It will soon be 20 years since the Federal Government launched its MIC Program to kick-start the Australian venture capital industry. So why is it that we still haven’t got it together when it comes to ICT? Why does this sector still bemoan a lack of venture capital?
Unfortunately, the answer is not in either of two reports recently submitted to the Australian Federal Minister for Communications, Information Technology and the Arts: Australia: Winning in the Global ICT Industry, McKinsey & Co, and Availability of Capital Roadmap, the Australian Information Industry Association (AIIA).
Both reports talk about a venture capital funding gap for the ICT sector, but barely touch upon the hundreds of millions of Australian venture capital dollars that were invested in ICT and ICT related companies during the technology boom.
The reports point to a supposed failure in the venture capital industry and its institutional investors, but offer not a syllable of critical analysis about the Australian ICT industry and why this sector is currently lacking investment focus.
SO WHAT ARE THE FACTS?
A recent AVJC report, Australian Venture Capital Investment 1996-97 to 2001-02, found that in the last six years the ICT community received more venture capital funding than any other industry sector.
$499.8 million went to communications. Another $430.9 million went to information technology and software. That’s over 20 per cent of all venture capital invested – including the buyout sector.
The business and financial services category, which includes many IT related businesses, received another $586.5 million, while media and communications, also with a high IT component, received a further $150.8 million.
What this demonstrates is that there was no shortage of venture capital for ICT investments over the six years in question. In fact, it shows quite the opposite.
This, of course, leads to the more pertinent question, the one that people should be asking. If there is an ICT gap, where has all the money gone?
The answer is that a fair chunk has vanished; along with many of the now defunct companies and technologies it was used to support. The next question, which venture capitalists and their institutional investors have been asking for some time now, is exactly how much of it will they see again, and can they still hope for the above stock market returns they were promised for their extra risk?
The ultimate answer is still a few years away but the interim answer is not pretty. In the past year, venture capital managers have found that raising new specialist technology and ICT venture capital funds is almost impossible.
Worse than that, in the past two months, two specialist technology funds, that were cashed up, are now being wound down because investors have withdrawn their support and capital commitments. One of these funds had $70 million left to invest; the other had over $30 million.
That’s over $100 million of available venture capital that has been taken off the table a first in the 12 years that the Australian Venture Capital Journal has been in business. Never before has Australia seen institutional and professional investors withdraw their capital from partially invested mainstream wholesale venture capital funds.
Rather than beat up the venture capitalists by saying that they are not ICT focussed, it is probably fairer to throw the book at them for being suckers during the dot-com hype and for not being critical enough in their choice of investments.
As for the IT industry, it should not cry a lack of venture capital interest. Had it lived up to the promises it made between 1996 and 2002 and delivered justifiable returns, investors would not now be withdrawing their support.
Too many people in Australia have a genuine love for technology and for technology investment. We need to get beyond the boom-bust cycle and make technology a steady constant of the investment landscape.
The ICT industry needs to quit wailing and refocus its attention on understanding exactly what the venture capital industry and its institutional investors require, and then bust its collective gut to provide it.
Victor Bivell is Founder and Editor of the Australian Venture Capital Journal and the Australian Venture Capital Guide. Visit www.vcjournal.com.au