SERIES A AND BEYOND

Venture capital has seen very strong growth in Australia in the last five years. From 2015 to mid-2018, Australian venture capital firms raised more than $4 billion in new funds, with the yearly value of new funds closed roughly doubling each year over that period. In its 2019 yearbook, the Australian Investment Council (AIC) estimates that Australian VCs are holding more than $2 billion in ‘dry powder’ (unallocated capital). Not included in these numbers are record new funds raised in 2019 by Square Peg ($340m) and AirTree ($275m), alongside a range of smaller funds.

This rapid increase has been combined with a rise in the availability of other sources of growth funding for Australian startups, including debt (particularly venture debt), crowdfunding, and access to public markets. Growing interest from top tier foreign investors has also helped provide a pathway to Australian companies raising larger rounds. International venture firms including Sequoia, Accel, Bessemer, Felicis, Bond Capital, and Index Ventures are now participating in growth rounds for Australia-based companies with some regularity, alongside corporate-backed venture funds from global tech firms including Salesforce and Microsoft.

The magnitude of this growth is underscored by the sector-wide data. According to Techboard, a firm specialising in Australian startup data, Australian startups raised more than $2.2 billion in 2018-19 in private funding (angel, VC, and high net worth). This represents an increase of 136% on Techboard’s figures for the previous year.

Data from AIC also highlights the expanding availability of later- stage capital in recent years, with Series C rounds increasing in particular. Venture debt has also become increasingly available, broadening the types and sources of funds startup founders are able to access.

Much of this growth has been supported by the entry of superannuation funds into the venture capital sector. Host Plus, an industry super fund, is the biggest single investor in Australian startups, with more than $1 billion invested directly and through venture firms. Given the mammoth size of the Australian superannuation sector (Australian superannuation firms held $2.9 trillion worth of assets as at 30 June 2019), if the trend towards VC investment continues to grow, it could raise the value of the sector very significantly.

IS THE VENTURE CAPITAL PROBLEM ‘SOLVED’?

It’s worth asking the question - does having more capital in the system translate into bigger round sizes for Australian startups?

The data suggest that the answer to that question is a clear ‘yes’. In the last 5 years, the average size of a substantial growth round (Series A and beyond raising US$2 million or more) has grown steadily, from an average of US$9.73 million in 2015, to US$18.89 million in 2019 (Figure 5).

When we control for the age of the companies doing the raising, the results are also encouraging. Companies under five years old at the time they raised have consistently been raising bigger rounds over the same period (Figure 6). This analysis suggests it is not just a few successful companies hoovering up all the extra capital - new firms are seeing a windfall too.

FIGURE 5: AVERAGE DEAL VALUE: AUSTRALIAN COMPANIES, SERIES A AND BEYOND, DEALS OVER US$2M
crossroads 2019 WEB Charts Figure 5
FIGURE 6: AVERAGE DEAL SIZE: AUSTRALIAN COMPANIES 5 YEARS OR YOUNGER, SERIES A AND BEYOND, DEALS OVER US$2M
crossroads 2019 WEB Charts Figure 6

CAN AUSTRALIAN FOUNDERS RAISE ENOUGH TO BE GLOBALLY COMPETITIVE?

The signs are encouraging for startups looking to go global from an Australian base - the data suggests that in the last five years Australian businesses have nearly doubled their average raise size for growth rounds. The question remains: is this enough? Are Australian founders able to raise enough funds to genuinely compete with their global peers?

Comparing, in aggregate terms, the biggest rounds raised by founders around the world is a relatively simplistic way to approach this question, but it helps paint a picture of the overall landscape we’re working in. After all - there’s no special reason why an Australian startup looking to rapidly take on global markets would need less funding in absolute terms than a US startup in the same position.

On this most basic of metrics, Australia still lags (Figure 7). The fact that the biggest rounds raised in Australia in the last three years are substantially smaller than the US is perhaps not surprising, so we have excluded US figures from this analysis. But Australia remains behind other peer ecosystems.

Given the amount of dry powder being held by Australian venture firms, the rise in average deal size across the sector, and the rapid growth in size and number of more mature tech businesses, this disparity should shift in the years ahead. If it doesn’t, it may indicate a more serious structural problem stopping the most successful Australian tech companies from raising very large rounds of private funding.

FIGURE 7: AVERAGE OF TOP 20 VC DEALS BY COUNTRY SINCE JAN 2017
crossroads 2019 WEB Charts Figure 7