In the last 25 years there have been four global economic shocks (19 October 1987, November 2000, 9 March 2009, and now), with the 1997 Asian debt crisis and Australia’s recession in 1994 being localised events. The lessons learned by investors during these events were harsh, and the impacts of COVID-19 will be another steep learning curve for us all.
Beating COVID-19 is obviously going to require a collective effort from us all on the home front, from employers, institutional investors, and from governments. This is not a man-made, self-inflicted economic woe that central banks can solve alone like before, we are in unchartered territory, and hopefully, we can pull together as a community.
Against this backdrop, and with central banks and other financial regulatory authorities racing to inject liquidity into a seizing financial system, it would seem that the notion of start-ups raising capital is off the table. After the 2001 dot-com bust, and the GFC, it took between four and six quarters respectively for investment volumes to recover, noting that the causes of these economic shocks were imbalances in confidence and the underlying financial structure.
While we expect COVID-19 to continue to wreak havoc on markets in the near-term, it is the medium term and the coming 18 months that pose the greatest worry for start-ups. However, the mobilisation of the super fund industry and local VCs fuelled by existing deployable capital, and a need to generate growth and returns, provide us the opportunity to bridge the gap experienced in prior economic declines.
With interest rates at historic lows and volatility in equity markets at record highs, it’s no surprise that super funds – as well as other institutional and private Australian investors – have looked to private markets and venture capital as a source of returns. For instance, over the last three years, Australia’s Future Fund has increased its portfolio weighting to global venture capital and private equity from 6 per cent in 2017 to 16 per cent in 2020 and in 2019, investors including super funds and private investors allocated $1.75 billion to Australian venture capital. This is a significant increase from the $40 million raised in 2012, but this amount is only equivalent to one or two modest US venture capital funds.
While Australia’s start-up ecosystem comparatively may be “behind” global peers like the US (which has 50 years of history), we do have a key important competitive advantage when it comes to funding. The US venture capital industry gets most of its investment capital from pension funds and endowments, which have a modestly growing and finite funding capacity that is dependent on recycled capital for further investment.
Australia is quite different – as a nation we have a substantial pool of super fund capital (now $3 trillion) which has experienced extraordinary inflows from investment and member contributions, and despite market impacts from COVID-19, will still continue to grow at pace over the longer term. Even in the context of short-term redemptions, the capital within super funds still needs to be deployed to achieve benchmark returns, and our relationship and proximity to these funds put Australian VCs in an enviable position of having tremendous support behind them from domestic institutions.
But this deployment of capital to local venture capital will need to continue locally in order for the Australian start-up ecosystem to stabilise and to recover. We believe Australia’s institutional investor base has an important role to play in supporting early-stage companies and the ecosystem that will continue to deliver solid returns and assist in our economic recovery.
Australia already has a high-calibre talent base attuned to building global technology successes. Over the last decade, more than $75 billion of shareholder value has been created by Australian start-ups including Atlassian, Aconex, ThreatMetrix, Canva, Afterpay, Envato, Tyro and Freelancer. The next generation of up-and-coming game changers is quickly emerging too with companies like HealthMatch and Swoop Aero, which are both actively engaged in combatting COVID-19 as a function of their businesses.
Prior to COVID-19, technological innovation was estimated to have the potential to add $315 billion to the Australian economy in the decade to 2028. As the country is forced to move work behaviour online, and everyone is regularly using start-up-built software to interact and facilitate remote work, we are in a unique position to rapidly migrate legacy industry practices to more nimble technology-enhanced practices. This difficult period may even help the economy transition beyond coal and commodities to a nation that embraces and builds cutting-edge software, understands the value of healthcare and scientific research, exports renewable energy, and invests to feed the world’s population.
As a country we will emerge from COVID-19 stronger, but scarred by the experience. In the process, we cannot allow ourselves to become risk-averse because if we’re not willing to take risks as a country, we’ll stagnate and find ourselves unable to break the orbit of this experience. We’ll stunt our talent, our pipeline of future tech companies, and our growth.
The Aussie tech ecosystem is young, vibrant and full of potential – we can’t afford the risk of failing to provide the funding it needs at an institutional level. The adoption and positive effects of technology investment for individual industries – and the knock-on benefits to jobs, productivity, and further innovation – will not only be a core determinant of our ability to rise from COVID-19 but our future prosperity.
Alister Coleman, founder and managing partner, Tempus Partners