James Riley
July 20, 2015

SIVs may distort Aussie VC sector

SIVs may distort Aussie VC sector

Shanghai'd: SIV money to attract unqualified fund managers?

The famine-to-feast nature of the Significant Investor Visa money expected to hit the Australian venture capital market could do more harm than good, according to one of the industry’s most experienced fund managers.

Established VCs are worried the annual $350 million in SIV funds ear-marked for startups and venture funds (and other higher-risk investments) will distort the market and attract undesirably inexperienced players into the sector.

Mostly they are concerned that the money will lead to the creation of large numbers of sub-scale funds, led by managers who are good are raising money but who cannot drive tech startup success.

Starfish Ventures’ founder and investment principal John Dyson says the changes to the SIV program announced as part of the federal budget in the May would change the current famine into a feast, “and I am not convinced that’s a good thing.”

“I am not convinced the amount of SIV money will be that large ($350 million annually), but even at half that amount every year, it will distort the market.”

For Mr Dyson, this is not a happy prospect. Just as Blackbird Ventures managing director Niki Scevak voiced similar concerns last week, the Starfish team worry this SIV money will end up being a drag on the performance of the industry through inexperienced management.

This scenario is worse than a lost opportunity, Mr Dyson says, because of the damage to the rest of the industry’s credibility through poor performance of new entrants.

Having first heard about the changes to the SIV visa program when Trade Minister Andrew Robb made the announcement – rather than through engagement with the VC sector – he says the industry is concerned that government has not fully thought these changes through.

They are worried that the unintended consequences might be dramatic. Where the scheme does attract poor VC, it will simply undo the years of hard work.

“The other thing is consistency. There is no point in having $300 million flow into the market next year and the year after, but then have none the year after that,” he says.

Whatever policy-makers decide to do in filling that funding gap (of $3 million to $5 million), they should make it long term policy. The VC sector had suffered through too many changes in policy, and changes in thinking.

After abandoning the long-running Innovation Investment Fund in the 2014 budget, the Abbott Government has shown no enthusiasm for introducing a replacement scheme.

The new SIV arrangements, in which a portion of the $5 million each visa applicant invests in Australia must be directed to higher risk startups, VCs or small cap equities, came into effect on July 1.

According to investment research analyst Basis Point’s managing director David Chin, a conservative estimate of the SIV application pipeline points to $350 million in venture money hitting the market annually. Mr Chin will unveil new research into the SIV money at a Basis Point conference in Sydney this week.

The arrival of this new pool of capital looks set to coincide with greater interest from the institutional investment community.

Starfish’s Mr Dyson says it is important that government gets the settings right, or the nation risks missing a great opportunity to put a long term, sustainable venture funding system in place. The key, he says, is enabling funds of scale that can meet the funding gap between the angel investments of the $10m - $50m investments.

Allowing a huge pool of money to flood the already serviced embryonic startup end of the market without addressing the funding gap would be disappointing. Investment by angels and the creation of incubators and accelerators and co-location working spaces were all working at that startup end of the market.

“Venture capital looks easy, but it is much more difficult than it looks,” Mr Dyson said. “What we tell people is that starting a company is the fun part of what we do. It’s the sexy part, it’s the easy part.”

“What’s difficult is growing those companies, in building out the business and making them sustainable,” he said.

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