New research by Harvard private equity and venture capital guru Josh Lerner shows despite nearly $1 billion venture capital (VC) announced in the last few months, Australia’s VC market is far from being saturated.
The flurry of activity in the last quarter of 2015, which saw $900 million in new funds announced – with $300 million already raised – compared to the $368 million raised for the entire FY15, has seen some investors raise concerns about the VC market reaching saturation point, which could drive valuations up. But Blue Sky Venture Capital’s head Dr Elaine Stead says rather than simply looking at capital raised over a given period, comparing ratios of VC stock to GDP is a lot more revealing.
“While Australia is raising an uncommonly large amount of VC in FY16, it is nowhere near the US in terms of relative saturation,” Dr Stead said.
Where does Australian VC really stand?
The data, commissioned by Blue Sky, shows even taking the new $900 million worth of funds into account, the US is still nearly seven times the Aussie ratio.
Comparing VC-to-GDP ratios shows the extreme difference in relative VC stock. Even when adjusted for population, Australia lags in investment compared to the US.
“Looking at VC investments as a percentage of GDP, Australia ranks 23rd, which is above Brazil and Russia but below New Zealand and Austria. We are nowhere near saturation,” Dr Stead. “And our innovation inputs are equivalent, if not better, than other countries. We’re a sophisticated market, with good infrastructure and internet services.”
“Australia also rates highly in years of schooling and tertiary studies enrolments. And the country produces significant numbers of science and engineering PhDs.”
Blue Sky is currently raising $200 million for its third VC fund, targeted at institutional investors to invest in later-stage deals in Australia and overseas.
Dr Stead says much of the capital raised in other funds are focused on the early stage, but Blue Sky has found its sweet spot.
“We find the proportion of good quality investment opportunities is much higher at the later stage due to survival bias, but not many funds are focused on the late stage. While VC is starting to reach critical mass in Australia, it’s important to ensure enough capital is available for the entire ecosystem and beyond the early stage,” she said.
Blue Sky has just made a record breaking $25 million investment into Vinomofo, and is also invested in Australian darling Shoes of Prey, as well as Pet Circle, THR1VE and ParcelPoint.