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28th October, 2019

Australian VCs reach the big leagues as appetite for tech investment grows

A new report indicates that the appetite for investing in local startups has grown significantly over the 2019 financial year, but as exciting a time as it is for tech companies, the data also highlights some long-term concerns for early-stage tech companies.

Startup companies are often designed to be built as attractive investment opportunities for private equity investors.

Founders that come up with billion-dollar business concepts don’t normally have the funds to execute these visions, and investors don’t normally have billion-dollar ideas – and thus, a funding-for-equity partnership is born.

READ: 5 ways to woo and investor

In the larger technology ecosystems around the world like the US or the UK, the appetite for private equity investment has been large for a while now. Venture capital firms have been putting billions of dollars or pounds into local (and international) tech companies.

Because of this ever-growing appetite, those international ecosystems have been producing some of the largest, most successful and exciting tech companies on the planet.

Due to its youth, the size of its economy and sparser population, the investment appetite in Australia has historically been smaller.

But  in its annual report of the statistics, trends and happenings within the Australian tech funding landscape, Techboard showed that the tides of Australian investment are turning, with significant increases in the amount of money being invested into local tech companies, making it the most exciting time in history to be an Australian tech startup founder.


2019: Bigger investments and a spike in fin-tech prominence


When asked what he believed to be the key and most noteworthy differences between Techboard’s 2018 report and its 2019 report, Techboard’s Co-founder and CEO Peter van Bruchem highlighted two trends that the data from the report seemed to show.

“The first noteworthy statistic was the change in scale of the larger capital raises,” van Bruchem told The Pulse.

“Looking back at the top 20 capital raises from 2018, the biggest ones were pushing $10 million, but in the 2019 financial year, the ecosystem had matured significantly, and the larger scale capital raises were well above $20 million.

“The amounts just keep going up.”

The second highlight that van Bruchem pointed out was the increase in the amount of funding given to the fin-tech sector, and more specifically, to startups working in the fin-tech lending space.

“Companies like Prospa and Moula raised an unprecedented amount of capital, and many other smaller ones have been surfacing as well, showing a clear trend that the space is growing quite rapidly.”


Consistency of growth


Adding to his point about the significant growth in the size of Australian capital raises, van Bruchem explained that in the 2018 financial year, there was a funding “drop-off period” in the June quarter.

But the 2019 June quarter saw no such drop-off take place, and funding to startups continued to be generously handed out (and even increased) during that period.

“This stat really tells the story of our current investment climate. As the investment funds continue to grow and startups continue to mature, there are no signs of an investment slow-down any time soon.”

In saying the above, van Bruchem did mention that with the current political climate in the US and the UK, it is still difficult to draw any “definitive conclusions” from the international data that we’re privy to.


Exciting times for early-stage startups


As part of its data gathering service, Techboard also releases quarterly reports into Australian tech and startup funding.

In the 2019 March quarter report that was released earlier this year, there was a sense that Australian investors were less interested in funding the early stage startups and focusing their efforts on the larger ones that were in heavy demand.

READ: Local funding for startups continues to shrink, report shows

But van Bruchem believed that the early stage startups should be “encouraged” by the current climate of Australian investment and said that their spirits shouldn’t be “dampened” by the larger investments taking place.

“Australian VC firms are still very much open to making smaller investments into earlier stage startups.

“For instance, Airtree Ventures have been entering into $1 million rounds, and Square Peg Capital have been showing an increased interest in early stage tech as well.”


News coverage issues and confidentiality still a factor


When asked whether or not the data reported on earlier stage investments was realistic or reliable, van Bruchem warned the ecosystem not to read too deeply into it.

“Much like we mentioned after the release of the March 2019 quarterly report, many of the earlier stage investment rounds that are taking place aren’t included in Techboard’s data, and the reasons for this vary.”

According to van Bruchem, with all the excitement taking place at the bigger end of Australia’s tech town, there is less room in the mainstream media for reports about the smaller raises taking place.

“Aside from the ongoing news coverage issue, another reason why early stage investment can go unreported is because of confidentiality restrictions.

“Sometimes, the founders prefer not to go public about their investment, and other times it’ll be the choice of the investors to keep things under wraps,” he said.


Mature startups are swallowing up skilled employees


While things are looking quite positive from a ‘willingness to invest’ perspective, van Bruchem made it clear that the 2019 report did raise some moderately concerning points that the ecosystem should be weary of.

The way van Bruchem sees it, the biggest expense that startups seek capital investment for is labour.

In order to grow, tech startups require the expertise of skilled employees across the board. Many need advanced engineers who have kept up with the rapid advancements in technology, they need business development experts to sell their products in different markets, and HR experts to manage their growth effectively.

“As Australian investors continue to funnel such huge amounts of funds into the more mature tech startups, these startups have the means to hire the highly skilled employees, leaving very few leftover for the smaller ones to bring on.”

Without skilled employees, small startups will never become big startups, and the Australian tech ecosystem will eventually hit a ceiling.


The understated importance of deal-flow


Another issue that van Bruchem raised was that, although this obvious growth in appetite is a very positive development for the Australian tech ecosystem, if Australian investors aren’t kept satiated, their now-enormous appetite might cause them to look for pasture in someone else’s fields.

“We need to be aware of the important role that deal-flow plays in this industry.

“If we aren’t feeding and fuelling this big machine that our investment landscape has become, the existing capital will need to be absorbed elsewhere.

“Australia as a country needs to be creating enough high-quality businesses that our investors want to partner with.”

In short, if the Australian ecosystem doesn’t produce sufficient deal-flow, this investment gravy train will ultimately move on to serve the next party.


What’s the long-term solution?


After sharing his concerns regarding access to skilled employees and the importance of deal-flow, van Bruchem continued on to explain that there were some ways that these issues can be remedied, but it was all in the hands of government and corporate.

“If we want our startup ecosystem to continue along this upward trajectory, there needs to be government policy recognising the importance of startup businesses. The government needs to open its doors and show its clear support.

“There needs to be a better R&D Tax Incentive in place to make innovation more affordable for early stage startups, and migration policies that allow startups to bring in skilled employees from overseas need to improve as well.”

READ: Living with the new R&D Tax Incentive changes

In his final remarks, van Bruchem said that the Australian corporate sector can also play its part by supporting the locally emerging and early stage startups.

“For almost every international and foreign tech solution, there is a local one that needs support. Corporates need to place an emphasis on utilising these local solutions, as this will play a big role in fuelling the machine and keeping our ecosystem alive.”

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