VC: Patience is a virtue

James Riley
Editorial Director

The startup sector’s relentless pursuit of a bigger chunk of Australia’s superannuation funds is a bit like Herman Melville’s hunt for a great white whale.

How hard could it be to harpoon such a giant target? Such a tiny proportion of super in Australia finds its way into higher risk investments (somewhere south of 0.2 per cent) that it seems a gigantic and docile pool of capital in search of an entrepreneur.

Which is why Alan Kohler’s interview with Starfish Ventures’ managing director John Dyson over the weekend was just a little bit fascinating. Because while Dyson is clearly hoping that the super funds will get more active in the VC sector, he acknowledges the challenging ROI benchmarks that need to be met to attract these funds.

So for all of the incredible activity in the tech startup sector, with lots more ideas and many more entrepreneurs and potential entrepreneurs, together with the proliferation of angels, incubators and accelerators, the pool of VC talent in this country remains shallow.

The VC market will take time to mature. Dyson says there is a need to be patient. This is a term you don’t hear much in this industry.

But it is true. There is a lot of great creative stuff happening in the tech sector at the moment and that has generated lots of activity. These startups has attracted more investment activity from angels and others – early stuff. And we can reasonably hope the pipeline of companies will generate some pull-through that will create some additional Australian VC muscle.

Starfish’ Dyson acknowledges the super funds allocation to VC is small. And the reason it is currently small is that the super funds want to see a 25 per cent return for the higher risk VC segment – and that’s a big number.

“But I think over time our industry (VC)will be able to provide significant returns to our superannuation investors as a long-term asset class,” Dyson says.

And that’s incredibly important to the creation of environment where local companies can grow, and at least have the option of remaining local.

“It has been interesting to watch over the past year. There has been a huge amount of activity at that very early stage of a company’s development, where there is a very large number of angels, incubators and accelerators,” Dyson told the ABC.

For a company to raise $50,000 to $500,000, it is probably as easy now as it ever has been in Australia – and the new technology and distribution models mean entrepreneurs can do a lot more with this money than ever before.

The big challenge for these companies – and for our startup sector in Australia – will be in raising the next round of funds after that. It is finding the $2 million to $5 million next round of funds that forces a lot of companies offshore.

This is where the disconnect between ideas and capital is most glaring, and has been the biggest challenge for the industry and for government policy-makers.

This the part of the maturing market that Dyson talks about. For Starfish to get benchmark returns of 25 per cent the firm would need to multiply by two to three times its own funding operation. But over time he is confident the company will get there.

Starfish currently has 40 companies under investment. The rule of thumb to be successful is that at least two out of every six portfolio companies need to be performers, and at least one of those six needs to be an outstanding performer.

This is not easy. If it was, we’d all be doing it. Super funds will get on board as the industry’s run rate improves – and that will provide a sustaining boost not only in funds, but expertise. But it isn’t going to happen tomorrow.

“What we do (Starfish and other VC firms) takes a huge amount of time. Nothing happens overnight, unfortunately, and we need to be patient.”

“That’s one of the reasons we need serious investors. Because what we do is serious business, and we need that support.”

Do you know more? Contact James Riley via Email.

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