Australian VC again

Twice recently there have been calls for the Australian government to mandate capital flows into Australian venture capital.

One was a quickly rebutted argument that a fraction of Australian super funds be channelled thus.

The other, which still has legs, is that Chinese seeking a quick residency entry into Australia pay for that ticket via a government-mandated Hail Mary pass into Australian venture capital.

Behind these calls for capital flow against capital market logic there are two motivating forces:

1. By would-be managers of venture capital funds seeking a virtually risk-free access to management fees, and

2. By others that believe that the ‘problem’ with Australian venture capital is that there is in fact virtually no capital.

Ignoring the unholy former of these motivations, the second bears further contemplation.

There are those that believe that we can kick start a successful venture capital and tech sector industry by priming the pump with excess capital.

Since, as an industry sector, Australian venture capital has always had a negative IRR, a counter argument could be mounted that the more capital that flows into this industry, the lower the average IRR will be. That is, if there is more capital chasing the same deal flow then the average return on this capital has to diminish. This is pure logic.

A counter argument would be that ‘this time it will be different’. By some miracle the endemic problems will fix themselves. The problems being; poor deal flow, inexperienced first time managers that haven’t served a ten year apprenticeship, no exit market in Australia, no corporate buy into tech M&A in Australia, the distance from the key tech markets, under-sized funds, and the list goes on.

Personally I would like to see these problems addressed by any government mandate, along with the corralling of capital.

It probably won’t happen and, if not, in ten years time everyone will try it again, exercising the collective self-serving amnesia that they are practising right now.