Q&A: 5 key insights from a leading VC founder in Australia
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Australia’s venture capital industry may lack the size and liquidity of more mature VC markets such as the US.
But over the last 10 years, a well-established local sector has arisen, offering proof that the VC model can be used to effectively add value for Australian startups.
One such fund is Equity Venture Partners, a Sydney-based VC fund which began life as a corporate advisory service in 2011.
With a focus on early-stage software startups, EVP’s success stories include workforce management platform Deputy, and SiteMinder, which provides software linking hotels to online booking sites.
Those investments were a by-product of EVP’s first VC fund — a $25 million round launched in 2016.
The company closed its second fund — a further $35 million — earlier this year, from a combination of existing investors and a new batch of high net-worth contributors.
We sat down with co-founder Howard Leibman, who gave us his insights on the EVP business model and the VC landscape in Australia.
What is your investment time-frame when you provide funding for a new business?
Venture capital funds are typically set up with a 10-year horizon. So for example, our second fund was established with a 7-year minimum, and the option for three consecutive 12-month extension periods.
So after 10 years we have to return capital to our investors. The way the cycle tends to work is a VC fund will raise capital, and for the first 2-3 years will invest that across a portfolio.
And over the subsequent 3-4 years, the fund works very closely with those portfolio companies to help build value. Then for years 5 and beyond, you’re beginning to look for opportunities to exit your investment, either through a trade sale or IPO.
For this $35m fund, we’ll prob make a dozen investments over the next two years. They’re very high conviction, very concentrated bets.
And we’ll be rolling our sleeves up and becoming as active as we possibly can to see those companies succeed.
Some VC funds specialise in later-stage Series B or C rounds. Where does EVP usually seek an entry point?
We tend to invest at the early Series A stage, so the companies we invest in have typically already raised a small amount of external funding, and we’re coming in with the capital to drive a go-to market capability and scale up.
We typically make an investment in return for equity preference shares, so we never invest debt and we don’t ask for ordinary shares.
With those preference shares come preference rights which are negotiated deal-by-deal, such as anti-dilution clauses.
But the approach is really one of partnership. So even though we have preference shares, we only invest when we have a view that we’re in it together, on a journey for 5-7 years with a view to building long-term equity value and hopefully seeking an exit.
Do you have background professional experience that you apply to EVP’s venture capital investments?
The investments are not in areas that we necessarily have specific industry expertise, but the common thread is that we invest in early stage software software companies.
And those software businesses can play in any number of different industry verticals — from practice management software for accountants through to booking software for hotels through to jobs management platforms.
They’re generally B2B platforms that go to market through a subscription based revenue model, so they tend to be software-as-a service (SaaS) primarily.
The expertise we have is a much more generic skill set that’s build around helping early stage software businesses scale. To the extent there’s expertise within the firm, that’s where the expertise is and that’s the common thread that runs through the portfolio.
Is the portfolio mainly focused on Australia, or do you look abroad for potential investments?
The fund is definitely Australia-focused. We fall under an acronym called ESVCLP — Early Stage Venture Capital Limited Partnership.
It’s a government program which aims to foster innovation by encouraging investment in VC funds. A fund that’s registered as an ESVCLP essentially provides investors with capital gains tax-free returns, and there’s a tax offset of 10% per year on the way in.
So it’s a very tax effective structure, and in return for offering those tax benefits, we as a fund manager agree to do certain things — one of which is to invest no more than 20 per cent of those funds outside of Australia.
But the truth is that even if it were not for that tax requirement, we would focus on Australia in any event.
And that goes back to our model of having an active investment structure. So we have a strong preference for companies that we can regularly engage with, and that doesn’t work well when you’re investing offshore.
And lastly, has EVP completed an exit from one of its investments?
We’ve not had an exit out of either of the two funds, as yet. But what tends to happen is as a business grows, it raises subsequent rounds of venture capital.
And as the size of the companies grow and the size of those rounds increases, so too does the need to attract larger funds.
Inevitably, that means you’d be looking to either the small handful of larger Australian funds, but more likely the more established US VC funds that are increasingly looking to invest in Australia.
A good example is Deputy, where we were the first non-founder shareholders. They then scaled up and raised $25m from a Boston-based VC fund about two years ago. And about 3-4 months ago, we raised another $US81m led by a group called IVP out of the US.
So what tends to happen is, a fund such as our will invest pretty early, and as the company grows, its scale increases as it brings in new funds — generally from larger VCs.