After a period of extensive tax reform in Australia, the
country's venture capital community has emerged in a stronger
position to support new ventures and encourage a new generation
Australian venture capital funds drew A$1.5 billion ($790
million) in committed capital during 1999, according to Venture
Economics, a research company that regularly surveys the
Australian venture sector. That figure is about three times the
amount of committed capital funds raised in 1998 illustrating
not only very solid growth, but a wealth of new opportunities
for private companies seeking capital.
It's unlikely that committed capital will triple again in
the near future. But the venture community expects its robust
growth to continue. Many of our venture partnerships are
raising funds, and there are several new incubators and other
venture groups being formed, with capital to invest. Venture
Economics found 23 venture funds formed in Australia in 1999,
compared with 13 in 1998 and 12 in 1997.
Jesse Reyes, vice president of Venture Economics, forecasts
growth for the Australian venture capital sector. On a visit to
Australia in August 2000, he released figures showing that
Australian funds posted a 19.5% average annual return to
investors over the past five years, and a return of 30% during
"For an industry that only really emerged on its own during
the past decade, it shows remarkable progress comparable to
similar industry growth in the US and Europe in their early
days," he said. "Putting this figure in perspective,
institutional investors in the US are looking for returns north
of 20% from venture capital. So you are just about at the stage
where you can go to the US market and realistically seek
funding from US institutions."
Our positive outlook
The Australian Venture Capital Association Limited, or
AVCAL, is the industry hub for members including investor
groups, banks, incubators, angels, corporate advisers,
technology companies, accountants, lawyers, government agencies
and service providers which helps support venture funds and
Our venture members provide capital for early-stage
companies, later-stage expansion, and finance for management
buy-outs and buy-ins of established companies. The 36 investor
members have A$5 billion either invested, or available for
AVCAL sees the venture sector gaining even more momentum
over the coming years. Our confidence is based not only on the
rapid growth of the past, but on recent developments that we
think will help build a very productive environment for risk
capital and private equity.
One reason for our positive outlook is the recent change in
tax policy brought about by the Federal Government. In April
1999, AVCAL put forward a series of recommendations to the
Ralph Review of Business Taxation, seeking tax changes which
would make it easier for overseas pension funds to direct some
of their capital towards Australian venture capital funds. We
asked the Ralph Review to consider three changes:
a) Waive Australian tax on the income and gains made by
non-resident investors in local funds;
b) Maintain the flow-through tax status of venture capital
funds, so that tax obligations be passed on to each investor
in a fund, and
c) Provide roll-over relief on the capital gains tax due
in scrip-based mergers, so improving the way young companies
can grow through mergers and acquisitions.
The Federal Government's historic tax reform of 1999 clears
the way for new capital to enter the Australian venture sector.
It removed some of the principal obstacles to new investment in
the sector, and AVCAL has welcomed these changes as a very
positive development for the Australian investment community
and for the country's entrepreneurs.
Overseas funds, for instance, can now invest in Australia
with similar tax conditions to those in their home markets.
Pension funds from the US are spared paying tax on their gains
in Australia, just as they are when they invest in venture
capital funds within the US.
Because Australia has maintained the flow-through status,
our funds will be able to pass on their rewards directly to the
Finally, the Federal Government proceeded with a
comprehensive change to roll-over relief on the capital gains
tax due in scrip-based mergers. We expect this to have a very
beneficial effect on companies, helping them grow faster not
only in Australia but also overseas.
Another reason for optimism is the success of Australian
companies that have been backed by venture capital. As more
companies achieve lasting success, the profiles of the
Australian venture capital community and the entrepreneurs who
lead fast-growing companies are raised.
One example is ResMed, a developer of medical devices formed
to commercialize research from the University of New South
Wales. The company raised venture capital in 1993 and was
recognized with an AVCAL award in 1997 for Best Expansion Stage
company. It listed on the New York Stock Exchange in 1995,
followed by a listing on the Australian Stock Exchange in
Only a proportion of venture-backed companies ever go
public, and there are many local, private companies that have
achieved their success through trade sales within Australia or
overseas. These success stories are now recognized by others.
One effect is to encourage new entrepreneurs to come up with
ideas for young start-ups. Another effect is to convince
institutional investors to dedicate more of their capital to
Growing international links
The Australian venture capital community has steadily
increased its activities overseas, resulting in more
transactions with global potential. Although Australian
entrepreneurs have often used local venture capital to help
them expand offshore, the trend has become especially strong
over the past few years. These successes have helped create
productive relationships between Australian venture capitalists
and their peers in North America, Europe and Asia.
For many private companies, Australian venture capital is
the first building block in a long-term plan to build an
international business. Intellisol, a Sydney software company,
has raised funds from Macquarie Bank in order to expand in the
US, Canada, the UK and Singapore. RedSheriff, an internet
company in Melbourne, has used funds from Equity Partners and
the Australasian Media and Communications Fund in order to open
its New York office.
Venture capitalists are also increasing their presence
offshore. Some Australian venture capital funds have opened
offices in the US and have formed close links with American
venture capital partners, investment advisory firms and
prominent entrepreneurs. Some Australian funds have invested in
private companies in the US, usually with the aim of helping
them expand into the Asia-Pacific market.
As these networks grow, it is likely to become easier for
venture capital firms and their portfolio companies to grow
quickly in overseas markets. This kind of overseas expansion is
rarely smooth. Still, we expect the venture community's growing
international activity to pay dividends in the years ahead.
At a time when public markets are in a state of flux, the
immediate outlook is challenging for private companies and
their venture investors. Sharemarket investors are less
welcoming towards initial public offerings, making it even more
important for young companies to call on the experience of
venture capital funds and their managers.
In order to ride out any uncertainty in the public markets,
some private companies will need greater support from the
venture capital sector.
This means the Australian venture capital community will
play a stronger role in the formation and growth of new
companies in Australia. The venture members of AVCAL are likely
to become even more active as they find a large number of
private companies with good ideas and ambitious goals.
The past few years have witnessed very solid expansion among
private companies and their supporters in the venture
community. Despite volatile public markets, we expect the
growth to continue.
Australian Venture Capital Association
Level 7, 167 Macquarie Street
Sydney NSW 2000
Tel: 61 2 9232 1055
Fax: 61 2 9232 1065