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Australian VCs troubled water

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You don’t have to speak to very many entrepreneurs to hear a lot of negativity about the Australian VC industry. Use of the term “vulture capital” has become as common as calling police officers “cops” and is often used jokingly, albeit a touch defensively, by VCs themselves.

Why do Australian VCs get such a bad rap? No doubt some of it is just part of the Australian culture of “running people down” We don’t always realise it but we can be a pretty negative bunch.

The general refrain goes that VCs are too conservative in what they invest in and too greedy, and in many cases there is an implied suggestion that they are not very patriotic (i.e. they don’t champion Aussie inventiveness). Then there is the fear that they will come in and fire the founders.

Just to be clear, VCs are much maligned everywhere, not just here. But in Australia I think they are more misunderstood than anywhere. In my view, clearly there is a lot wrong with the Australian venture capital industry, but it is not that the VCs are bad: it is that we have a bad industry structure. Given that our industry is modelled exactly on the Silicon Valley VC industry, which is the acknowledged global best practice beacon of all VC, how can this be true?

The Silicon Valley model evolved over time to mesh high risk capital with a high risk start-up culture and grew around the traits of the local market. Unfortunately, when the model is applied in Australia, it is being employed in a vastly different environment for which it did not evolve – like relocating a chicken to the ocean floor and expecting it to lay eggs. It is analogous to early settlers using European architecture and building peaked roofs to accommodate the snow that doesn’t fall in Australia.

The first problem faced by Australian VCs is that they are Australian! This country is not exactly a world renowned developer of global venture backed companies. You can’t build businesses here by learning from the lessons of our local Microsofts, Suns, IBMs, HPs, AOLs, Apples, Googles, Amazons, EBays or Skypes. We don’t have any of those stories. So there is no cookie cutter to follow here. VC management companies typically get paid two percent per annum to manage funds for their investors. Our funds are small compared to the US and our typical manager does not have much money to spend on people and infrastructure. What they can spend gets quickly consumed by finding deals, doing due diligence and negotiating investments.

There is a really limited capacity to actively help portfolio companies. Not only are the funds smaller and less resourced, but our startups are less capitalised, management has a lot less experience and we are a long way from where most customers live.

Australian managers are more typically generalists than specialists and for this reason they often find it hard to bet the company on an outstanding niche that will give super returns. Because Americans are specialists, they are much more at ease using outside advisors and consultants, so the US start-up sector is part of a complex eco system involving not just VCs but angels and a bevy of professional firms, lawyers, accountants, head hunters, investment banks, consultants and the like who have extensive experience in helping early stage companies. There is a very limited set of outside professionals available to help in Australia, so the VCs need to do much more.

When an Australian VC invests in a start up there has been a lot less outside help, modest angel help and the team is usually building their first global startup. There is a really important point here. The world is increasingly global but it is still true that you can build a company in the US and get to a very advanced stage before you have to go offshore. For Australian companies, going global is a survival imperative. Even in fields where there is enough of a domestic market here to support initial growth, if you have a true innovation and you leave the US untouched, someone there will replicate your innovation, use the giant US market to gather scale, brand and cost advantage and then come and wipe you out here later.

The bottom line is that the job of the Australian VC is much more demanding than it is in Silicon Valley, with much poorer opportunities to work with and less capital leverage. Management fess for an Australian fund should probably be four to six percent per annum, but the global one-size-fi ts-all approach of the limited partners won’t let this happen any time soon.

Michael Gale is co-founder and CEO of Gramercy Venture Advisors, a boutique advisory firm predominantly servicing young companies in high growth sectors and professional investors in this space. Prior to Gramercy, Michael spent the previous eight years as CEO of San Francisco and New York-based Double Impact, a leading venture catalyst.

 
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