Are Australian investors overly conservative?

Getting venture capital for any start-up is hard work. Even in the US, the world’s biggest venture capital market and the mecca for start-ups, only two out of every hundred get funded.

It’s even more difficult in Australia where there is a smaller market. Entrepreneurs say an even bigger problem is that the venture capital firms here are conservative.

Start-up specialist Fiona Boyd, founder of RushCrowds, a social media site that sends people to music, arts and entertainment events, says Australian VCs are just timid.

“They’re not actually hunting and looking for the deals,’’ Boyd says.

“They are very vanilla. They want it all beautifully wrapped up and presented.”

“But you know what? It’s venture capital, no one really knows the future and when people are playing with new technologies, the outcomes are mainly unknown, apart from the fact that you can create great technology, test it, put it into market and build up from there.”

Valley of death

Significantly, RushCrowds has not been able to get any interest from VCs here. But it plans to set up operations in San Francisco and has already had positive discussions with venture capital firms in Silicon Valley.

“What happens here that might be different to Silicon Valley,” she says.

“Here, everyone is very focused around their rules and their process which is good to a degree and it may lead to some degree of self protection but I think they are missing the opportunity.”

“There are a number of companies that are going straight to Silicon Valley unfunded because they know that’s where the risk money is.”

The problem, she says, is the “valley of death” for start-ups that are looking for anything less than $5 million.

“They are simply not interested. The Australian VCs will probably be doing themselves out of good deals if they don’t become more active at a lower range of one to five,’’ she says.

What makes it more difficult for start-ups now is that venture capital firms around the world are investing less.

Part of it is because of the global financial crisis, the other part is that investors are now more conservative and gun-shy.

Global dip

Brigitte Smith, managing director of GBS Venture Partners, puts it bluntly: “It’s going down fairly precipitously and that’s a global phenomenon.”

“The volume of venture capital in the United States is probably at half to a third to the level that was being raised in 2007 so there has been an extreme contraction of the industry globally and we’re seeing that also in Australia.”

Figures from the Australian Private Equity and Venture Capital Association Limited (AVCAL) show that in 2011, VCs invested $120.6 million in 76 companies, the lowest since 2007 when they invested $150 million in 68 companies.

In 2010, they invested $186.5 million in 92 companies, in 2009 it was $209.9 million in 97 companies and in 2008, they invested $201.9 million in 72 companies.

There are approximately 26 funds in Australia, but of these probably only 10 are actively investing. They most commonly invest in life sciences (45%), information and communication technologies (30%) and clean tech (5%).

Most funds are mandated to invest in Australian businesses and it is estimated that 80% of Australian venture capital goes to Australian companies.

With some 250-300 active portfolio companies, the average investment range is $4-$15 million. They are not drawn to anything less than that. Total funds under management are about $2.3 billion.

Chris Nave, a partner at Brandon Capital Partners, says the problem is particularly acute in Australia.

“While the drop in Australia has been precipitous like in the US, Australia is starting from such a lower base,” he explains.

“While the US venture industry has contracted, there are still a lot of funds under management but because we have such a low base in Australia, we are not unrealistically facing a situation in two or three years where there no venture capital will be available.”