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Entrepreneurship2.2 Startup Finance

2.2.1 Value of venture capital investments

Venture capital (VC) plays an important role in financing the launch, early development and expansion of innovative, high-growth-potential companies. These companies may have difficulties accessing traditional sources of capital due to their higher risk profile. In any given year, roughly a quarter of young innovative Australian small and medium enterprises (SMEs) seek some form of external finance. Evidence suggests that the success rate of businesses applying for venture capital investment fell from 3 per cent in 2005-06 to just over 1 per cent in 2013-14.[37] The dollar value of venture capital investment has followed a similar pattern. It peaked in 2007-08 with a total of $901 million invested but subsequently declined to just $266 million in 2012-13. The main contributor to this decline was early expansion funding, which is the largest and most volatile of the three investment types. More recently, Australia’s venture capital investment has been trending back up, reaching $701 million in 2018-19, with around 21 per cent of this going to startups.[38]

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2.2.2 Venture capital investment deals

Surveys in Australia and across the OECD suggest that obtaining adequate access to capital is one of the biggest hurdles to growing innovative businesses. In 2016-17, nearly one in three innovation-active Australian businesses reported the lack of access to funds as a barrier to innovation.[39] Government policy aims to attract more venture capital investment by reducing the associated risks and addressing any information asymmetries, making it easier for investors to find potential matching opportunities.[40] Venture capital is defined as high risk private equity capital for typically new, innovative or fast growing unlisted companies in the pre-seed, seed, start-up or early expansion stage. During the period from 2007-08 to 2012-13, the total number of venture capital deals declined before rising again strongly in more recent years. Since its lowest point of 49 deals in 2012-13, the number of pre-seed and seed funding deals increased more than three-fold to 166 deals in 2017-18 before falling to 125 deals in 2018-19. Over the same period, the number of early expansion deals nearly tripled from 65 in 2012-13 to 172 in 2018-19, and the number of start-up funding deals nearly doubled from 59 in 2012-13 to 114 in 2018-19.[41]

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