Elaine Stead

New research by Harvard private equity and venture capital guru Josh Lerner shows despite nearly $1billion venture capital (VC) announced in the last few months, Australia’s VC market is far from being saturated.

The flurry of activity in the last quarter of 2015, which saw $900 million in new funds announced – with $300 million already raised – compared to the $368mil raised for the entire FY15, has seen some investors raise concerns about the VC market reaching saturation point, which could drive valuations up.

But Blue Sky Venture Capital’s head Dr Elaine Stead says rather than simply looking at capital raised over a given period, comparing ratios of VC stock to GDP is a lot more revealing.

“While Australia is raising an uncommonly large amount of VC in FY16, it is nowhere near the US in terms of relative saturation,” Dr Stead said.

The data, commissioned by Blue Sky, shows even taking the new $900 million worth of funds into account, the US is still nearly 7x the AUS ratio

Comparing VC-to-GDP ratios shows the extreme difference in relative VC stock. Even when adjusted for population, Australia lags in investment compared to the US.

“Looking at VC investments as a percentage of GDP, Australia ranks 23rd, which is above Brazil and Russia but below New Zealand and Austria. We are nowhere near saturation,” Dr Stead.

“And our innovation inputs are equivalent, if not better, than other countries. We’re a sophisticated market, with good infrastructure and internet services.

“Australia also rates highly in years of schooling and tertiary studies enrolments. And the country produces significant numbers of science and engineering PhDs.”

Blue Sky is currently raising $200mil for its third VC fund, targeted at institutional investors to invest in later-stage deals in Australia and overseas.

Dr Stead says much of the capital raised in other funds are focused on the early stage, but Blue Sky has found its sweet spot.

“We find the proportion of good quality investment opportunities is much higher at the later stage due to survival bias, but not many funds are focused on the late stage. While VC is starting to reach critical mass in Australia, it’s important to ensure enough capital is available for the entire ecosystem and beyond the early stage,” Dr Stead said.

Blue Sky has just made a record breaking $25 mil investment into Vinomofo, and is also invested in Australian darling Shoes of Prey, as well as Pet Circle, THR1VE and ParcelPoint.

Blue Sky Venture Capital is a division of Blue Sky Alternative Investments.

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Elaine Stead

Blue Sky Venture Capital announced yesterday  it was launching a new $200 million venture capital (VC) fund targeted at institutional investors to invest in later-stage deals in Australia and overseas.

VC fundraising in Australia increased to $368 million last financial year[1] and since July alone, a further $400 million has been announced with Blackbird Ventures and SEEK co-founder Paul Bassat each raising $200 million funds.

But early stage VC still receives the lion’s share of funding. More than three-quarters of the capital raised this financial year was allocated to seed and early stage companies, while balanced and later stage companies received just $84.6 million.

Assistant Minister for Innovation Wyatt Roy said Blue Sky’s fund was a welcome addition to the innovation landscape.

“It’s great to see investment managers such as Blue Sky attract significant capital to develop and nurture the local VC scene and invest in later stage companies. This represents and exciting turning point in the development of the Australian innovation ecosystem,” Mr Roy said.

Blue Sky Venture Capital investment director Dr Elaine Stead said the fund would continue the venture capital strategy Blue Sky had pursued for the past 10 years and purposefully focus on late-stage and expansion deals.

“While VC is starting to reach critical mass in Australia, it’s important to ensure enough capital is available for the entire ecosystem and beyond the early stage,” Dr Stead said.

“We find the proportion of good quality investment opportunities is much higher at the later stage due to survival bias. But it is much harder for these companies to find more significant amounts of capital for late stage development or early expansion as not many funds are focussed on the late stage.”

Blue Sky is targeting the fund at institutional investors, in response to their increased appetite for VC investments.

“Venture capital needs patient capital that can tolerate a long-term investment strategy, and that fits comfortably with superannuation mandates,” Dr Stead said.

“Institutional funding is slowly re-entering the Australian private capital market, which means companies are able to remain private for longer, rather than having to explore the public markets before they are ready.”

The new industry-agnostic fund will also look to take advantage of Blue Sky’s ever increasing international deal flow.

In the last year, Blue Sky’s existing venture capital funds invested in on-demand consumer retail business Shoes of Prey, last mile delivery network and logistics technology company ParcelPoint, fast casual retail chain THR1VE, and Minneapolis-based medical device company Conventus Orthopaedics. The company recently exited head lice treatment company Hatchtech in a US$197 million deal with Indian-based Dr. Reddy’s Laboratories.

“Half of our portfolio is now based or has substantial operations outside of Australia and we have had the privilege of co-investing with some fantastic international venture funds. This activity, combined with Blue Sky’s unique 3,000 strong investor network, and multinational presence, has resulted in a substantial proportion of our venture capital deal flow originating outside Australia but usually with an Australia nexus,” Dr Stead said.

“Many of the best quality deals come from referrals and we have invested in infrastructure to optimise our referral network including scouts and partnerships in strategic hubs focusing on the US and Asia.”

“The larger pool of capital will mean we can take advantage of the great later stage opportunities that come through our networks, through a captive fund instead of as stand alone investments which allows us to move quickly and provide investors with a portfolio approach which we think is important for mitigating risk for investors, even at the more advanced stage we invest at,” Dr Stead said.

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[1] Australian Private Equity and Venture Capital Association (AVCAL) 2015 Yearbook

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Elaine Stead

Blue Sky Venture Capital, a division of Blue Sky Alternative Investments Limited (ASX:BLA), is aiming to raise $30 million for a new fund in a bid to capitalise on Australia’s underpenetrated VC asset class and bring funds to the cash-starved sector.

The new fund is targeting a 30 per cent internal rate of return net of fees, and will have its first close on 22 August 2014. Blue Sky is applying for registration as an Early Stage Venture Capital Limited Partnership, meaning returns to investors will be tax exempt.

Blue Sky Venture Capital investment director Dr Elaine Stead said competition for high quality VC deals in Australia was at an 11 year low, with a mere $100 million of capital invested in 2013, compared to $29 billion in the U.S.

“There has been no better time to invest in the Australian VC market,” Dr Stead said.

“Our new fund is aiming to raise $30 million, almost a third of what was invested in Australia last year alone. This places Blue Sky in a strong position to take the pick of the best opportunities in an asset class with the potential to generate very high levels of capital growth.”

While 80 per cent of all VC investment goes into the earliest stage companies, including start ups, Blue Sky intends to focus on the underpenetrated, and lower risk late VC and early stage expansion sector.

The company is also committed to maintaining a technology and industry agnostic approach, in contrast to the wider VC market, which typically invests 80 per cent of capital in the crowded biotechnology and IT spaces.

Dr Stead said Blue Sky would invest across a diverse and balanced portfolio of deals.

“We look for validated, game changing products or technologies, which offer a global reach, rapid scalability or growth, established, experienced management teams and businesses where we believe we can genuinely add value,” she said.

Blue Sky invests in Australian and international companies from Sydney to Silicon Valley as well as in partnership with other international venture firms. The firm recently formalised a co- investment partnership with North American healthcare specialist fund, Five Corners Capital.

“We back companies that address global markets, and our investment partnerships ensure our companies have access to the expertise, capital and partnerships needed to support their growth,” Dr Stead said.

Blue Sky manages $600 million worth of assets across private equity (PE) and venture capital, hedge funds, real assets and real estate.

The PE and VC division has delivered a 16.3 per cent internal rate of return net of fees since inception to investors within its funds, far higher than the 4.9 per cent industry benchmark. Early stage investments include Mexican restaurant chain Beach Burrito Company, biotechnology company Hatchtech and online retailer Pet Circle.

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