05_IMag_May_2011
Australian venture capital is an almost forgotten asset class. In the past decade, institutional investors – particularly those who lost money in the dotcom crash – have bypassed the industry in favour of other alternative strategies. But are they right in doing so? Some practitioners argue the mining boom provides the right conditions for resources entrepreneurs to build highly profitable businesses and provide venture capitalists with a rich series of vintages. Others expect more pain in the industry for years to come. SIMON MUMME reports on the current state of Australian venture.

 

Venture capital is not a good asset class, says Mark Carnegie. It’s a fantastic asset class, but it rarely shines. Only when an industry undergoes structural change, and opportunities arise for entrepreneurs to become the dominant force in a new market or usurp an incumbent order, does venture produce the great vintages that have attracted investors to the asset class, he says. Like its older cousin in private equity, the early investors in companies that exploit industry transformations, such as the successful dotcom start-ups of the late 1990s, are positioned to reap windfall gains. Latecomers who buy into the hype, often at inflated valuations, will likely lose their shirts in these deals. Unfortunately, the dotcom boom saw many Australian superannuation funds fall into the second category. For many among them it marked their first foray into domestic venture capital. But they’ve been left with a bad taste in their mouth as the vintages they ploughed capital into have soured.

Carnegie, known for his successful exploits in private equity and ventures with media start-ups such as Business Spectator and Text Media, says these institutional investors have made two blunders in their assessment of Australian venture. The first is that they have ring-fenced technology, biological sciences, health care and clean technology as the primary industries in which successful ideas can be seeded and grown into commercial successes. The second is that, like institutions worldwide, they bought into the dotcom frenzy and regard the terrible returns it generated as typical of venture – rather than the outcome of just another asset bubble. “The problem is, institutions invested in technology venture, put a lot of money in at the top of the market and got crushed,” Carnegie says. These misperceptions have created what Carnegie sees as “a once-in-20-years-type of opportunity” in Australian venture capital. The huge amount of capital invested in Australian venture during the dotcom boom has, at long last, petered out – “the pig has finally made its way through the python” – and institutions are unwilling to invest any more, starving entrepreneurs of capital and empowering investors with capital to deploy. “People thought that venture was tech,” Carnegie says.

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