Promise of new era in venture capital

THE state government’s February announcement of $900,000 to support the launch of three venture capital funds made public what until then had been a poorly kept secret among the local startup community.

The money flushed out three new funds that have either launched or are in the process of doing so, something many in the startup community are savouring.

The lack of Western Australia-derived venture capital for startups has long been considered a big gap in the market.

Formal venture capital has been a stop-start affair in WA since the turn of the century, with a few funds (heavily backed by government) matching private funding that was, for the better part of the past 20 years or more, closed to new business.

In its place, an informal network of local tech entrepreneurs and high-networth individuals with money from mining and property backed some great founders.

But it was hit and miss. It’s hard to have a conversation about WA’s startup funding ecosystem without the subject of Canva arising.

It was the unicorn that got away. Even recognition by Curtin University adjunct professor Bill Tai – a US-based venture capitalist who frequented Perth for the windsurfing – that Canva founders Melanie Perkins and Cliff Obrecht were onto something failed to sway locals with money.

It may be too early to suggest that WA is about to right that wrong, but there is certainly a buzz within the sector that things are starting to come together.

For instance, three new proposed private venture capital funds – Purpose Ventures, Fund WA and Quokka Capital – have each received $100,000 per annum for three years to assist them with their establishment and working capital needs.

StartupWA chair Jason Balchand said this new cohort of fund managers not only filled a gap in the market but also sent a strong sign that the sector was to be taken seriously.

“This is a big signal that WA is open for business,” he said.

But there is more to it than that. There has been the state government’s reinvention of the WA Future Fund to become the very specific WA Future Health Research & Innovation Fund.

It has already dispersed millions to researchers and companies on the commercialisation track.

In the private sector, the Forrest family’s private investment vehicle, Tattarang, last year launched Tenmile, a $250 million health-focused venture capital initiative to leverage the millions of dollars of research and development funding by governments that support innovation but do not extend to the commercialisation phase: the so-called ‘valley of death’ for many startups.

Long-running startup convention West Tech Fest has grown significantly, and a host of other events and programs seem to have been energised.

Another interesting development is Vici Ventures, which is associated with the Perth Angels. Co-founded in late 2022 by Perth Angels chair Wilson Casado, Vici is not a fund but describes itself as a venture partner in early-stage deals.

It plans to nurture innovative and high-growth ventures with essential capabilities and build a community to raise the founders.

Not to be ignored is significant growth in the study of entrepreneurialism in schools and universities, largely on the back of funding by Timezone founder Malcolm Steinberg, who wants younger people to understand the benefits of business startups so that more wealth is spread across the community.

Given that commitment, it should be little surprise to learn that the Steinberg Family Office has committed $10 million to back Purpose Ventures, which, as a result, appears likely to be first out of the starting blocks among the proposed new funds.

Purpose Ventures said it raised $35 million at the close of fund raising last week.

Purpose

“I am passionate about seeing the success of the next generation of WA entrepreneurs and believe our quality of life is directly related to the amount of wealth generated by the community,” Mr Steinberg said in a statement announcing the official launch of Purpose Ventures.

“Modern technology and innovation have been important in the development of a number of recent Australian unicorn companies that can generate this type of wealth for our state.

“The lack of early-stage funding in WA was clear and we believed that backing … the Purpose Ventures fund was the best choice in accelerating our local venture capital market.

“Their experience and the team they have gathered should put WA on the national stage as a place founders can get funding and support to scale global companies from.”

There is no doubt Purpose Ventures founders Derek and Kylie Gerrard have the broad credentials for their intended business.

Both were with energy and water monitoring software group Greensense, from its launch in 2008 to its 2014 sale to ERM Power, with Mr Gerrard running the business during that time.

They were then involved in the WA launch of national networking group Innovation Bay and, more recently, have been players at incubator group Spacecubed.

In between, Mr Gerrard took on the role of venture fund manager at the RAC-funded BetterLabs, which had about $23 million to invest in innovations and the companies behind them.

Mr Gerrard also points to his investment banking background at Barclays in the early 2000s as being a deal-making background he thinks is important to making investments and exiting them profitably.

He has also been in a consulting, corporate advisory and private equity partnership called Go Capital, but has moved on from that in order to devote his energies to Purpose Ventures.

“This was a 10-year commitment,” Mr Gerrard told Business News.

“In October last year we made that decision. “Malcolm [Steinberg] agreed to be the cornerstone investor.

“We have talked to 100 or more investors, all in WA, to see if there was support to get this fund to a minimum thirty million dollars, which we felt we needed.”

Mr Gerrard said he was targeting 20 additional investors at a minimum of $1 million each to invest in the vehicle, an Early Stage Venture Capital Limited Partnership.

This tax-effective structure requires that no more than 30 per cent of a fund is from any single investor, and is considered conditional until it meets that threshold, after which it can be closed.

Such funds have a 10-year life.

However, investors and the fund manager need not wait a decade to see a return on their investment.

Exits and sell-downs of investments can occur at any time, allowing the fund manager to return profits to investors.

Fund managers will typically have a performance fee, for returns over an agreed hurdle rate, which can also be paid before the fund’s life is over.

In something of a twist, Mr Gerrard said Purpose Ventures would pay half of any performance fee earned into a new foundation to fund WA charities.

Again, this is an area he knows well, as chair of innovative charitable organisation Meridian Global Foundation.

Mr Gerrard said several factors had been obstacles to the more prominent emergence of early-stage venture capital funds in WA, but some of those were less acute these days.

“A lot of people who made money here are in sectors like mining and property, and you keep investing in what you know,” he said.

Changing conditions

More recently, however, a growing number of people are investing outside familiar territory, while increasing numbers of family offices are seeking to diversify their investments.

Many have beneficiaries generationally removed from the entrepreneurs that made the initial fortune.

In addition, there is growing expertise on the ground in Perth in fields outside the state’s main strengths, particularly in terms of what venture capital needs.

Mr Gerrard said investing in venture capital funds was all about backing a team of people.

He highlighted the group Purpose Ventures had gathered as venture partners: HealthEngine founder Marcus Tan, infrastructure adviser Nicole Lockwood, and Spacecubed founder Brodie McCulloch.

Finally, there was what Mr Gerrard called “line of sight”, where investors can see returns commensurate with the risks taken. While Canva might have been the one that got away, the absence of WA investors in a Perth-founded success story has left many feeling they missed an opportunity.

Mr Gerrard said the ad hoc nature of WA’s existing early-stage venture capital scene, if it could be called that, was a problem that could be solved by the establishment of funds such as Purpose Ventures.

The fund would be resourced to look at the myriad opportunities that come across its desk, whereas many family offices and high-net-worth individuals have barriers in place that prevent startup founders from presenting their ideas in the search for capital.

FundWA’s Glenn Butcher. Photo: FundWA

Glenn Butcher, who leads FundWA, another group that has won state government funding, said he effectively came out of retirement to launch the fund because he became convinced the opportunity for investors and the state was huge.

Mr Butcher points to the past decade in Victoria, where the valuation of startups and scale-ups had risen a staggering 22 times, from $16.5 billion to $380 billion in the year to date.

In the past five years, more than 100,000 jobs had been created by the sector in that state.

Opportunity

By comparison WA had verified well over 300 startups and scale-ups valued at about $4 billion for the year to date, although Mr Butcher believes there may be as many as 10 times as many companies in the ecosystem but not captured by the data supplied by dealroom.co.

“That shows we have a stunning opportunity to create the jobs of the future here,” he said.

Mr Butcher said he had retired after a long career in some major global businesses, such as Atlassian and Amazon, as well as being a partner in venture capital firm CP Ventures, which launched two funds, and was effectively engaged in lobbying the state government about diversifying the economy. “I pulled all this data together and actually convinced myself,” he said.

“So, I kind of came out of retirement. “I could do this anywhere while living in Perth, but I am doing this because there is genuinely a huge commercial opportunity here.”

Mr Butcher thinks this potential is largely the result of a lack of investment. “We are smaller than South Australia,” Mr Butcher said.

“That means to me that nobody is funding things in WA.

“It is not as if we don’t have the sophistication here.

“We lack the funding infrastructure to make that happen, a different type of funding infrastructure. “You can’t go to the bank for this type of funding.

“That is what all of us in venture capital are trying to do.”

Mr Butcher said one of the reasons for WA’s historical shortcomings in the sector may relate to its isolation from markets, both capital and customer.

More than a few WA founders have ended up in Sydney or Silicon Valley as a result.

“Isolation was probably true maybe as recently as 10 years ago or even five years ago,” he said.

“I don’t think that it’s true anymore.

“No matter where you are in the world, you are remote from some set of your customers.”

Mr Butcher points to the convenience of WA’s time zone when communicating with Asia, a big source of markets.

FundWA, which includes startup founder and adviser Asheesh Malaney, intellectual property lawyer Pia Turcinov and cardiologist Michael Nguyen as directors, and former Sapien Cyber chief executive Glenn Murray as a venture partner, has taken a different route than the other two local venture capital players.

It will take the form of a Managed Investment Scheme, a vehicle Mr Butcher said was even more tax effective than ESVCLPs, and which can take advantage of another form of tax incentive where companies meet a principles-based innovation test to become an Early Stage Innovation Company.

Minimum investment will be $250,000 and there is no intention of having a cornerstone investor representing a big part of the overall funds raised.

Mr Butcher has signalled FundWA would seek about $50 million over three years but was aiming more modestly for around $10 million “pretty quickly”.

He added that he already had $1 million and had used those funds to commit to FundWA’s first investment: backing Packapill, the company behind Hola Health, a Perth telemedicine that provides online consultations with doctors and prescription delivery.

He said Packapill only launched nine months ago and already had an annualised growth rate of almost 600 per cent.

“That is the kind of growth rate I want to see,” Mr Butcher said.

Frustration

While Purpose Ventures appears to have got off to a flying start in the fund-raising stage, and FundWA has already committed to an investment, the third venture capital player highlighted by the state government, Quokka Capital, is awaiting approvals for its ESVCLP.

Quokka Capital co-founder and partner Nigell Lee said Quokka had been ready to press the launch button about 18 months ago but decided to change structure to an ESVCLP because of the long-term benefits for all involved.

Mr Lee, whose co-founder Charlie Caruso is also well known in the startup space, said the pivot had been more drawn out than anticipated.

“The process has taken longer than expected and delayed our opportunity to start contributing into the ecosystem,” he said.

The duration of the process had also been challenging in terms of nailing down a cornerstone investor, but Mr Lee said the fund was seeking one as well as keeping active in the market.

He said he had continued reaching out to the marketplace in anticipation of a launch, while adding to the operators who can actively deal with the significant investment opportunities in WA.

“I know what my inbox looks like, and we haven’t even launched yet,” Mr Lee said.

Like the other new funds, Quokka intends to focus mainly on WA, but its founders believe there is much to be gained in better connecting the startup world here with the rest of the nation.

“WA is very much siloed,” Mr Lee said.

“We want to change the conversation. WA is part of Australia.

“We will be based here [but] we need to connect with the rest of the country.”

History

WA has had venture capital funds previously, but they received significant state backing, mainly in the form of matching funds.

The first of these was the Foundation Innovation Investment Fund, a $35 million fund focused on investing in early-stage ventures from startup to $4 million in revenue.

The fund was established in 2001 as part of the AusIndustry Innovation Investment Fund Program and was wound up in March 2012. Operated by the Ian Murchison-led Foundation Capital, that fund’s successes included Fractal Technologies, OneRail and Dspace, although it is unknown what the final outcome was in terms of overall return on investment.

Foundation Capital morphed into a new entity called Stone Ridge Ventures, started in 2007 by Rob Newman and Matt Callahan, which took over the Foundation fund and several other funds run by former Perth-based superannuation industry fund Westscheme.

That included the $10 million Murdoch Westscheme Enterprise Partnership fund, which was set up in 2004 to support the commercialisation of research coming out of Murdoch University, but then broadened its mandate in terms of institutional focus.

With Westscheme as a $10 million cornerstone investor, Stone Ridge in 2008 launched the early-stage Stone Ridge Ventures Technology Fund.

The first exits from the SRV Tech Fund have now been made with the exit of Scanalyse in early 2013 to global mining services company Outotec.

Other investments were Dimerix, Matteo Mining and Orthocell. Another venture capital fund operating around the same time was established by Yuuwa Capital, founded by Matthew Macfarlane, Liddy McCall and James Williams.

Launched in 2009 as the manager of a $40 million venture capital fund with a $20 million investment from the federal government’s Innovation Investment Fund program, the Yuuwa fund also gained a big private investment from interests associated with former WorleyParsons founder and managing director Peter Meurs.

Among its investments were Agworld, icetana, Nexgen Plants, PolyActiva, fitgenes and AdAlta.

As it has wound down its investments, in specie allocations have been made, with Mr Meurs interests ending up as substantial stakeholders in companies like icetana in September and AdAlta in January.

Less formally, the Perth Angels investing network has been operating since 2010, originally as WA Angel Investors.

It also has a long list of startups backed by syndications it has led and claims to be the only group in WA with global and national angel investor network affiliation. But even that network is evolving.

A newer chapter, South West Angels, has broadened that network since launch in 2019.

Reflecting on WA’s past in terms of venture capital funds launching in seeming 10-year gaps, Mr Balchand, from StartupWA, said he hoped the three new funds would provide momentum that prompted future rolling activity here, rather than the apparent lumpiness of the past.

“I am hoping we can use these three new funds, this burst of funds, to attract more funds over the next five years,” he said.

“So, it isn’t a flash in the pan.”