How Aussie Superfunds Investment Managers see US Venture Capital

Having lived in Silicon for many years, the single question I am asked by most Australians is how to best invest in US technology stocks. Having started my career in licencing US technology for the APAC market and eventually investing directly into Silicon Valley technology start ups as an angel investor and then as a Managing Partner of a venture capital firm, I have reached the conclusion there are better returns for Australian investors to have their superannuation member fund invest in a range of venture capital firms in the USA rather than investing directly via crowdfunding platforms.

While crowdfunding platforms like AngelList, Kickstarter or Indiegogo are accessible to anyone with money, they are perilous to say the least. US Venture Capital firms with a track record of performance and return of funds to limited partners are infinitely better investment funds to attain exposure into US technology start ups. There’s the dilemma… how does the Sunday BBQ crew in the leafy suburbs of Australia park their money into a US VC fund.

The founding vision of Frequency Ventures is to provide Australian superannuation funds who represent hard working Australians often not in the technology sector with access to invest into US Venture capital funds who have demonstrated returns on multiple funds. We can’t and won’t compare Venture Capital as an alternative sector in Austraila to the US Venture Capital market. That’s a superfluous conversation lamented by Australian VC general partners for many years.

Over the past 6 months, I have met with and received feedback from dozens of Investment Officers from Australian superannuation funds. My conclusions are:

1. Australian superfunds do not possess necessary technology skills on their investment teams.

Nor are they expected to.  Our  principles have deep experience investing directly in technology start ups and managing investments on behalf of investors. Like most things, the more you do it the more skilled you become.  Frequency Ventures has this experience and provides superannuation funds in Australia access to experienced and successful venture funds, not first time funds that have not previously returned capital to investors.

2. Australian superfunds  require alternative asset allocation into both geographical and vertical segments that Australia’s start up technology  does not offer.

Software is not changing the world. It’s ‘transforming’ the world. Our lives are being impacted at every touch point with technology from listening to Spotify on our phone on the way to work each morning to apps we use to do our banking, order an Uber and pizza. Australia has 22+ million people and only via investment in US venture capital firms have investment into technology that penetrates the major markets globally that being transformed at massive scale. India and China are moving from 3rd to 2nd, and 2nd to 1st world economies via technology. Australia will not, at mass, build enough technologies that penetrate these markets globally. The venture capital ecosystem in Australia while slowly changing can’t compete with the capital and connections of Silicon Valley to fund global technology venture backed companies that provide exponential returns to shareholders.

3. Chief Investment Officers think public stocks provide exposure to technology stocks

And they should not. While we all agree public tech stocks are over valued as are private start ups, the Australian Stock Exchange is full of technology companies that have less than 1 million in revenue and have ridiculous valuations of 30-60x price/ sales. The ASX is a slot machine for technology companies looking for Series A funding. The entire lack of  venture capital infrastructure and culture in Australia is why Silicon Valley Series A Venture Capital funds finds the best Australian tech start ups such as Atlassian (funded by Accel) and ThreatMetrix (funded by August Capital). I can name dozens more Australian companies that have avoided the doomed penny stock market route of raising money via an IPO in Australia to pursue a real return for all shareholders from the USA venture capital market.

Our Vision

Having allocation into some of the premier Series A Venture Capital firms in Silicon Valley, Frequency Ventures has opened the door for Australian superfunds to engage in technology start up investing with the leading venture capitalists in the world. It’s time for investment fund managers at Aussie superfunds to offer these returns to their members.

2017 Venture Capital Market Summary

2017 Venture Capital Market Summary

In time, it will be interesting to see if there is any parallel in Frequency Ventures launching in 2017, a record year for venture capital in the USA, thanks to the SoftBank’s $100 Billion Vision Fund which not just stole the show, it moved the goal posts out 30 years and rattled the establishment Sand Hill Road venture capital firms.

Sequoia Capital bounced back with rumours it is peddling a $8+ billion raising while on March 26, SEC processed paperwork showing that 18-year-old General Catalyst has closed a $1.375 billion fund.

Venture capital activity in the United States reached its highest level since the turn of the millennium in 2017. According to the PitchBook-NVCA Venture Monitor, VC firms invested a total of $84.2 billion last year, up 16 percent from 2016 and more than 100 percent from ten years ago. Meanwhile, the number of completed deals dropped to the lowest level since 2012, a trend that was offset by a steep increase in the average deal size.

A Changing Venture Capital Environment
10 years ago, if a company got to a $500M valuation, the only path to new capital and an exit was an IPO. Those days are now a distant memory.  With US venture capital  tripling in the past 10 years, the increased supply of funding has increased valuations significantly, allowed ‘unicorn’ technology companies to remain private  and avoid the public markets scrutiny and compliance. Post the financial crisis caused by the sub-prime meltdown in the USA and global “GFC” (global financial crisis), compliance and disclosure for public investment activity has made NASDAQ or NYSE listings less and less attractive.

The Bottomline for Australian SuperFunds
Record venture capital in the USA is being raised, the amount raised per deal is more. Superfunds should allocate investments in US Venture Capital funds. Despite valuations being higher, venture backed technology companies can stay private longer and avoid the cost / compliance of going public via an IP0.