The Victorian government is on the hunt for a private manager for its $50 million venture growth fund, which aims to use venture debt to fill a funding gap for local startups.
The Victorian Growth Fund (VGF) was announced in last year’s state budget, with the state government to provide $25.75 million over four years to underpin it. Through the fund, the state government will co-invest with institutional investors into local high-growth startups.
The state wants to at least double its own funding through private investors, bringing the VGF’s total funds to at least $50 million.
Invest Victoria released a tender for a fund manager for the VGF at the end of April, revealing further details on the structure of the fund and what companies it will be targeting.
The VGF will be providing venture debt funding of $2 million to $5 million over two to five years, with a proposed term of up to 10 years.
The fund will be primarily focused on high-growth scaleups that are at least two years old, are growing at least 20 per cent per annum, generating at least $3 million in revenue and have a clear line to profitability.
All of the state government’s capital will have to go to startups based in the state, but the rest of the fund can go towards companies anywhere in Australia.
The fund manager will operate independently to the government and make investment decisions without influence from Invest Victoria. It’s planned for Invest Victoria and LaunchVic to represent the state government on the VGF Unitholder Committee, but they will not be present on the Credit Committee, which will actually make the investment decisions.
There are plans for all of the fund’s capital to be deployed in the next four years, with the VGF to then use the recycled capital from previous debt investments to make further cash injections.
The VGF will fill a hole in the current funding market in Australia and provide an alternative for startups that don’t want to access equity funding, the Victorian government said.
“Startups often have serious financial or economic problems for reasons that extend beyond the viability of their products. Many of them fall prey to compliance failures or scaling too fast, but some also struggle with the type of capital made available for startups and early-growth stage companies,” the tender documents said.
“Venture-backed equity is often the only source of financing available for early-stage firms seeking growth. However, equity may not be the best financing solution in markets that are not mature in terms of acquisitions of early-stage firms, or when the startup has already been through a Series A or B round of fundraising.
“Venture debt may represent a better option for early-stage startups that fit this profile, however few local fund managers are specialised in this type of product in Australia.”
Through the VGF, the state government is looking to increase the pool of private capital in the Australian venture debt market that is available to Victorian startups.
The successful applicant will be reasonable for managing all of the funds assets and accounting efforts, designing its business model and investment scheme, and day-to-day oversight of the VGF.
The manager’s effectiveness will be measured in terms of the fund’s investment value, the main activities and industries of the companies it invests in and the jobs created by these investments.
Announcing the fund late last year, Victorian Treasurer Tim Pallas said the VGF will help local startups access debt financing.
“I wonder how many of these great ideas have just gone missing or gone overseas as a consequence of us not having being prepared to be a bit strategic in terms of our interventions,” Mr Pallas said in November.
“This will be one of a number of issues where you will see that innovation will drive productivity, will drive employment, and that is the key focus of the government. We know that particularly the Reserve Bank, and the Productivity Commission, has made observations that access to loan capacity is extremely difficult for commercialising companies.
“It’s even more difficult for those companies that don’t have a substantial capital base but have a great idea.”
The state government also said it is opening to working with two fund managers.
Expressions of interest to manage the VGF are due by the end of May.