This is Part 3 of a 3 part interview series with Mike Zimmerman (the VC with the perspective), General Partner at Technology Venture Partners (TVP), one of Australia’s leading tech VCs.

Mike agreed to talk with TechNation Australia about his perspective on the local tech industry, startup funding and his thoughts on what we need to do to take advantage of recent momentum in the local scene.

In Part 1 – we were introduced to the local VC industry
In Part 2 – we learnt about why better Angel networks are critical
In Part 3 – we pick up the conversation by addressing the current state of the tech startup and VC funding industries and how Government policy could help improve the industry as a whole

——————

I have a confession to make.

As we spoke (in Part 2) of needing better tech Angels, and other industry issues, it made me wonder if we hadn’t gone too far down the analysis track. I mean, there’s a question that isn’t being asked enough, which I think should be, before we talk about needing more funding.

The question?

“Is there actually enough demand, i.e. enough good, value creating, tech startups in Australia, that could take advantage of better conditions for VCs and Angels?”.

After all, what’s the point in focusing efforts on building better Angel and VC funding networks if we simply don’t have enough good startups to use them.

I put this to Mike and while he didn’t want to speculate on an answer to my question he did offer these numbers:

There are about 20-30 VC backable deals a year which, once you extrapolate, means that we can support 4-6 venture firms of scale in Australia.

Those 20-30 are not all web startups, they may be biotech, they may be products, they may be innovative technologies (e.g. increasing bandwidth of existing copper wires).

That’s an interesting number. In Q2 2008 in Silicon Valley there were 306 VC deals done at an average deal size of just under US$10M. Extrapolated that’s over 1200 deals for the year. So while 20-30 is probably a larger number than most people would have thought  are getting done in Australia, it’ still minuscule in comparison to the deal flow in Silicon Valley, let alone all over the world.

My feeling is that Australia has the necessary human and physical assets to create startups that capture more than the equivalent of ~2% of the Silicon Valley deal flow. It may be a cultural issue with risk it may be something else. Maybe more funding will release latent projects of value, who knows?

In any case, I think that the jury is still out on my original question - do we have enough good value creating tech startups that cold potentially be worth $100M+?

I’m keen to hear what people think.

Local Tech Fund Stages

Even though we mentioned that there are 20-30 backable deals a year doesn’t mean that every year that will be the case. VC funds have lifecyles, starting at investing (portfolio building) in the early years, through to management in the middle and then, of course, exits.

I asked Mike about what’s happening in the tech VC industry at the moment and this is what he provided:

There are only 3 top tier firms with money to invest at the moment – i.e. that are in the portfolio building, as opposed to management, phase of the fund lifecycle.

• Starfish Ventures
• Southern Cross Venture Partners; and
• Innovation Capital (a newer tech VC that recently raised a smaller $50M fund.)

Other than that, other top tier firms such as:

• TVP
• Accede Capital,
• CM Capital; and
• Allen & Buckridge

are all working with existing companies.

(NB: If you are a tech VC, or know of one, that hasn’t been included here and have details re: where in the lifecycle the fund is, feel free to contact me and I’ll post an update)

A short note. That’s not to say that the second list of firms won’t look at new investments, it’s just a valuable lesson in understanding where in the lifecycle of the fund the VC you may be approaching is when speaking about how long it’s going to take to build your company into something that’s has a potential acceptable exit within the fund lifecycle.

So that’s a brief summary of the state of the market at the moment. The next question is, assuming that more VC funding is required, and keeping in mind the difficulty many top VCs are having raising money, what can be done (while we wait for more big wins and a better tech Angel network) to make venture a more attractive asset class for LPs?

Government Support In Promoting Tech Innovation

It should be noted that I spoke to Mike about this several weeks ago, before the Cutler Report was handed down. Some of the below things were covered in that report. Some weren’t. That doesn’t mean there isn’t scope to have some of his suggestions included in policy or part of funding processes, just that it may be harder to get some issues that weren’t in the Cutler report on the agenda now, than it was when we first spoke.

Covering Government innovation policy Mike raised the following points:

Existing Policies

Commercial Ready

• Commercial Ready wasn’t perfect but it was valuable
• Commercial Ready shouldn’t have been cut off without any grandfather clauses and no replacement plan.

Local R&D

• In the past, because of our local expertise, low dollar (compared to the $US) and government R&D grants, keeping R&D in Australia was a very attractive option.
• As the dollar has risen in value it is critical to adjust R&D grants or else the goal of keeping R&D local becomes less and less feasible.

Innovation Investment Fund (IIF)

• The Government has some other valuable innovation policies such as the IIF, which is 2-4 matching grants to VCs to help them raise money
• The grants are up to 20M and, because government requires lower returns than your typical LP, it’s like a subsidy.
• There are some issues however:
  • The Focus is on building new managers so more experienced fund managers (with a track record and more able to help the companies) are not valued as highly as newer managers.
  • A $40M fund (i.e. 20M+matching 20M = $40M) is too small to build a diverse portfolio and invest in international deals

It’s clear that the overarching message is that we are still in the very early stages of building a sustainable VC funded tech startup industry and we need good help from the government to ensure that we make it through to the end.

The markets we look to, the US and, on a smaller scale Israel, both relied heavily on government support (NB: not intervention) when they were kicking off their tech VC industries, so we could do worse then look to those models to see what we can learn.

Suggestions For New Types Of Support

In addition to speaking about existing policies, Mike suggested some new areas of focus that would be helpful:

International networks

• Should government be giving grant money to hire overseas executives or bring them onto boards or subsidise locals to go to conferences overseas to get experience ?

More effort by government to subsidise the high cost of rent and broadband for startups

• This could be done by providing them a grant for office space/expenses
• Something like 50% so that it’s easer to get startups into co-working spaces and to have that transfer of skills, experience etc.

And of course, better tax incentives for investing in tech startups

• The question remains, what’s the difference between movies and tech and why is one treated so favourably over the other?

As we started to wrap up our conversation, Mike made a few last points that I thought were really interesting.

First is that there’s a great ecosystem starting to build organically but some support from government would help it along. For me, it was pleasant to hear another industry veteran recognize that we’re getting somewhere in our efforts to build the industry despite the current conditions.

Second is that Australia is really starting to build a brand in the Valley. More and more people in the Silicon Valley are running into Aussie deals. When this type of brand started to build around Israel what happened was one partner from US-based VCs would put up their hand and say “I’m going over there to work on deals”. What Australia has over Israel though is that lots of international entrepreneurs and executives are looking at Australia as a place to bring their families. It may only take one of those to make the move to be the tipping point which kicks things off from the top down.

As Mike says, there is some very cool stuff happening and he’s just really keen to make more stuff happen.

I couldn’t agree more.

————-

That brings to an end our 3 part series. A huge thanks to Mike for being so open about his thoughts and the industry. Hopefully he has helped many of you better understand an integral part of the tech startup industry.