Deal drought in local market

A SHORTAGE of good quality deals and seed capital providers is hampering WA’s venture capital market.

A recent venture capital forum hosted by the University of WA’s Graduate School of Management found there was also a lack of seed capital available to get new ventures to the stage where a major venture capitalist could invest.

Most venture capital players will only invest when a venture requires around $1 million. Before that, inventors and the like either need to rely on the generosity of friends, or try and find seed capital players.

Graduate School of Management head Tim Mazzarol said the forum found WA had a very fractured and disjointed venture capital industry.

“The purpose of this forum was to get discussion going on what was right and wrong with government policy and industry and university roles within the venture capital market,” he said.

“We need to find ways to become more flexible. We also need to educate investors about what ventures are out there.

“Universities can play a bigger role in this by being more commercial. It has been a common refrain for several years that scientists usually have poor commercialisation skills.”

Dr Mazzarol said one of the suggestions from the forum involved government taking a facilitating role in a seed capital fund that controlled around $40 million.

He said while there probably was no need for either the State or Federal governments to put money into the fund, there was a need for some organisation to help people gain access to seed funding.

There are only two funds operating in WA that could be considered true venture capitalists – Foundation Capital and Innovation Capital – while there are about 60 venture capital funds operating in Australia. The bulk of such funds reside in Sydney and Melbourne.

Most industry players argue that two major Perth players are suitable for the size of the market.

However, they also say WA does not appear on the radar screen of the eastern states-based funds because of the low number of deals done here. Increased availability of seed capital will help address this, however.

Seed and venture capitalists also do more than just pump funds into a venture. They instil crucial management disciplines and provide credibility to ventures. This credibility makes a project more likely to succeed when it seeks higher stages of funding.

Another key criticism of the venture capital market in WA is the rush towards listing.

WA punches well above its weight in terms of listings, but this can have a negative effect.

Argonaut Capital executive chairman Charles Fear said some overzealous brokers were partly to blame for the dearth of venture capital funds in WA.

“They took ill-prepared companies to market and that hurt them – and WA’s reputation,” he said.

“Of course part of their motivation was necessity because the funds these companies needed to expand weren’t available elsewhere.”

Zernike Australia CEO Peter Why said more attention was needed at the seed capital end of the market.

“We need to generate deal flow. Once that happens we’ll start appearing on the radar screens of the big funds in the eastern states,” he said.

“We have to start working on the quality of deal flow and building the linkages with funds in the eastern states.”

A WA Business News investigation of the venture capital industry last year found that Australia’s venture capitalists had around $5 billion to invest.

Little appears to have changed, as most venture capitalists are still cautious about investing in new ventures following the hammering they took after the technology boom.

Poynton Partners director and Foundation Capital board member John Poynton said there were enough deals around – just a lack of good ones.

“Deal flow is an issue but the people seeking the funding need to know where to look,” he said.

“There is a dearth of good quality deals. People often come to us with an idea that is simply too hard to back.

“What we’ve found since the 1990s is that it is hard to back ideas when they are in the early stage. And there are not quite the angels out there that there used to be.”

Business ‘angels’ are people who invest in ideas. However, unlike venture or seed capitalists, they usually do not take an active role in the management of the company developing that idea.

Foundation Capital managing director Ian Murchison said that, while WA took about 8 per cent of the national venture capital pool, it should be able to do better.

“I think the deal flow has

been impacted by the technology boom. Too much money went into dot.coms,” he said.

“A lot of companies in WA don’t realise they could be attractive to venture capitalists. These are companies in WA that are privately owned but don’t pursue expansion. Many don’t recognise the opportunities they have to pursue export markets.”

One of Foundation’s successes, Australian Leather Holdings, falls into this category. It was a successful manufacturer in WA and wanted to pursue export opportunities.

“There are many examples of companies that have gone from a few million dollars in revenue to hundreds of millions by turning to overseas markets,” Mr Murchison said.

Innovation Capital WA representative Paul Naughton said he believed WA lacked the necessary technological culture to attract venture capital players.

“We’ve grown up in a resources culture. We don’t have any technology icons here. But we are very entrepreneurial and innovative,” he said.

Add Venture Capital investment manager Greg Johnston said it was difficult to attract investors into venture capital funds.

Add Venture Capital is a new player in WA’s seed capital market.

“It is hard to raise capital in this market. It’s hard to attract institutional investors into something that does not have a long track record,” Mr Johnston said.

The fund is managed by the Harold Clough-owned TechStart, which began its life as Technology and Innovation Management, a company managed by WA’s four universities.

Add Venture Capital has made five investments over the past two years out of the $650,000 it was seeded with.

Mr Johnston, who is also an executive director of TechStart, said there was a definite weakness in the seed capital area.

“Venture capitalists in Australia traditionally come in much later than in other markets, such as Europe and the US,” he said.

“However, US statistics show early stage venture capital funding traditionally outperforms all other private equity classes. We need to educate investors on the benefits and the risks of investing in early stage technologies.

“There is definitely a need for more venture capital funding in WA, if we want to get the economy to grow.

“The money probably doesn’t need to be spent in mining or agriculture in the raw sense. However, spending on technology to support these industries could be valuable.

“Technology is the driver of economic growth and it has been for thousands of years.”