Current state of Venture Capital in Australia
Entrepreneurship and innovation are known to facilitate economic growth for nations and offer them a competitive advantage in the 21st century. Accordingly, investments made through venture capital funds support the growing start-up market in Australia and forms a strong aspect of the Australian economy. The Australian Government has established various tax incentives programs that are designed to attract venture capital investment for startups in Australia. As of 30th June 2020, $16.99bn has been committed to the current Australian venture capital programs.
The year 2017 marked the highest number of investment deals in Australia’s history with an aggregate deal value of $2.6bn in comparison to 23 deals in 2010 with an aggregate deal value of less than $0.5 billion. Globally, Australia was ranked as fifth in the Global Entrepreneurial Index 2018 which measures the quality of the entrepreneurship ecosystem of a country using 14 different components. As the venture capital market has become more matured in Australia, fund managers have also been building skills and experience to make fundamentally good investments. According to an EY analysis of ABS VC&PE data, venture capital has yielded an average return of 13% since 2014/15, compared to the 8% investment in other aspects of the Australian economy. The internal rate of return reported (‘IRR’) by some of the leading VC firms in Australia would place them among some of the best firms in Silicon Valley. For instance, Brandon Capital reported an annual IRR exceeding 20% for its MRCF1 Fund and Brandon Biosciences Fund 1, while AirTree Ventures reported IRRs of 39 per cent and 43 per cent for its Ecorp and Netus funds respectively. Moreover, a lower rate of risk also makes Australia a favourable country for investors seeking the best risk-adjusted return across various markets.
Despite Covid-19, Australia witnessed a record high of US$1.6 billion invested in venture capital funding. The Australian PE/VC Index was the only one to record a positive return of 0.3% during the second quarter of 2020. Accordingly, the Australian Investment Council notes that ‘Australia has an opportunity to emerge from the COVID-19 pandemic as a more competitive nation in the global marketplace.’
Although the trend is not exclusively limited to Australia. Globally, venture funding surged 61% in the first half of 2021 compared to the second half of 2020 and numerous companies went public with a valuation above $10 billion. Head of KPMG High Growth Ventures, Amanda Price explains this surge in venture capital activity during the pandemic:
‘The new dynamics driven by the global pandemic have accelerated digitization across many industries’
Early-Stage Venture Capital Limited Partnership
Among the various tax incentives offered by the Australian government to boost investment, the Early-Stage Venture Capital Limited Partnership (‘ESVCLP’) program has emerged as a popular method to make such investments. The availability of tax concessions along with various other reforms such as the removal of divesture requirement, which required the ESVCLPs to dispose of their investments once the value of the company exceeded $250 million, and providing ‘front-end’ benefits such as 10% tax offsets, have certainly been the reason of making ESVCLPs a popular vehicle of venture capital investment among domestic investors. Notably, five of the largest funds closed between 2015-2019 in Australia, i.e., AirTree Ventures Fund III, MRCF5, CSIRO Innovation Fund 1, MRCF BTF and MRCF3 were all structured as an ESVCLP. As of 30th July 2020, there were 106 active partnerships under the ESVCLP program and 89 active partnerships under the VCLP program, out of which 56 partnerships were registered in the 2019/20 financial year. An EY modelling found that in 2018/19, 80% of the investment value was registered under the ESVCLP and VCLP programs.
