Here’s why high-net-worth investors often fill a ‘vital gap’ in Australia’s startup ecosystem
The last 10 years have marked a breakthrough period in Australian private markets.
Along with a well-established venture capital industry, a number of tech ‘unicorns’ ($1bn+ valuation) have also sprung out of the local ecosystem.
However, while venture capital (VC) funds are writing some pretty big cheques these days, those capital flows are predominantly deployed later in the company life-cycle for businesses that have already established a successful revenue model.
In view of that, there’s another cohort – high-net-worth (HNWs) investors – who often play a crucial role in providing early-stage companies with seed funding to get off the ground.
Steve Torso, from investment platform Wholesale Investor, explained the dynamic when he spoke to Stockhead late last year.
“One thing to highlight is that when people think of VCs, the larger funds will typically invest in about one out of 100 companies,” Torso said.
“And it’s often less – the lowest I’ve heard is one in 818; they looked at 818 companies and invested in one.”
“So you’ve got to ask yourself the question; companies out there are getting funding so where’s it coming from? And I think that’s where HNWs and family offices have played a massive role in Australia.”
Another prominent investor at the early-stage level is Investible, which has introduced a portfolio approach to angel investing with stakes in around 70 companies.
The fund has also tried to address a key pain-point in angel investing — how to provide a framework that connects the right companies to the right investors.
Its solution is Club Investible, an active network of HNW investors looking for direct exposure to early-stage companies.
Initially founded in 2015, the club was launched on the back of a series of early investments made by the group led by Investible co-founders Trevor Folsom and Creel Price, who realised they needed to create a structured vehicle to manage deal flow.
These days, it has around 55 members in Australia with additional members in New Zealand, Thailand and Singapore. And the buy-in is for HNWs only – each member contributes $250,000 to an Investible fund, the first of which closed last year with a $22m raise.
Speaking with Stockhead, Investible’s chief investment officer Hugh Bickerstaff reiterated the view that HNWs fill a “vital gap in the market” for early-stage capital.
And he said one of the advantages of the club was it gave HNW investors access to deals they might not know how to find easily.
“Say you want to be an early-stage investor – how do you actually do it? It’s really difficult for an individual, because there’s a lot of things you have to be good at to be an angel,” Bickerstaff explained.
“Firstly you have to be able to source great deals, which isn’t easy because you need access – a lot of the best deals aren’t publicly advertised. And once you source them you have to be able to screen them. Our business does all of that with an established framework in place to protect member interests.”
Bickerstaff said Investible screened around 2,000 startups that applied for capital each year, down to a workable number of 200-250.
“From there you drill down to around 60 that warrant further due diligence, and finally around 10 or 20 that you actually invest in.”
At that point, Bickerstaff said Investible’s established governance structure created a more stable environment for facilitating deal flow.
“Sourcing and screening a deal is the first phase, but for HNWs it’s also about securing the investment. Just because you want to invest doesn’t mean the founder will take your money,” Bickerstaff says.
“Our platform provides a brand, and the ability to add value beyond the initial capital. Angel investing is a long game, often a seven-plus year game. So you need a framework to support both founders and investors over that period, and help them through that journey.”
He said the club model had been effective by offering structured access to different types of HNWs – from startup founders who made successful exits and wanted a more hands-on role, to people in the midst of successful corporate careers who had “plenty of cashflow and no time”.
In that sense, members have the flexibility to choose whether they actively engage with seed-stage companies as mentors, or allow the fund to essentially curate investment opportunities and make contributions on a discretionary basis.
“Ultimately, we’re aiming to institutionalise angel investing in some respects,” Bickerstaff said.
“It’s about creating a sophisticated portfolio model with a professional team of analysts doing due diligence, and looking to achieve commercial outcomes.”