Investors pitch $132m at WA tech firms in 2015

18/01/2016 - 10:09

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SPECIAL REPORT: Funding for WA’s tech sector is much healthier than a recent government-backed report concluded, research by Business News has found.

Investors pitch $132m at WA tech firms in 2015
PRIVATE: Seqta executive chairman John Vickers (left) with chief executive Grant Grosser. Photo: Attila Csaszar

Funding for WA’s tech sector is much healthier than a recent government-backed report concluded.

Technology companies headquartered in and run from Western Australia raised just more than $130 million in fresh capital in 2015, research by Business News has found.

That is the largest amount raised by WA tech companies in more than a decade, and is on top of an estimated $40 million raised by the sector in 2014.

The Business News research paints a rosier picture than the findings of the 2015 Start-up Ecosystem Preliminary Report for WA, released last month.

The report, produced by consulting group Boundlss with backing from the state government and the City of Perth, was restricted to early-stage tech companies established since January 2010.

It said that, over the six years to November 2015, total funding raised by WA’s tech startups was only $101.7 million.

That total included $12 million raised by Silicon Valley-based 1-Page, which listed on the ASX in 2014 after completing a reverse takeover of Perth-based InterMet Resources.

The Business News data excludes international companies like 1-Page, migme and Flexiroam, which have used ASX listings to raise capital but otherwise have little or no connection to Perth’s startup ecosystem.

For similar reasons, Business News has excluded Canva, a successful software business set up by former Perth couple Melanie Perkins and Cliff Obrecht, and now run from Sydney.

Four funding sources

The biggest source of capital for WA-based tech firms last year was reverse takeovers (RTOs), or backdoor listings.

Eleven Perth-based companies, including Tech Mpire, Fastbrick Robotics and Velpic, raised $55 million through RTOs last year.

Four Perth companies, led by CVCheck and MyFiziq, opted for a more traditional path, raising $24 million through initial public offerings.

One of the major attractions of an ASX listing is the ability to raise further capital through secondary raisings.

Eight Perth tech companies, including Spookfish, Norwood Systems and rent.com.au, were able to complete substantial secondary raisings worth a combined $30 million.

While many companies have pursued an ASX listing as a priority, others have preferred to remain private.

Seven privately held tech companies raised $22 million last year.

These included education software developer SEQTA and online booking service HealthEngine, whose private raisings matched most of the listed companies in scale.

(Seqta and HealthEngine fail to qualify for the Boundlss/government/COP report because they were established more than six years ago.)

Individual investors

Seqta raised more than $6 million from high net worth individuals, including Mineral Resources boss Chris Ellison and company director Neil Hamilton.

Navitas co-founder Peter Larsen, who was Seqta’s first strategic investor in 2013, also participated.

The raising was a big step for Seqta, which has now raised about $10 million from external investors since being founded nine years ago.

Executive chairman John Vickers said the company had considered an ASX listing.

“It was tempting because there seems to be a lot of interest in companies like ours, but the timing wasn’t quite right,” he said.

“Finding supportive investors who could give us the capital we need to take the business through the next phase of growth seemed the more sensible solution.”

Mr Vickers said the company could have maintained steady growth without extra capital, but recognised an opportunity to accelerate the development of its software, which is used by 22,000 teachers, and step up sales and marketing activity.

“If you can achieve that by raising the right capital without having to go public, we think that is a better choice,” he said.

Mr Vickers said the company had a strong preference for individual investors.

“We’ve tried to stay away from the institutional VC market,” he said.

“We want supportive individual investors who have networks or experience that can add value to SEQTA.”

Early mover

Forrest Capital founder Kim P Hogan said investor interest in the tech sector was at its highest in more than a decade.

“Definitely, you would need to go back to the late 1990s to find that much money going into tech plays,” he said.

Cottesloe-based Forrest Capital was an early mover into the tech space, and Mr Hogan expects the boutique advisory firm will probably be one of the first to leave.

“Trying to find good deals that are reasonably advanced and at good prices is getting more challenging,” Mr Hogan said.

“Things are becoming a bit expensive.

“We’re starting to concentrate on the investments we’ve got and make them perform better, rather than chase new positions.”

Forrest Capital raised nearly $20 million for tech firms in 2015, including listed biotech plays Imugene and Actinogen Medical.

It has funded several backdoor listings, including for Perth-based Spookfish and Silicon Valley-based 4D-S.

Forrest is working on the listings of UK-based software firm Data Labs and 3D printing company Albion 3D.

Mr Hogan said Forrest drew on expertise from around the globe to make its deals work.

Actinogen, for instance, headquartered in Sydney, struck a drug licensing deal with the University of Edinburgh, and last year completed phase 1 clinical trials in Perth.

“Where the technology was developed is not really relevant to us; we’re interested in the science and the commercial opportunity,” Mr Hogan said.

“If the science doesn’t stack up, we’re not interested.

“The good thing is that a lot of the money has come from Perth investors.

“If they are successful, that money stays in Perth.”

Mr Hogan said institutions were starting to sniff around the tech sector in search of bumper deals like the 1-Page listing.

He suspects there could be a speculative bubble in tech stocks, but noted this was no different than other investment sectors.

“If you look at how much money went into exploration stocks over the past decade, how many of them actually produced a mine? Not many.”

International attraction

Viaticus Capital principal Gavin Rezos has also led several backdoor listings, including Alexium International Group and Department 13 International.

“International technology companies are attracted to the reverse merger market here as a means of raising capital whilst retaining control of their business,” Mr Rezos said.

“They are not coming to Australia to seek venture capital funds, as they can get that in their home country.”

Mr Rezos said most companies undertaking an IPO or reverse merger often had management that had a negative experience of VC funding.

This can include the VC fund seeking to direct management, including to business relationships that suit the VC, or ensuring the lion’s share of economic value end up in the hands of the VC.

“The ASX should play to its strengths and encourage reverse mergers,” Mr Rezos said.

“Importantly, listed companies can raise funds in two days without complex documentation that would be required for subsequent VC funding rounds.”

RTOs

If this analysis were widened to include all tech firms that have completed a backdoor listing through a WA-based shell company, the numbers would be very different.

In 2015, 28 companies raised $149 million through backdoor listings using WA shell companies, according to data compiled by Business News.

That’s on top of $63 million raised through 12 RTOs in 2014.

A further 43 WA-based shell companies – mostly moribund exploration companies – have announced plans for a backdoor listing, indicating the trend has a long way to run.

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