South Australia gets just 0.2% of Australia’s venture capital — so how are we going to change that?
When I first started working in the venture capital community in 2001, I met a VC from Sydney. His opening comment was “How are those kangaroos hopping down North Terrace in Adelaide?” Like many people from East Coast, he considered Adelaide a provincial backwater (not helped by this recent occurrence of a kangaroo actually hopping down North Terrace).
In the United States, city hopping (sorry, can’t help myself now) is quite common. Moving to Indianapolis to work for pharmaceutical company Lilly, to Bentonville to work for Walmart, or Omaha to work for Warren Buffett is stepping up, not stepping out.
But not so in Australia, where the financial hubs are very clearly Sydney and Melbourne. This also means that most venture capital funds are located in the same places, where they can tap into sophisticated, wealthy investors, and fund managers.
Once the funds are raised, they prefer to invest in their own city — they can be more hands on with portfolio companies and can tap their own networks to find new hires.
But most importantly, venture capital firms are time poor. They are generally owned and run by very small teams, running on a fixed fee per year. As a manager, you have a choice: meet say, four prospects in Sydney in a day, or fly (at your own expense) to Adelaide to see a single prospect.
The result is a paucity of venture capital funds being invested in South Australia. The Australian Venture Capital and Private Equity Association (AVCAL) Yearbook 2016 shows that in the past five years, South Australia received in total $1.3m in venture investment — that’s about a quarter of a million dollars a year, or enough for two or three coders.
South Australia gets less than 0.2% of the venture capital investment in Australia.
While kangaroos don’t (often) hop down North Terrace, if South Australia is to build the jobs of tomorrow, we need new, innovative companies, and they need capital to get started.
The solution is to make it easier for East Coast venture capital companies to invest in South Australia. We need to have local money and smarts, which will bring experienced hands on advice, local and global networks to hire good staff, and most importantly, ensure investment proposals are prequalified — it is worthwhile flying across to Adelaide for the day to meet a company which is investment ready with a great idea.
The State Government last year funded a review of the venture capital and commercialisation industry by respected industry professional Alistair McCreadie. It suggested a venture capital fund be set up with South Australian government funds. The key recommendation is that it must co-invest with another recognised fund. This will mean:
· At least twice the Government’s money being invested
· Validation of the fund’s investment decisions by another, well regarded venture fund
· Bringing new investors into the state
The fund was approved by the Government in the budget this year, where it allocated $50 million.
Importantly, it also has set up an Early Commercialisation Fund to provide grant support that will allow businesses to get ready for venture funding. Too often in the past, South Australian companies have sought venture funding while underprepared. This fund has been set up to provide staged funding as a company matures. Historically, all governments, including the State Government, have tended to run separate, disjointed programs, developed as ad hoc policy initiatives.
The result should be an outcome where there is a path from idea to proof of concept to business plan to substantial investment. We can then grow the new economy companies and jobs — and keep the kangaroos out of North Terrace.
