Venture Capital

After two false starts, Australia is having a moment

Zebediah Rice
Oct 4 · 10 min read

Last month Culture Amp, the employee engagement software firm, announced that it has successfully completed a capital raise valuing the company at over A$1billion. Culture Amp’s success this week is yet more proof that Australia may finally be on the cusp of creating the long-sought after state of a self-perpetuating, self-reinforcing “startup flywheel” and this broader change has gone almost unnoticed.

Geographic spots like Silicon Valley, New York City and, in recent years, non-US spots like Tel Aviv and Beijing have successfully reached this status, becoming global-scale hubs for innovation and extraordinary new-business creation (see Startup Genome table listing the flywheel hubs). Australia may soon be joining those ranks.

Source: The Startup Genome 2019

Across these top tech hubs, a new company has reached a billion dollar valuation almost every month for the last 10 years. Regrettably for Australia, the lucky country has struggled for decades to rise into the ranks of the top five or ten hubs, even falling back six spots to 23rd in the 2018 figures (see table to the left). But these surveys are inevitably backwards looking and recent events suggest Sydney’s ranking may well be moving back towards the top of the list as signs emerge of an Australian flywheel spinning.

A flywheel is a very heavy disk that is difficult to start spinning but once it is going it seems to keep rotating on its own forever. Similarly, a startup flywheel is a region which has achieved a sufficient density of startup success that these elements keep begetting further success, seemingly without external stimulus. These sorts of tech ecosystems can drive a nation’s economic output and productivity gains for years to come.

For many years, experts have looked at Australia and noticed that the ingredients for this kind of a tech flywheel, even the elements necessary to rank in the top five or ten global tech hubs, yet the startup flywheel never seemed to keep itself spinning.

For many years, experts have noted that Australia has all the ingredients for this kind of a tech flywheel, even the elements necessary to rank in the top five or ten global tech hubs, yet the startup flywheel never seemed to keep itself spinning. For example, a look back over the last thirty years shows there have been two or three prior moments when Australia appeared poised to reach ‘flywheel’ status and then failed. As the dates on the ASX IPO chart show, the late 1990s saw the first wave and the two most recent ones were in the mid-2000s and the the early-mid teens.

Waves of ASX IPOs with sample company logos from the two most recent waves

Sadly, the 1990s boom was brought to an end by the dotcom bust in 2001 and the fits and starts of the second boom was brought down by the GFC. This pattern of a post dotcom collapse followed by an emerging recovery in the 2000s followed by another collapse post-GFC can be seen reflected in the venture fundraising figures as well (pictured below). For example, in 2000 and 2001, Australian VC funds raised over $1B in both years; by 2004 this figure fell ~90% (see chart, below). Meanwhile the number of funds formed dropped from 27 in 2000 to 3 in 2002. A similar collapse in funds in the market occurred in the years following the GFC in 2008 which saw six years of stagnation in fundraising at a fraction of the peaks of the dotcom era.

Source: AVCAL/AIC

But things have changed dramatically in the last few years, with new fund raising shooting up 10x or more from the lows to above $1B per year in each of the last two years. And recent figures from the Australian Investment Council (AIC, formerly AVCAL) documented nearly 25 Australian VC funds active in the market raising in aggregate over $3 billion, so this trend look set to continue. Furthermore, according to recent media reports, Australia now boasts 7 tech billionaires, boxing well above its population-adjusted weight as compared to the 74 tech billionaires in the USA. What happened? And is this an indicator that Australia has reached the fabled “startup flywheel” status?

Australia now boasts 7 tech billionaires, boxing well above its population-adjusted weight as compared to the 74 tech billionaires in the USA.

To answer that question, the natural place to look are a series of quantitative measures for particular regions. Researchers typically look at metrics such as the number of start-ups founded or patents filed per year, the quantum of local VC funding or firms, and the speed to exit or aggregate IPO exit value. All of these are important yardsticks but among the three [1] broadest, most impactful and difficult to replicate measures are:

  1. Money, lots of it and consistency of it. This is the most important factor. Typically, the lion’s share of venture capital money comes from institutions (with pension funds being the largest category of institutional capital) because that is where most of the money of the world is centralized. With $1.8 Trillion of domestic superannuation assets under management, Australia ranks fourth among countries with the largest pool of retirement savings, so it already has sitting onshore the essential ingredient to become a global leader in VC funding and startups. The numbers tell the story for why this hasn’t happened yet: super funds in places like North American and Europe typically allocate on the order of 10% of their assets to illiquid investments like Private Equity (PE) and Venture Capital combined. Sadly, Australian super funds allocate only 4% of their assets to PE and VC (VC isn’t reported separately), an improvement on the 2% or so seen in the early 2000s but still far below the global averages. Making matters even worse, superannuation funds allocate on average only .37% of their capital to Australian PE and VC funds combined! And this dearth of local support has not been made up for by inbound global institutional capital. Fortunately, through these lean years abundant free cash among Australia’s wealthier citizens has allowed the country to do a decent job in funding its startups through their early stages. But angel funding sources aren’t sufficient to support a startup ecosystem through the entire journey to exit.
  2. The second ingredient needed for a successful ecosystem is a world-class educational system that can churn out the talent required to staff start-ups. That means not just the engineers and designers but also the managers and risk takers that can compete with peers at a global level of performance. Though the country has to do better (for example on producing engineering talent), it has a solid foundation. For example, Australia boasts 43 universities and approximately 400,000 foreign students enroll in Australian universities each year, a figure that has doubled in the last 10 years, and ranks in the top 10 countries with the most PhDs. In part because of this educational base, the Global Entrepreneurship Development Institute (GEDI) ranks Australia 5th globally.
  3. Quality of life. With dozens of regions around the world competing for a spot at the top, this third factor could be the crucial difference to a tech ecosystem making it into the top ten or not.
Bronte Beach oceanside pool sydney australia
Bronte Beach oceanside pool sydney australia
A typical oceanside saltwater pool minutes from Sydney’s urban center (Photo by Silas Baisch)

For example, Sydney and Melbourne are both ranked in the top 3 cities to live in the world. Thanks to abundant and affordable travel options and high-quality video capabilities, people can live and work anywhere. So, why not live somewhere widely acknowledged to be amazing? And for global companies and investors wanting presence in Asia, Australia is increasingly becoming the nation of choice to set up their Asian outposts.

I have been an active participant in funding Australian startups since the mid-1990s and continue this today. With this experience, it is my observation that even though Australia has all three of these key ingredients, the essential missing feature in the past two waves of attempted Australian startup flywheel Nirvana was a lack of a complete chain of funding through a start-up’s lifecycle. And the reason this was lacking was because there wasn’t yet a sustained track record of successful exits to convince institutional capital (i.e. superannuation funds) to support VC funds at scale and across multiple funds.

Even though Australia has all the key ingredients for a world class tech ecosystem, the essential missing feature in the past was a lack of a complete chain of funding through a start-up’s lifecycle. And the reason this was lacking was because there wasn’t yet a sustained track record of successful exits to convince institutional capital (i.e. superannuation funds) to support VC funds at scale and across multiple funds.

There were successes during those years to be sure, but these were the exceptions that proved the rule. You saw companies like Atlassian and Envato that had to grow for many years without any external funding; companies like Carsales and Wotif that had to rely on their commercial partners to fund their growth; or companies like my former portfolio companies Click Energy and New Forests that had to rely principally on overseas VC funds like mine for the funding to grow. Sadly, except for a handful of notable exceptions, the country lacked a sustainable source of post seed/angel capital. Old hands will recall that VCs firms like Allen & Buckeridge of the 1990s and Starfish Ventures of the 2000s have faded away.

So, it was with some trepidation that I moved to Sydney from California to continue my VC career several years ago. As it happened, my fears of a sluggish or slowing Australian startup ecosystem were not realized. In fact, quite the opposite with the industry’s latest wave of growth proving that Australia may be nearing escape velocity:

  • It started a few years ago with pioneers like Hostplus and First State Super who took the lead in backing the latest crop of Australia-based VC funds. More than $4 billion was raised in new Australian venture capital funds during the three years from 2015 to 2018. You don’t reach those numbers without institutional capital.
  • It continued with Australian VCs backing a group of exceptional founders who have delivered by creating truly disruptive and global tech businesses at scale. This only happens when there is a sufficient volume of startups funded through their lifecycle for the winners to emerge. The last boom wasn’t big enough to support a large number of winners: Australian start-ups numbered in the dozens in 2009 and received a grand total of only $250 million in venture funding in that year. In contrast, by last year (2018) these figures grew exponentially, as over 2,200 Australian startups raked in over $2 billion according to AVCAL/AIC data. In the wake of this growth of VC money to support the best companies throughout their startup journey, Australia has nurtured over 10 companies up into the billion-dollar club (Netwealth, CultureAmp, Airwallex, Atlassian, Zip, Sweat, iSignthis, AfterPay, Canva, Tyro, Optal):
Australian Unicorns: Netwealth, CultureAmp, Airwallex, Atlassian, Zip, Sweat, iSignthis, AfterPay, Canva, Tyro, Optal
Australian Unicorns: Netwealth, CultureAmp, Airwallex, Atlassian, Zip, Sweat, iSignthis, AfterPay, Canva, Tyro, Optal
Australian Billion Dollar Tech Startups

The country could be on its way to minting several more startups valued at a billion dollars or more in the coming months. Candidates for the next Australian unicorn include companies like (CoverGenius, SafetyCulture, Brighte, HealthEngine, Pushpay, Deputy, Campaign Monitor, Lendi, Athena, Rokt, JudoBank, FinClear, and Prospa):

  • The (potentially) final push needed to set the flywheel free to continuous startup-creation spinning has occurred only in the past year or so: exits. For example, there have been IPOs of Australian-backed companies like Prospa and Fiverr and Australian backed companies have consummated private sales like Wave Financial for $583M to H&R Block, Melbourne-based Aconex’s sale to Oracle for $1.6 billion, Sparesbox’s sale to Genuine Parts Company, and PureSec’s sale to Palo Alto Networks.
  • The public market numbers support this change as well. According to Macquarie Bank, Australian equity markets have supported 67 ASX-listed technology IPOs over the last three years which have collectively raised $1.5 billion. The exit dynamic has even reached the point where top overseas VCs like Accel, General Catalyst, and IVP are backing Aussie companies and tech companies such as Life360 and Sezzle have in recent months taken to listing their shares on the ASX. Life360’s shares rose 11% on its opening day and Sezzle’s surged 82%, suggesting investors have a large appetite for these sorts of offerings.

Recent data points like these that give a window into Australia’s startup ecosystem suggest that it may finally be reaching “Flywheel” escape velocity. Unfortunately, the story isn’t over yet and there are many challenges ahead.

Despite the successes of the last few years, the Australian venture capital market is relatively nascent, with only a few moderately large funds (i.e. with $200 million or more in AUM) presently active. In the last decade, the Australian venture capital market has seen only two years (2016 and 2018) that exceeded $1 billion in annual capital raised, a figure dwarfed by the sums raised for many single funds in the US. With a few notable exceptions, superannuation funds on the whole have been slow to move into the sector. And places like Silicon Valley and New York continue to beckon for Australia’s best and brightest to emigrate. Nevertheless, as someone who deployed capital as a VC in both of Australia’s prior attempts at creating a self-sustaining flywheel, this time feels different. Perhaps the third time will be the charm and the lucky country will once again earn its moniker.

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Disclaimer: The opinions and analysis put forward in this article are those of Zebediah Rice personally and are not the views of King River Capital or its respective affiliates.

[1] There are various other factors (such as well-designed government regulations, service businesses with an expertise in tech and startups, a culture of risk-taking, supportive domestic stock exchanges, and formalized mentor networks for example) but none are as difficult to establish as these three and all of them arise naturally if you have the core three working properly.

King River Capital

Blog posts, opinion pieces, and articles on startup culture, venture capital investing, and technology by the King River Capital team

Zebediah Rice

Written by

Zeb is a partner at King River Capital (www.kingriver.co). He also publishes regular health & wellness podcasts under the Serena rubric (www.serenasystem.com)

King River Capital

Blog posts, opinion pieces, and articles on startup culture, venture capital investing, and technology by the King River Capital team

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