Venture Capital June 2016 Strictly for Educational Purposes C lickDisclaimer to edit Master title style This presentation is intended to be a general overview to be used strictly for educational purposes. This presentation may not contain all the details and information necessary for you to make investment decisions or evaluations. This presentation should be viewed in conjunction with the links and sources provided. The information in this presentation are individual opinions and personal academic/industry experiences, all of which are subject to change. They do not necessarily reflect every detailed aspect of the economy, industry, the financial market or finance as an academic major. Comments made are of a general nature and they are not designed to suit personal circumstances. Any representations or illustrations in this presentation may have been modified or simplified to suit the audience it is intended for. Strictly for Educational Purposes 2 C lickContents to edit Master title style Section Page 1 Executive Summary 5 2 Government Initiatives 10 3 Venture Capital Firms and Investment Case Studies 14 4 Conclusion 19 Strictly for Educational Purposes 3 C lickPublications to edit Master Team title style Publications Directors • Jesse Mo • Robin Nandy Subcommittee Contributors • Aditya Katyar • Alex Chye • Alex Chan • Anita Chao • Henry Chen • Kevin Lu Strictly for Educational Purposes 4 Section 1 Executive Summary C lickWhat to editis Venture Master Capital?title style Overview Definition Involved Parties • Venture capital is money provided by an outside investor to • Limited Partners: finance a company that is new and growing – Investors who contribute money to a VC fund in • Typically seeks new, disruptive businesses with a perceived exchange for ownership shares in the fund long-term growth potential that will result in a large payout – Liability is limited to the amount of capital they for investors contribute • Venture capital generally follow a series of financing rounds – Includes high net-worth individuals and pension funds which include: • General Partners: – Seeding round: start up capital is provided by an – Managers of the VC fund angel investor to finance a business idea – Liability is unlimited – Angel round: the investor purchases an equity stake • Entrepreneurs: – Series rounds: financing provided by VCs in exchange for an equity stake – Individuals who have business ideas or who are currently developing a business • Venture capital realises returns from investments via an exit method: – They seek VC financing in exchange for an equity stake in their business – Initial Public Offerings (IPOs) • Underwriters: – Trade Sales – Become involved in an IPO exit of venture capital – Management Buyouts (MBOs) investments – Liquidation – Usually an investment bank Sources: Australian Private Equity and Venture Capital Association Limited, Australian Government Strictly for Educational Purposes 6 C lickWhat to editis Venture Master Capital?title style Industry Ecosystem Investors Government Super and Pension Funds Tax concessions for Early Stage Venture Start-Ups Capital Limited Provides grants, Partnerships assistance, (ESVCLP) incubator and Co-Investment accelerator programs High Net Worth Funds Individuals Venture Capital Invest to Firms/Funds diversify Sovereign Wealth Funds portfolio with Provides capital expectations for business of high operations and growth value add via expertise Provides Equity stake at return on initial investment investment and return at exit Source: Australian Government, Australian Private Equity and Venture Capital Association Limited Strictly for Educational Purposes 7 C lickVenture to edit Capital Master Landscape title style Financing in Australia Overview of 2015 Australian VC Funds Raised by Fiscal Year $mm • VC funds raised from $126m to $368m in 2015; a 400 368 compounded annual growth of 193%. 357 352 350 • This was driven by the allowance of superannuation 300 investment in Australia. 240 250 • The seven VC funds raising new capital included Brandon 175 200 158 Capital Partners, Medical Research Commercialisation Fund 143 152 150 126 3 (MRCF3), AirTree Ventures’ and the OneVentures 100 Innovation and Growth Fund. 100 • Majority of funds raised to focus on seed and early-stage 50 ventures 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Number of Funds Raising by Fiscal Year Investment Focus of Funds Raising (FY15) 14 13 12 23% 10 9 Seed/Early Stage VC 8 7 6 6 5 4 4 4 Balanced/Later 4 3 3 Stage VC 2 77% 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: Australian Private Equity and Venture Capital Association Limited Strictly for Educational Purposes 8 C lickVenture to edit Capital Master Landscape title style Investments in Australia Overview Distribution of Investments by Sector (FY15) • VC investments in Australia have fluctuated heavily over the Industrial 10% years, peaking at $535mm in FY14 5% • Unlike the US, investee companies in Australia are more Tech, Media, Telecom 34% focused on consumer and industrial sectors rather than 8% technology and media Consumer • Investee companies tend to be mostly in the start-up and late stage phase, unlike the US which tends to be more Financial Services focused on seed and early-stage venture investments Biotech/Sciences 34% 9% Other Total Investments Made by Fiscal Year Distribution of Investments by Stage (FY15) $mm 3% 9% 600 535 500 21% Seed 400 Start-up 280 300 229 224 212 191 Other early stage 200 137 151 153 144 Late stage VC 9% 100 Other VC 0 58% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: Australian Private Equity and Venture Capital Association Limited Strictly for Educational Purposes 9 Section 2 Government Initiatives C lickAustralian to edit Master Federal title Government style Initiatives Timeline 2001: 1984: $2.9b innovation Management and Investment 2011: action plan to fund Companies Program, first Board of Taxation 2015: education and R&D government initiative 1997: initiates review of New PM announces launched to foster an $130m Innovation Venture Capital Act $1.1b National Australian VC Industry Investment Fund Innovation and Science established Agenda 1992: 1999: 2002: 2012: 2016: Pooled $30mm Venture Capital Department of Tax Laws Amendment Development Commercialising Act introduced to Industry, Innovation (Tax Incentives Bill) Funds Act 1992 Emerging launch Venture and Science initiates passed was passed Technologies Capital Limited second review of the Program Partnerships Venture Capital Act established Program Sources: University of Wollongong, Pooled Development Funds Act 1992, Venture Capital Act 2002, Tax Laws Amendment Strictly for Educational (Tax Incentives for Innovation) Bill 2016 Purposes 11 C lickAustralian to edit Master Government title style Initiatives Overview of Key Programs Management and Investment Companies Innovation Investment Fund • Venture Capital firms were designated as Management and • Started in 1997 under the Howard government Investment Companies under Management and Investment • Terminated in May 2014 as part of new, emergency Companies Act 1983 budgetary measures • Superannuation and pension funds which invested in MICs • Details: could claim a 100% tax deduction – Australian government would match private sector • Requirements: funding at a ratio of 1:1 for start-up businesses – MICs hold shares in new businesses and start-ups for – Public funding would not exceed more than at least 4 years $100mm – Funds invest no more than 20% of their capital into – Qualitative factors to be considered include the VC’s any one company experience and investment strategy Venture Capital Limited Partnership Program Early Stage VC Limited Partnership Program • Requirements to become a VCLP • Requirements to become a ESVCLP – Incorporated limited partnership – Incorporated limited partnership – Pay tax in Australia – Pay tax in Australia – Have at least $10mm committed capital – Have between $10mm-100mm committed capital • Benefits of becoming a VCLP • Benefits of becoming a VCLP – Flow-through taxation – Flow-through taxation – Foreign partners exempt from capital gains tax – All partners exempt from capital gains tax • VCLPs must invest in a predominately Australia business • VCLPs must invest in a predominately Australia business with less than $250mm in assets for more than one year with less than $50mm in assets for more than one year Sources: University of Wollongong, Pooled Development Funds Act 1992, Venture Capital Act 2002, Tax Laws Amendment Strictly for Educational (Tax Incentives for Innovation) Bill 2016, Australian Financial Review Purposes 12 C lickAustralian to edit Master Government title style Initiatives Impact of Key Programs Past Government Schemes Government Funded Success Companies • Management and Investment Companies 1984: • ResMed – Was largely unsuccessful at fostering innovation – Healthcare company which manufactures devices to – Failure attributed to more incentive to invest in later- treat breathing and sleep-related disorders stage businesses rather than early-stage ventures – Listed on the ASX in 1999 resulting in lack of supply of funds • Gekko Systems • Innovation Investment Fund 1997: – Company which develops mining technology – IIFs increased supply of funds for risky early stage products and equipment high-tech start-ups – Has operations in 44 countries worldwide – However, relative to private equity, the supply of • Atlassian venture capital in Australia is still negligible – Enterprise software development company – Listed