Interactive tool: how Australian VCs have invested $9.5 billion since 2003 and how it’s being spent
How the spread of money has shifted between sectors, cities, and states since the first funds were established.
Behind a great business idea is the investment to turn it into a reality. Government grants – local, state and federal – may help with that investment. But increasingly, the private sector is also stepping in to help businesses through venture capital funding. But how has venture capital investment in Australia changed over time?
Globally, venture capital investments supporting seed, startup and early stage, and later stage ventures, have almost tripled since 2010 growing from $US39.6 billion to $154.2 billion in 2019 according to the Organisation for Economic Co-operation and Development. Investment is heavily focused on the United States which accounts for 88% of venture capital investments. Australia has just 0.3% of the market. But the numbers are rising.
For more than a decade, venture capitalism has been growing with the support of two federally funded programs — the Early Stage Venture Capital Limited Partnerships (ESVCLP) and Venture Capital Limited Partnership (VCLP). Both provide incentives, including tax exemptions, to encourage Australian and foreign investment in these venture capital funds. The benefit to investors is the profits they make through the share on returns when the partnership disposes of its interest in a business.
Over the lifetime of these programs, $16.7 billion in venture capital commitments and $9.5 billion in investments have supported 1,500 Australian businesses, according to the 2019-20 Innovation and Science Australia annual report. While the priority sector for investors have shifted across time, what has maintained consistent is that venture capital funds are an area of growth — and through better awareness of investors and their priorities, more Australian businesses can benefit.
The growth of venture capitalism in Australia
Venture capital funds are approved and registered under the Venture Capital Act 2002 – with a requirement to provide annual reports to the Department of Industry, Innovation and Science. The data collated from these reports, dating back to 2002-03 for VCLPs and 2007-08 for ESVCLPs, provides a wealth of insights into changing trends.
The 2002-03 financial year saw just three funds registered as VCLPs, all conditional only. By 2004-05, these funds had grown to enable the first reporting of financial data — $300 million in committed capital from investors and $8.2 million invested into Australian services and manufacturing businesses.
The number of registered VCLPs began rising sharply in 2016-17, with 81 in total helping to build total committed capital in excess of $10 billion for the first time. By the 2019-20 financial year, 89 partnerships were registered and supporting $1.3 billion being invested in Australian businesses for the year.
With the focus on early stage investment and startups, ESVCLPs have a smaller pool of cash to invest. For the 2007-08 financial year, ESVCLP had one registered partnership – but no investment, committed capital, or businesses invested in. Seven years later, 18 partnerships were registered which contributed to $63.8 million of investment and $481.7 million in committed capital.
By 2019-20, more than 100 partnerships were registered – 106 in total – investing $353.3 million and $3 billion in committed capital. And the number of partnerships and businesses supported were greater than the number supported by the more traditional VCLPs.
How investment has grown over time
Who are the investors?
Both ESVCLPs and VCLPs provide incentives for Australian and foreign investment – but Australian investors prefer to go smaller. Early stage businesses are the focus for Australian investors, contributing approximately 90% of capital to ESVCLPs.
Outside of Australia, early stage investors can be found in Asia followed by the Americas and Europe. The Cayman Islands, China, Israel, South Africa, Sweden, Taiwan and the United States are among the diverse regions for funders.
More than 41% of VCLP investors can be found in the Americas – Bermuda, Canada, the Cayman Islands, Saint Vincent and the Grenadines, the United States and the Virgin Islands are among these investors registered locations. Geographically, VCLP investors are more diverse. There is a stronger representation from East Asia and the Pacific, Europe and Africa. But international early stage venture capital investment is growing faster than other venture capital investment, a trend that should see the footprint of ESVCLPs continue to grow and spread.
Sectors which receive funding through ESVCLPs and VCLPs are continually changing – and that means the funding door for a particular sector is never closed.
Despite this, early stage funding is overwhelmingly focused on information technology investments. From $11 million in 2011-12, investment in the sector grew to $123 million in 2019-20. But the most recent year of data shows a drop from $132 million in 2018-19 – the first decline in IT investment. This drop allowed for growth in funding for startups supporting the health, manufacturing and services sectors as ESVCLP investment diversified.
Carnegie Healthcare Fund is one venture capitals fund investing in health startups with two new businesses receiving recent financial backing. Renew Medical will develop and commercialise a non-invasive and cheap silicon insert that helps people suffering from accidental bowel leakage. And EBR will develop an implantable system for the treatment of heart failure.
A low priority for startup investment is the energy and mining sector, receiving less than 1% of the total share of investment for 2019-20.
The IT sector also benefits from VCLPs investment – totalling $246 million for the 2019-20 financial year, more than the investment of ESVCLPs. But other sectors are a bigger focus for these investors. The services sector, which incorporates finance and insurance as week as food and personal services, has received more than $3 trillion through partnerships — $324 million of that in 2019-20. Peak investment for this sector occurred in 2016-17 when funds delivered $413 million to advance opportunities in this space, and dropped to $141 million in 2018-19 before rising again.
Investment in manufacturing saw a rapid rise in the 2015-16 financial year – increasing from $72 million to $408 million. The following year it dropped again to $84 million before increasing once again.
Healthcare is another fluctuating investment sector – peaking at $265 million in 2019-20. The impact of COVID-19 may see this sector continue to grow as a priority for investors as the world looks to health solutions to return to normality, and reduce the potential spread of future pandemics.
Venture capital investments by sector
Where are the businesses being funded?
State and territory breakdowns of investments show strong favouritism towards businesses based in New South Wales for both ESVCLP and VCLP programs. During the 2019-20 financial year, New South Wales received $1.1 billion in investment from the combined programs.
Under ESVCLP, internationally based businesses are the second largest region of investment followed by Victoria and Queensland. Victoria is the second largest investment region for VCLP investors, followed by Queensland and Western Australia.
Visibility of businesses to the venture capitals funds are likely to be a key factor in their investment decisions. Almost two thirds of registered and conditionally registered ESVCLPs and VCLPs are based in New South Wales – specifically Sydney and its surrounds. The ACT, Queensland and Victoria are the only other states with venture capital presence.
But a black spot exists for venture capital investment in Australia. Northern Territory not only has no venture capital presence, it received no funding under the two programs – the only Australian region to not benefit from these government supported programs.
