1 This publication contains venture capital statistics for the period 1 July 1999 to 30 June 2002.
2 The venture capital survey is partly funded by the Department of Industry, Tourism and Resources and the Department of Communications, Information Technology and the Arts. The survey was first conducted for the 1999-2000 reference period, with results released as a Special Article in the Managed Funds, Australia (ABS cat. no. 5655.0) December quarter 2000 issue. Additional data was incorporated in a subsequent release on the ABS web site.
3 The population of investment managers included in the survey was constructed from lists of participants in government programs (Pooled Development Fund, Innovation Investment Fund), membership of the Australian Venture Capital Association Ltd (AVCAL), the Australian Venture Capital Guide, business directories and venture capital journals. The survey is, in fact, a census of the venture capital vehicles that were able to be identified by ABS. The investment managers reported on behalf of the venture capital investment vehicles they controlled.
SCOPE AND COVERAGE
4 The Venture Capital Survey aimed to cover all investments in enterprises that met the following definition of venture capital, which is based on leading industry sources (principally AVCAL).
5 Venture capital was defined as high risk private equity capital for typically new, innovative or fast growing unlisted companies. A venture capital investment is usually a short to medium-term investment with the potential of high capital gains on divestment (rather than long-term investment involving regular income streams). The venture capital sector is part of the infrastructure of a well developed private equity capital market.
6 As venture capitalists invest in a business, they become part owners and may require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not take day to day control, but provide support and advice on a range of management and technical issues to assist the company to develop its full potential.
7 While most venture capital involves new, innovative or fast growing private companies, our scope did not exclude other high risk involvement such as turnaround investment. Turnaround investment is where venture capitalists provide management expertise, often in conjunction with appropriate investment, in failing established enterprises with the intention of turning them around through astute restructuring, capital stock renovation or other improvements.
8 However, some organisations which were not considered venture capital funds for the purposes of this survey included Incubators and entities set up by either a State Government or by way of a Commonwealth grant. The incubator's principal activity is to facilitate seed enterprises in their efforts to get their business into a position of growth. The incubator may offer grants, seed funding, reduced office rental, mentors, marketing contacts and access to office equipment.
9 Similarly, non-government organisations offering non-financial support to seed industries in the form of assistance in preparing business plans, identifying suitable employees or board members etc were not included. In addition, non-institutional investors such as business angels (private individuals investing in private equity) were not included.
10 The following are typical characteristics of venture capital activities.
SURVEY RESPONSE, 2001-02
|Out of Scope|
|Operating in Year|
11 The following describes various stages at which a venture capital vehicle may make investments.
- The venture capital industry receives a large number of approaches from individuals and groups of individuals who have what they believe to be good business propositions.
- A small or a specialist fund manager will receive between 5 and 20 approaches each month for funding; of those 2 or 3 may receive more thorough examination, and out of those perhaps 1 per quarter will get funding.
- The medium sized organisations will receive anything from 20 to 400 approaches in a month. Even though they are medium in size by the amount of capital they are raising and disbursing, their offices typically have a small number of highly trained staff. There may be 5 or 10 approaches that are investigated thoroughly or undergo due diligence. From these perhaps 2 or 3 will receive funding in a quarter.
- There are a small number of organisations that are large and receive upwards of 400 approaches a month. These offices are still run with a small number of highly trained and focussed staff. The culling process is very similar to the medium sized organisations, with perhaps 5 to 7 enterprises receiving funding in any one quarter.
12 Finance for small to medium sized enterprises from start-up to mature operations tends to follow various stages as they grow:
- Seed: product is in development. Usually in business less than 18 months.
- Early: product in pilot production. Usually in business less than 30 months.
- Expansion: product in market. Significant revenue growth.
- Turnaround: current products stagnant. Financing provided to a company at a time of operational or financial difficulty.
- Late: new product or product improvement. Continue revenue growth.
13 The Venture Capital industry uses a variety of valuation methods for the equity they hold in the investee companies. The valuation methods may vary from one organisation to the other. However, the AVCAL method (described below) is widely used by their members in reporting the value of the private equity holdings.
Methods of valuation
ASSETS VALUED BY THE AVCAL METHOD
14 This method is well documented by AVCAL and Venture Economics and states that all assets should be valued at cost for the first 12 months and thereafter valued at market value or Directors' Valuation.
ASSETS VALUED BY DIRECTOR'S VALUATION
15 Assets may be valued by the Directors taking care to undertake valuations with integrity and based on a common sense approach. This will need to be logically cohesive and subject to a rigorous review procedure under the direction of senior management and possibly non-executive Directors.
ASSETS VALUED BY INDEPENDENT VALUATION
16 The fund may choose to engage a registered independent valuer who will then value the asset based on the current market movements and environment.
ASSETS VALUED AT COST/BOOK VALUE
17 This method is preferred at least for the first 12 months and it is the cost of the asset at time of purchase by the Fund.
18 Related ABS publications which may also be of interest include:
- at the beginning of an enterprise there is a product or an idea that has potential to become commercially viable. To take the enterprise towards commercialisation, finance is generally provided by the principals, and relatives and friends of the principals;
- as an enterprise develops further, finance, management and other skills may be provided by ‘business angels’, independent business people who can see potential in the business, and who essentially prepare the business for professional financing;
- as the enterprise demonstrates a product and market, full commercialisation will follow. At this stage a number of venture capitalists not only provide financial resources, usually via a fund or company, but also provide more specialised management and business skills to ensure the future growth and prosperity of the enterprise. The venture capitalists often provide the funds through venture capital investment vehicles which may be Pooled Development Funds, Innovation Investment Funds, or other specially created vehicles operated by specialised venture capital managers. In other cases corporations provide investment directly into venture capital deals;
- venture capitalists exit their investment by initial public offering (IPO), management buy-out / buy-in, or trade sale. At this point the enterprise is mature enough to be reliant on its own resources and skills;
- each year venture capital vehicles enter the industry and a number leave. Reasons for leaving the industry include relocation overseas, enterprises going into liquidation or those that leave venture capital for longer term private equity arrangements.
19 Non-ABS data sources:
20 Data available on request
The ABS may be able to provide additional data for this survey on request.
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