The Australian venture capital sector has undergone a marked renaissance in recent years.
The sector nearly went extinct after the dot.com bust at the turn of the millennium. The sector also stagnated after the Global Financial Crisis and for the first four years of this decade, but in FY15, the market began to turn the corner and inflows started to increase. Over the past two to three years, the local market has continued to experience tremendous growth, with strong capital inflows and increased transaction volumes.
Australian VC funds raised a record $568 million in FY16 and the strong capital-raising numbers continued through FY17, evidenced by one Australia’s largest capital raises to date: Sydney-based AirTree Ventures’ $250 million fund. While final data has not yet been released for FY 2017, early indications from industry body AVCAL suggest that the sector has continued its record growth. In June 2017, AVCAL Chief Executive Yassar Al-Ansary said “on current indications for the 2017 financial year we are expecting another record year of venture fund raising in Australia. It would be reasonable to expect that total fund raising for FY17 would either be very close to or exceeding the one billion dollar mark.” By comparison, in FY2013, the entire industry raised only $154 million.
Commensurately, VC firms have increased the number of investments they have made, and the dollar amounts of their investments. In FY2016 the amount of investment was almost 50% higher than the previous year, with a combined $347 million invested by 33 VC funds. This total deployment was the second highest total recorded in the last decade. (In the record setting FY2014 $542 million was invested, during which almost half was a single $266 million investment in internet marketing service Campaign Monitor.)
Notwithstanding this resurgence of activity, Giant Leap sees indications that the Australian VC market remains under capitalized. In FY2016, investment in Australia’s VC sector was less than half that of the OECD average, as a proportion of GDP. The particularly strong US VC industry raised US$41.6 billion in venture capital in 2016 (calendar year), compared with our record A$568 million (for the financial year). On a per capita basis there is over seven times more venture capital funding available in the US than there is in Australia.
We believe that as Australian start-ups grow and mature, they will require more growth capital. We also see a growing number of early stage businesses that are likely to require start up capital.
We are pleased with Giant Leap’s current position, in our first year, relative to the rest of the Australian VC market. As of June 2017 we have raised $13.6 million of capital from more than 70 independent investors. Only 22 venture funds had raised more than $10 million as of April 2017. Of those 22, most have been operating for many years, and/or have raised their capital from corporate balance sheets.
While Giant Leap is Australia’s only impact-focused venture capital fund, “impact tech” is becoming an increasingly popular phrase in the US and elsewhere globally.
We have been inspired by the growth of international groups including Kapor Capital, Omidyar Network, the Collaborative Fund, Patamar Capital (formerly Unitus Impact) and others who are leading the global impact venture capital sector. A Wharton University survey of impact investing funds identified 21 “impact venture capital” funds in 2015, controlling US$775.8 million of assets under management. J.P. Morgan and the Global Impact Investing Network (GIIN), noted that venture stage impact investing had been growing at a 41.6% compound annual growth rate over the period from 2013-2015.
Giant Leap believes the sector is ripe for growth in Australia. Although Giant Leap is the only venture capital fund solely focused on high-growth, high-impact businesses, we do see funds with adjacent mandates. Social Ventures Australia’s venture funds are permitted to invest in early-stage businesses, but focus primarily on social enterprises rather than high growth tech-enabled startups, and they have indicated that they are targeting and producing returns in the range of 6-8% p.a. (Giant Leap targets a 20% IRR). Social Ventures Australia have not participated with Giant Leap in any deals thus far.
Giant Leap has more commonly invested alongside mainstream venture capital funds, and shared screening and due diligence with them. We believe that this demonstrates that impact opportunities are meeting the return requirements of mainstream, non-impact focussed investors. We also believe that investing alongside mainstream venture firms allows us to influence mainstream investors and investees to consider, and potentially adopt, a more intentional impact focus.
We are seeing improved quantity and quality of prospective impact deals through our deal pipeline, and greater evidence of the VC ecosystem’s interest in the field of impact venture capital investing. An impact-themed pitch night that Giant Leap hosted with Startup Victoria attracted more than 650 entrepreneurs, investors and advisers, the largest turnout of any Startup Victoria pitch night.
We believe impact venture capital is a growing market, and Giant Leap is proud to be helping pioneer this work in Australia.