May 30, 2024

Exploring Australia's Venture Capital Ecosystem: A Beginner's Guide

Michael Sable

ustralia is unique in so many ways. It is a continent and a country. It is an Asian nation with a European population. It has a wonderful climate but is also a very dangerous environment. And it also has an emerging venture capital ecosystem that is becoming a force within the region. In recent years, top startups like Canva, Atlassian, Linktree, and Airwallex have all originated from Australia. 

What is happening? How has Australia been able to overcome its geographic isolation to produce startups that are increasingly significant on the global stage? The answers to these questions requires an exploration of the country and the context in which its entrepreneurs and venture capitalists operate. In entrepreneurial finance specifically and business generally, there are always outliers—unique situations that are worthy of exploration because by doing so we can come to understand deeper truths about how to build great companies. The Australian startup and venture capital scene is one such example.

Situated in Oceania, Australia is a nation of 27 million people. Comprised of six states and ten territories, it is the largest country by area—7.7 million square kilometers—in Oceania and the sixth largest country in the world. Australia is the oldest, flattest and driest inhabited continent with the least fertile soil but is nonetheless megadiverse with many different landscapes and climates. 

It is highly urbanized with most of the population concentrated on the eastern seaboard and living in the major cities of Sydney, Perth, Canberra, Melbourne, Brisbane and Adelaide. Due to its abundant natural resources, it has strong mining and agricultural sectors that have given it a strong position in the global commodities markets. The country is a leading exporter of iron ore, coal, natural gas, gold, wheat, aluminum, and wool. 

Consequently the $1.7 trillion economy ranks 14th globally, and it has a high quality of life with a per capita GDP of $64,000 which is 10th globally. A financial services sector has emerged as a complement and enabler of its industrial economy and the venture capital industry has its origins in this transition which all economies eventually make.

The Evolution of Venture Capital in Australia

It is widely acknowledged that the venture capital industry began in the United States in 1946 with the founding of the American Research and Development Corporation (ARDC) which made its first venture investment in 1957 when it provided financing to the microcomputer company Digital Equipment Corporation (DEC). 

When ARDC exited 14 years later, it had earned a $350 million return that was 5,000 times more than its original investment. This is about $4 billion today adjusted for investment. In contrast, the first acknowledged venture capital firm in Australia was International Venture Corporation (IVC) which was established by Bill Ferris in 1970 with $500,000 ($6 million today) of original capital. IVC later received $2 million in backing from Hill Samuel, a predecessor to Macquarie Bank. 

Subsequently, fueled by the early 1970’s property boom in Australia, other venture firms were established. However, the inflation and stagflation of the latter half of the 1970s both in Australia and globally along with higher interest rates put a damper on the venture capital industry. In addition, a structural challenge in Australia is that due to the enormous natural resource wealth of the country, for a long time there was less incentive to engage in the risky, technology-intensive investments that the venture capital industry is noted for.

To catalyze the development of the venture capital industry, the Australian government began to intervene in the 1980s. In 1983, it introduced the Management and Investment Company (MIC) Program that was modelled after the American Small Business Investment Company (SBIC) Program. Under the terms of this program, a MIC fund had to invest at least 70% of its capital in at least 5 Australian companies that were small, growing, innovative and export-oriented. 

Among the numerous incentives offered to investors in these funds was a 100% deduction on their contributed capital. This was done to increase investments into Australian startups. However, there was another challenge in Australian venture capital: the absence of productive exits opportunities. In the Australia of the 1980s, there was both little appetite on the part of domestic or foreign companies to acquire small, venture-financed technology firms and there was no stock market suitable for listing them as in the United States. 

To address this challenge, a number of smaller secondary stock markets were opened in Australia that provided liquidity and exit opportunities. This gave Australian venture capital investors the opportunity to cash out and the venture capital industry began to develop traction within the country. By 1987, 11 MIC funds were managing a third of a billion in capital along with 4 independent non-MIC venture funds and 25 other funds that invested in venture deals that were owned by a combination of public companies, merchant banks and stockbrokers.

A critical event in the evolution of the venture capital industry in Australia was the enactment of the Venture Capital Act (VCA) of 2002, which removed tax impediments to venture capital investments in Australia. The VCA was designed to attract venture capital investment through the formation of venture capital limited partnerships (VCLP) or Australian venture capital fund of funds (AFOF), which invest solely in venture capital limited partnerships or related ventures. Limited partnerships, which obtain registration and, thereafter, continue to satisfy the reporting criteria, obtain both capital gains tax exemptions and ‘flow-through’ treatment of income. 

This capital gains tax exemption is critical to venture capital firms in Australia as most venture capital funds make their earnings as capital gains from the sale of equity investments. Thus, unconditionally exempting registered limited partnerships from liability to pay tax on capital gains is a practical necessity if Australia is to compete for capital and expertise with other areas of the world that offer similar benefits. 

This acted as an incentive to venture capital investment by both Australian and foreign investors. Moreover, Australia especially needed these incentives because of the structure of its economy. In the 2000s, only around 20% of the venture capital in Australia went to the high technology sectors such as health, biotech, and information and communications technology vs 90% in the United States. This is likely due to an abundance of sound investment opportunities in the commodities sectors.

Share of high-technology sectors in total venture capital, 2005

The Modern Australian Venture Capital Industry

Since the early 2000s, the modern Australian venture capital industry has grown considerably. Indeed, the stated objective of the Australian government is to develop a tech sector that contributes $165 billion or a tenth of GDP per year and employs 1.2 million people by 2030. Having fostered necessary reforms in the venture capital industry, the government is also promoting human capital development with a new skilled migrant visa. Efforts are succeeding. There are currently over 129 active investors classified as venture capital. In addition, the amount of capital invested has grown considerably. 

In 2012, only $244 million was invested but in 2021 that had risen to $2.4 billion. Moreover, the average amount invested has quadrupled from $500,000 in 2010 to $2 million in 2021. This growth in the amount of venture capital is further supported by demographics. Australia’s superannuation funds collectively manage one of the top five pool of retirement savings in the world at over $3 trillion and they invest heavily in venture capital and startups. 

Aside from positive growth trends, another advantage in the Australian market is that due to the country’s small population and geographic isolation, startups are encouraged to be globally oriented from the get go and to be capital efficient while growing. According to Kate Pounder, the CEO of the Technology Council of Australia: “Historically, it’s been harder to raise, so you had to make your capital go further…And I think at a period of time where investors are looking for profitability and well-managed companies, not growth at all costs, that tends to be a strength of Australian firms.” 

Indeed, as interest rates rise, venture capitalists everywhere are becoming more judicious about how they allocate capital and the amount of runway available to startups is diminishing considerably. Historically, Australian startups have had to be capital efficient because they just haven’t had access to anywhere near the amounts of capital that their American counterparts have had. 

A positive by product of this is that startup valuations in Australia are markedly more reasonable compared to the United States which is an added incentive for foreign venture capitalists to invest. The ability to attract foreign investment should not be underestimated as an advantage. Aside from capital, foreign investors often bring inside knowledge of how to successfully enter and compete in overseas markets with complex commercial and regulatory landscapes that require innovative approaches.

Australia has a number of domain strengths in the venture capital industry. It has already proven that it can successfully incubate software and fintech unicorns such as Canva and Atlassian. Atlassian, which has a market cap of $50 billion, develops collaboration products for software developers while Canva makes software that democratizes access to graphic design and is currently valued at $26 billion. 

Software and fintech have attracted large amounts of venture capital in Australia because while the country has a large commodities sector, it also has world class financial institutions that can use software and fintech tools produced by the nation’s highly educated population. In 2022, fintech firms raised $1.3 billion in venture capital in Australia while enterprise and business software firms raised $1.2 billion. 

Cleantech is also attracting investment in Australia. In the third quarter of 2023, cleantech startups raised $116 million versus $60 million in the second quarter 2023 and $40 million in the first quarter. There are other advantages. Samantha Wong of Blackbird believes that: “Australia is a pretty supportive environment to grow a climate tech company. On the funding support side, Australia has an efficient and generous R&D reimbursement regime where companies are refunded 44% of eligible R&D spend. 

The recently announced $15 billion National Reconstruction Fund (NRF) to invest in areas such as renewables and low emission technologies also represents a great opportunity for Aussie climate startups.” According to Gabrielle Munzer of Main Sequence Ventures, Australia is also an attractive destination for the interrelated areas of cleantech and deeptech because it: ”…leverages a very strong education sector, which is a major export for this country, and a connectivity to some really strong sovereign industries like renewable energy supply chain and food production and manufacturing, for example…Deep tech investing is exciting when it comes out of a research sector that’s highly ranked. 

And we’re fortunate to have that in Australia over many decades. The scientific institutions here rank in the world’s top 1% in more than 15 fields of research.” This latter point is worthy of amplification. So much of the development of a sound venture capital industry is about marrying excellent sources of financial capital with robust human capital. Australia has excellent educational institutions that are increasingly attracting top students from Asia, especially China. 

Indeed, as of June 2022, there were more than 141,000 Chinese students enrolled in higher education in Australia. Those students could become a powerful tool to assist startups in the development of businesses with the strategic insights required to succeed in the huge, dynamic and growing markets of Asia. The country’s excellent climate, great quality of life and relative freedom are characteristics that could induce those students to stay in Australia.

Recently, Australia has joined many other countries in that its venture capital community has also gotten on board the artificial intelligence train. But the country is faced with the same constraints as elsewhere. Startups are confronted with tremendous competition for the top artificial intelligence professionals from deep-pocketed, well-established firms. 

The country does have AI strengths, particularly in natural language processing and computer vision. In addition, it is well-positioned to apply artificial intelligence to industries that are already well-anchored in the country. According to Ms. Munzer: “…Australian AI startups have a distinct leg up when it comes to applying AI to industries in which we have a natural advantage. Here, the ROI of automation and/or new insights can drive significant tangible value. 

So, with in-depth knowledge of domestic supply chains in industries like agritech, construction, manufacturing and mining tech, we’re well-positioned to tailor solutions. The startups we’ve backed in these sectors understand customer pain points and work closely with customers to improve the productivity, safety and sustainability of their businesses.”

Top Australian Venture Capital Firms

A number of elite venture capital firms have emerged in the Australian entrepreneurial finance ecosystem. Blackbird Ventures, which is an investor in Canva, focusses on making investments across multiple sectors ranging from software to space. Its portfolio includes over 100 startups. The investment size is typically $30K to $5 million. 

The company emphasizes its long-term investment strategy with an emphasis on building companies that can grow and scale. In 2022, Blackbird launched a $1 billion venture capital fund which was the largest in the history of Australia. According to Nick Crocker of Blackbird, a key part of the firm’s strategy is to be the first investor in a founder (pre-product and pre-revenue) which it claims to have done 70% of the time: “Our job is to find the founder that can build the future—not to build it or predict it ourselves. We are the first cheque…Just because we have a bigger fund, doesn’t mean that changes anything in terms of our strategy. 

That early moment where you meet a founder who’s unknown, the idea is unproven – that’s where the magical relationship can be created.” Blackbird has also been an early investor in the unicorns SafetyCulture and CultureAmp. In contrast, Brandon Capital Partners is firmly focused on the biotechnology and medical devices segments of the Australian market. 

It is a stage agnostic investor whose portfolio includes Cincera and Certa Therapeutics. An advantage that the firm can offer startups is that its investors include not only Australians but also Americans and Brits which can help take their innovations global immediately. Brandon Capital also assists in providing capital in different stages through commercialization and offers a biotech incubator—Brandon BioCatalyst—for startups. AirTree Ventures focusses on making investments in artificial intelligence, energy, ecommerce and security. 

It has $1.3 billion in assets under management and its portfolio investments include Linktree, Employment Hero and Immutable. Investment size ranges from $200K to $20 million and it has made 104 investments. The company also helps portfolio firms to recruit and hire for key roles and provides advice of organizational design and employee compensation as well as access to an excellent network of experienced startup professionals. 

Artesian Venture Partners is unique in the Australian venture capital space in that it is a Certified B Corporation which means that it is devoted to meeting the highest standards of social and environmental performance. Not surprisingly, its 625 investments are concentrated in the climatetech, edtech, agritech, and healthcare arenas. This mission-driven venture capital firm invests at the pre-seed, seed, Series A and Series B stages.

Atlassian Ventures is the corporate venture capital arm of the leading software developer on the country. It focusses on seed, Series A and Series B investments in the cloud, particularly in strategically important areas such as collaboration applications and partnership solutions. The startups that obtain capital from Atlassian Venture gain access to not just financing but insights from corporate leaders who understand this market deeply and can provide strategic guidance accordingly. Main Sequence Ventures is another mission-driven Australian venture capital firm that is primarily focused on deeptech and especially investing in startup seeking to solve global problems like climate change and food shortages. Its typical investment size is between $500,000 and $10 million per round with an average of $2 million. 

Portfolio companies include Kasada, Five Cast and Castlepoint. Uniquely, investments made by Main Sequence Ventures must have a connection with Australian publicly funded research. Finally, OIF Ventures markets itself as an industry and technology-agnostic venture capital firm. Its portfolio includes Bridgit, Enboarder and Kasada. Aside from financing, it provides networking connections, strategy support and recruiting assistance. These are just a few of the venture capital firms that have emerged in the venture capital ecosystem of Australia and their diversity points to the vitality of the sector.

Wrapping Up

In the venture capital community, the land “down under” is on the rise. Having made important policy reforms to insure the viability of its venture capital industry, Australia is now well-situated to take full advantage of important trends. The COVID-19 pandemic has truly ushered in the death of distance as remote work is growing: companies are becoming accustomed to it and workers are demanding it. 

This has led to a growth of nomad tech workers. What better place to work from a distance than Australia? It has great weather, great educational institutions, an English-speaking population and proximity to growing Asian markets. It used to be thought that India’s large English-speaking population would induce firms seeking to business in Asia to locate there but bottlenecks remain. 

It is now becoming more possible than ever before for new locations to emerge as technology hubs and firms are rapidly migrating out of Silicon Valley. Why not set up a tech headquarters in Australia where one can service markets in China, Indonesia and the rest of Southeast Asia? Due to its locational, demographic and climate advantages, Australia is primed to become a tech hub for Australians and the immigrant entrepreneurs who become citizens there.

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