Is it my paranoia or are there fewer VC firms in the market?

Is it my paranoia or are there fewer VC firms in the market? With the banks only lending on property mortgages, where can I go for early stage financing?

Unfortunately it’s not just your paranoia – there are fewer VC firms in the market today than there were five to 10 years ago – certainly fewer with an interest in early stage businesses.

There remain a few quality firms with substantial assets under management but there is a disturbing trend toward the concentration of funds within these firms to the exclusion of others.

There are a several reasons for this including:

1. The track record of VC firms in Australia has not been of sufficient quality to attract the majority of institutions to this asset class. Few existing managers and far fewer new fund managers are successfully raising capital.

2. High net worth individuals and family offices are more nervous about making commitments to VC funds due to the illiquidity of the asset and the lack of endorsement that naturally follows institutional participation.

3. Institutions are investing increasingly large amounts of money – thanks to our superannuation system – and are looking globally for quality investment products. Australian VC firms therefore have to compete with more established and better credentialed international firms for that portion of our institutions assets that may be allocated to the VC asset class. On a straight financial return comparison, Australian firms do not compare favourably with top quartile US/European and Asian firms.

So, where can you go for investment support?

Firstly, it’s important to remember that a very small proportion of business financing is delivered by VCs (globally, not just in Australia). The lack of available VC funding should be viewed in this context.

The most fruitful avenues at the moment are strategic investors (major players in your sector with a potential downstream interest in acquiring your business), high net worth investors and angel networks.

There is non-VC investing activity going on but the legacy of the tech wreck and the GFC is that the bar has been lifted as everyone’s risk appetite has diminished.

The trick is to really understand your sector and the established players within it to help you uncover interested parties that not only want a financial return but have much to offer operationally and strategically to help fulfil the prophecy.

For more Funding expert advice, click here. 

Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology-based businesses.

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