Venture Futures for Australia

In Australia we have a well-documented long-term failure to develop a venture capital industry. I did some of the documenting in fact.

Amongst people that care about such things it is often thought that injecting more capital into the industry will solve the problem. The thinking is that an injection of capital will ‘prime’ the pump and get things moving.

In fact the Federal government is about to launch into just such a new program by mandating that some of the Golden Visa money goes to VC and PE funds.

This approach of priming Australian VC with government-mandated cash hasn’t worked in the past so any new actions along these lines will have to claim that either (a) this time there will be much more money and hence the priming will be more ‘effective’, or (b) the money will be better managed by some miracle.

I have this disconcerting suspicion that injecting new capital into the Australian VC market will simply result in the usual disappointing outcomes.

When you have more capital chasing the same set of local deals the inevitable outcome is that lower quality deals get funded, and hence the ‘average’ return on venture capital drops.

The further the drop in the average returns, the less likely that institutional investors will want to come into the market. These guys are simply too big to play anything other than ‘reversion to the mean’.

Inevitably, once the mandate ends the investment dollars will dry up (as they have now) and most will be none the wiser.

The only plausible way to subvert this scenario is if all that new capital focuses not on investing in local deals, but on importing start-ups from all over the planet. Much as we import ‘Australian’ sports stars from the developing world.

Shenzhen in China is doing just this at the moment. They are offering cheap venture capital, as well as access to all their local talent and low costs, in order to attract start-ups to their environment from Europe and the USA.

With our high costs we can’t hope to compete with the Chinese on anything ‘hardware’ but we could play this ‘import the start-ups’ game in disintermediation areas such as marketing, fintech, enterprise-in-the-cloud and the like.

We would also need to start investing much bigger licks of money. To play in the disintermediation game each round of funding in a start-up needs to have an extra nought on the end. What we do now in Australia is double the last round in quantum.

Think of this as exponential growth versus linear growth in funding increments between rounds. One works and the other chokes.