counted alongside the more mature venture capital markets of North America, Asia and Europe.

Since 2010, at least 75(1) Australian founded companies are worth more than $100m and 20 have hit that much coveted $1b (read Unicorn) valuation.

Whilst the numbers remain a long way shy of the above-mentioned venture capital markets, Australia is still punching well above its weight. What’s more impressive though, than the number of unicorns we have produced for our population size, is the velocity at which we are currently producing them.

AirTree recently published the below graphic of Australian tech companies worth more than $100m from the 1990’s and beyond. It is a terrific illustration of a production line that is growing in output.

To summarise…

Between 1990 and 2000 8 $100m+ companies were founded

Between 2000 and 2010 24 $100m+ companies were founded

Between 2010 and 2020 71 $100m+ companies were founded

Since 2020, there have been 10 companies join the $100m club and it is forecast by CSIRO that over the next ten years, $315B of value will be created by the Australian tech sector. That’s nearly 10 Canva’s.

And it’s no flash in the pan. The market is receiving support in fundamental areas setting off a growing number of flywheels.

So, what are the key forces at play feeding this maturing market? There are a few…

• Talent density — Australia has 3% of the world’s private unicorns(2) with only 0.03% of the world’s population. Our mature financial markets, educated population and the lifestyle provided are making Australia a destination for skilled workers

• Capital flows — funding in FY21 totaled $3.4B up from $2.6B in FY20(3) despite the COVID pandemic. This funding is flowing from both local and overseas investors looking to get their foot in the door of high-quality companies that are still being valued sensibly versus some overseas markets.

• Eco-system support — early-stage accelerators are helping record amounts of early-stage companies. It feeds into a tech sector that contributes 8.5% to our GDP and has grown 4x all other sectors. Institutions like Startmate, Fishburners, Stone & Chalk and Antler are all playing their part.

• Government assistance — the government is providing generous tax incentives, grants and research & development refunds to local technology start-ups and friendly tax treatment to investors through the VCLP/ESVCLP and ESIC programs.

What does this all mean? In a nutshell…

• More Australian start-ups are receiving important non-financial support and the infrastructure to collaborate and learn from experienced entities through formal guidance and mentorship programs;

• They are receiving funding at an earlier stage (through both the private and public sectors), enabling them to commercialize their ideas and put themselves in better positions to raise capital from later stage investors;

• Access to skilled talent is at an all-time high with sought after skill sets now comfortable staying on home turf rather than having to chase big packages overseas. Higher quality employees mean companies are better at scaling and able to weather the early-stage storms.

It is a genuine case of a rising tide lifting all boats.

Additionally, all of these factors add momentum to a flywheel that once spinning, generates more and more energy — in this case, start-ups.

To illustrate; you have Company A that is successful, it raises a stash of money at a lofty valuation and is either acquired in a cash deal or lets its early employees who hold stock either through investing or an ESOP sell down in a secondary round. These employees, newly minted and armed with the experience of being in the engine room of a company that scaled, go out and start Companies B, C and D. Some of these Companies, then go on to achieve magnificent things in their own right and soon you have Companies V, W, X, Y, Z, etc. This capital and talent flywheel is currently in motion and may support a staggering number of leading Australian tech companies in the years ahead.

Companies that seeded the first wave of Australian successes include: MYOB, OFX, Seek, Wisetech, Carsales.com, REA Group. There is no doubt that they are well known and much-loved local companies, but are probably not given enough credit in terms of what they have done for the current state of the eco-system. In essence, they are the founding members of the virtuous cycle that continues to compound to the benefit of all present-day participants.

These days, it is hard to look past Atlassian, the international tech behemoth. Not only has the company elevated Australia’s brand as a technology exporter, but it has also kickstarted an unstoppable talent flywheel. The list of ex-Atlassian employees who have gone on to start successful companies includes the ranks of Dovetail, Pyn, Launch Darkly, Easy Agile, Code Barrel, Sajari & Sleuth.

It’s even more exciting to see this flywheel start at Aussie tech behemoths like Airwallex and Afterpay. Recently, Afterpay backed one of their own software engineering interns to start their own company. It’s only a matter of time before the next unicorn comes from the alumni of Australia’s current batch of illustrious tech companies.

However, even with all of this momentum, one indicator that suggests the market is still in its infancy and has a huge amount of blue space to fill is the fact that one of Australia’s most well-known Unicorn, Canva, still represents a disproportionate amount of system value. Canva’s recent $55B(4) price tag means that it is worth more than the combined value of every other locally backed start-up in the country. And while this is a phenomenal outcome for Canva and its shareholders, one would expect that as new breakout companies emerge, and the existing crop of Unicorns continue to scale — this concentration should start to soften.

Yes, valuations are not the sole determinant of success — but they are certainly a good indicator of financial health. Large valuations typically mean that real and growing revenues have been generated which in turn enables large amounts of capital to be raised.

A healthy venture capital market subsequently has the potential to provide a ripple effect of incremental gains across the entire economy. New jobs are created, tax revenue is increased, efficiencies are realised — all encouraging a self-sufficient cycle of early-stage companies making greater improvements to a national economy.

As the eco-system deepens — more and more founders are afforded the opportunity to turn their designs into living, breathing entities which means the ‘low hanging fruit’ ideas get executed, making it harder and harder to find that billion-dollar business. This notion was well covered by our very own Sean Stuart in his piece, Have all the big ideas been taken? | by Sean Stuart | Aug, 2021 | Medium. There is an infinite number of great companies waiting to be unearthed within a healthy and well backed early-stage economy. The greater the level of support, the higher the chances are of them being realised. Processing speed, open architecture, cloud services, etc. all mean that even with ‘new ideas’ regularly being taken off the shelf, one’s ability to innovate is at an all-time high.

Australia is also very lucky.

We have an extremely advanced financial services market, even more so than that of North America in many ways. Our Government has created a playing field (through the New Payments Platform and Consumer Data Rights) that enables start-ups to innovate from the bottom-up and sell their wares to much larger, more established financial institutions.

The country has an excellent global reputation within the spheres of agtech and foodtech that, as the sixth largest producer of food in the world, has been borne from a need to improve processes and drive sustainability within agriculture and food technology. Far from resting on its laurels, the sector is driving towards being considered the global innovation hub in these sectors.

Our adoption of e-commerce, with the support of the Government, has been extremely advanced with consumers, SME’s and large enterprises embracing technology to create seamless and customer focused experiences. The wide, barren format of the country and its remote location relative to other nations has meant that supply chains have needed to inject technology to gain efficiencies.

The list goes on; IoT, health tech, computer vision, deep tech, space tech — there does not seem to be a sector where Australia is not well represented on the global stage.

Succeeding as the founder of an early-stage company is still difficult. Only 5.3% of all venture capital funding in Australia goes towards a seed round. Our research shows that only 8.7% of startups in Australia go on to raise a seed round and of those only 17% go on to raise a Series A.(5)

An even smaller number will go to reach those magical $100m and $1B+ levels — but these are good times, and they are here to stay. Australian investors currently have the rare opportunity to invest in the next generation of home-grown Unicorns. And in the process of doing so, to help lay the platform for technology to be the next great Australian export.

At Aura Ventures we believe there has never been a better time to back high-quality teams making products that create category-defining businesses. We consider ourselves extremely fortunate to have a front-row seat to this growing tide of value creation.

Notes:

(1) Air tree calculation, Aura Internal Data

(2) Assuming there are only 800 private unicorns globally

(3) SmartCompany

(4) TechCrunch

(5) Crunchbase

Important information

This information is for accredited, qualified, institutional, wholesale or sophisticated investors only and is provided by Aura Group and related entities and is only for information and general news purposes.  It does not constitute an offer or invitation of any sort in any jurisdiction. Moreover, the information in this document will not affect Aura Group’s investment strategy for any funds in any way. The information and opinions in this document have been derived from or reached from sources believed in good faith to be reliable but have not been independently verified. Aura Group makes no guarantee, representation or warranty, express or implied, and accepts no responsibility or liability for the accuracy or completeness of this information. No reliance should be placed on any assumptions, forecasts, projections, estimates or prospects contained within this document. You should not construe any such information or any material, as legal, tax, investment, financial, or other advice. This information is intended for distribution only in those jurisdictions and to those persons where and to whom it may be lawfully distributed. All information is of a general nature and does not address the personal circumstances of any particular individual or entity. The views and opinions expressed in this material are those of the author as of the date indicated and any such views are subject to change at any time based upon market or other conditions. The information may contain certain statements deemed to be forward-looking statements, including statements that address results or developments that Aura expects or anticipates may occur in the future. Any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected in the forward-looking statements. This information is for the use of only those persons to whom it is given. If you are not the intended recipient, you must not disclose, redistribute or use the information in any way.

Aura Group subsidiaries issuing this information include Aura Group (Singapore) Pte Ltd (Registration No. 201537140R) which is regulated by the Monetary Authority of Singapore as a holder of a Capital Markets Services Licence, and Aura Capital Pty Ltd (ACN 143 700 887) Australian Financial Services Licence 366230 holder in Australia.