Venture capital is high risk capital directed towards new or young businesses with prospects of rapid growth and high rates of returns. Venture capital is an investment not only of money but also of skills and time. This publication presents information of both financial and non-financial contributions to venture capital investments.
There has been considerable growth and interest in venture capital markets in recent years. The Federal government and various state governments have introduced schemes to foster the sector, including changes to tax regimes.
Australian Bureau of Statistics (ABS) undertook the first survey of venture capital for the period 1999-2000 and has since undertaken this survey annually at the request of and with the financial support of the Department of Industry, Tourism and Resources.
ABS conducted all surveys with the advice and assistance of users, industry bodies and data providers.
ABOUT THIS ISSUE
This issue contains the results of the 2003-04 Venture Capital survey and compares results with the four earlier surveys (1999-2000 to 2002-03). This is the fourth annual release of ABS Catalogue 5678.0. The initial 1999-2000 survey data was first published in the Special article - Venture Capital Survey, 1999-2000 released in February 2001 in the December quarter 2000 edition of Managed Funds (Cat. no. 5655.0).
REVISIONS THIS ISSUE
This issue contains revisions to previously published data for the 2002-03 and 2001-02 results. The revisions have mainly resulted from coverage improvements, consultation with users and providers about clarification and correction of a number of reporting errors.
EFFECTS OF ROUNDING
Any discrepancies between totals and sums of components in the tables are caused by rounding.
For further information about these and related statistics, contact the National Information and Referral Service on 1300 135 070 or Darren Page on Canberra (02) 6252 6731.
The results of the fifth Venture Capital survey show that there was strong growth in funds committed to venture capital investment vehicles during 2003-04. As at 30 June 2004, investors had $9.0b committed to venture capital investment vehicles, an increase of 19% on the $7.5b committed as at 30 June 2003. Investors had $5.1b of committed funds drawn down at 30 June 2004, an increase of 8% on the previous year end ($4.7b at June 2003). This left $3.9b of committed funds yet to be called on, up 38% on the $2.8b of unused commitments as at June 2003. See table 1 for details. Most of these funds were sourced domestically, with 93% of the total investment from Australian investors (up slightly on June 2003).
While both commitments and committed funds drawn down both increased strongly to the end of June 2004, the value of investments by venture capital investment vehicles at the end of 30 June 2004 ($3.1b in 909 investee companies) is down 7% compared with the end of June 2003 ($3.3b in 889 investee companies). This level of investment, derived after deduction of fees and other expenses, exits and allowing for holdings of liquid assets, decreased mainly due to 2003-04 being a successful year for exits in the venture capital industry. During 2003-04 the total value of all exits through trade sales, sale of shares (including IPOs) and buybacks amounted to $1,460m (representing $729m of investment and $731m profit over the life of the investments).
New and follow-on investments during 2003-04 contributed $627m to this June 2004 total, down 6% on investments made during 2002-03. Investments in these 909 investee companies were reported by 195 venture capital investment funds and companies (177 in 2002-03).
The selection of investee companies (into which venture capital is invested) was an intensive process. The total of 137 venture capital managers reviewed 10,530 potential new investments during 2003-04 and conducted further analysis on 1,067 of those, with 181 being sponsored for venture capital. These managers spent a total of 179,000 hours with the investee companies (190,000 in 2002-03), advising and assisting in the development of the enterprises.
The following diagram summarises key findings for venture capital in 2003-04.
KEY FIGURES 2003-04
Venture capital investors are generally sophisticated individual investors or organisations such as pension (superannuation) funds. Investors invest in venture capital investment vehicles which are mainly organised in the form of either trust funds or corporations. Venture capital trust funds obtain investment commitments from investors, which are drawn down over time. They must return capital plus profit (minus loss) as investments are realised. On the other hand, venture capital vehicles organised as corporations are able to choose to make distributions to investors (including parent corporations) or to retain capital for further investment. Investors in corporations may liquidate their investment by sale on the secondary market. Drawn down funding from investors in corporations can be estimated from paid up capital and borrowings, but the ability of corporations to reinvest retained earnings and the tradeability of investor equity in corporations makes analysis of investment by type of investor difficult. Certainly the concept of commitments by type of investor is less clear-cut, by comparison with trust funds.
At June 2004 investors had $9.0b committed with venture capital investment vehicles. This compares with $7.5b at June 2003 and $6.8b at June 2002. See table 1 for detailed source of funds data. Of the $5.1b drawn down at June 2004, 67% was by venture capital trust funds while corporations accounted for the majority of the remainder (31%).
The following graph analyses drawdown investment for venture capital investors by type of investor. The graph shows that the largest source of funds in terms of drawdowns for venture capital vehicles was domestic pension funds with 44% of total drawdowns (up from 39% at June 2003) by venture capital vehicles.
DRAWDOWN INVESTMENT IN VENTURE CAPITAL FUNDS BY INVESTOR TYPE, percentage of total investment in venture capital vehicles, June 2004
VENTURE CAPITAL MANAGERS AND INVESTMENT VEHICLES
The venture capital manager is generally a skilled business person and financial analyst. The gathering of commitments from investors takes a considerable amount of time as does the process of undertaking an initial evaluation of potential investees and later due diligence. The survey identified 137 active venture capital managers who were managing 195 venture capital investment vehicles. This compares with 136 active managers managing 177 vehicles in 2002-03.
Venture capital fund managers spent 179,000 hours with investee companies (tables 2 and 3) and received income in the form of management fees ($105m). In 2003-04, fund managers spent on average 3.0 days a month per investee company. This compares with 2.9 days in both 2002-03 and 2001-02. The average days spent with investee companies with Biotechnology, Pharmaceuticals and Health related activities increased for the fourth consecutive year. Decreases were recorded in 2003-04 in the average days spent with investee companies with Manufacturing and Transport related activities as well as those with Information Technology, Media, Electronics and Communications activities.
Venture capital investment vehicles had net assets of $3.7b at June 2004 compared with $3.8b in June 2003 and $3.6b in June 2002 (see table 5). Most venture capital investment vehicles were either trusts (funds) or corporations. Table 6 indicates that, of the 195 vehicles operating in 2003-04, 102 were companies. Of these, 82 were not listed with the Australian Stock Exchange. At June 2004, about 43% of venture capital vehicles were trust funds, this compares with 41% in June 2003 and 37% in June 2002.
Many venture capital investment vehicles participated in government sponsored programs. Table 7 indicates that 93 of the 195 venture capital investment vehicles were participating in a government program at June 2004, an increase of 1 on June 2003 and an increase of 3 on June 2002. Most of the participating investment vehicles were with the Federal government's Pooled Development Fund (PDF) program, with the other significant government programs being the Innovation Investment Fund (IIF) program and the Building Information Technology Strengths (BITS) program.
Investment vehicles by Value of Assets Held
The range of total assets held by investment vehicles was widely dispersed, from 101 investment vehicles having less than $10m in assets to 12 with more than $80m in total assets (see the preceding graph).
Table 8 shows the financial flows of venture capital investment vehicles over the survey period. The following graph shows investment flows for deals by the venture capital industry over the past three survey years. From this graph it can be seen that total investments by venture capital investment vehicles fell slightly (down $39m, -6%) in 2003-04, decreasing from $666m in 2002-03 to $627m in 2003-04. This decline was driven primarily by the fall in follow-on investments (down $32m, -16%) over the course of 2003-04.
Most return on investment to investees is through exits from investments. As shown below, 2003-04 was a successful year for exits in the venture capital industry. There was a total of 133 investee companies exited through trade sales, sale of shares (including IPOs) and buybacks amounting to $1,460m in 2003-04 (representing $729m of investment and $731m profit over the life of the investments). This compares to the total value of all exits of $331m in 2002-03 (comprised of $212m of investment and $119m in profits). The value of vehicles that have dropped out of the Australian venture capital industry ($144m in 2003-04) was lower than the level recorded in the previous three years. The reasons for leaving the industry include relocation overseas, enterprises going into liquidation, or enterprises that have left venture capital for longer term private equity arrangements.
Changes in investment, by venture capital vehicles in investees
Table 4 indicates that investment vehicles had total expenditures of $170m over 2003-04, mainly in management fees, which totalled $105m, down slightly on the previous year's expenditure ($178m over 2002-03). Total income increased to $154m, with the increase driven mainly by a large increase in dividends received from $39m in 2002-03 to $58m in 2003-04.
Income and expenditure of venture capital vehicles
Venture capital funds used various valuation methods. The Australian Venture Capital Association Ltd method was most frequently used, with 103 vehicles using this method, followed by book value/cost (39) and directors (32) valuation methods.
Valuation methods used by venture capital fund vehicles
Of the $3.1b that had been invested in the 909 investee companies (deals) at June 2004, $465m was invested in new projects during the 2003-04 financial year (down by $7m or 1% on 2002-03), with additional investments in existing projects of $162m (down $32m or 16%) (see table 8 for more details).
Number of deals by age of investee company
The preceding graph indicates that the number of deals by age of investee company in 2003-04 is in similar proportions to that recorded in 2002-03. The majority of deals remain in the 2 to 4 year category (56%).
Value of investment by investee stage
See paragraph 11 of the Explanatory Notes for a definition of the venture capital stages referred to in the above graph.
While investment as at the end of the financial year continues to be predominantly at the expansion stage, with $1.2b or 38% of total value recorded for the 2003-04 survey, expansion stage investment has declined significantly for the second consecutive year. During 2003-04 this was due to significant exits at this investment stage.
Management related exits maintained its position as the next most significant stage, with 30% of total investment in 2003-04. The more developed stages of investment such as management related exits, late and turnaround are higher than 2001-02 levels, while less developed stages, such as seed and early, have declined from the 2001-02 levels. See table 12 for details of investment by investee stage.
Percentage of investee company owned by venture capital vehicle
Venture capital arrangements typically do not involve a level of controlling equity by a single venture capital vehicle in investee companies, with most deals having less than 40% ownership by any one investment vehicle, as the above graph illustrates. However, it is worth noting that more than one fund manager may invest in the same investee company. For example, an investment vehicle manager may invest at the seed/start-up stage and receive 10% of the business and another investment vehicle manager could arrange the next round of funding and also receive 10% of the company.
Value of investment by number of investees
The above graph shows the distribution of value of investment placed by venture capital managers in individual investee companies. Most deals attracted less than $10m from any one investment vehicle and the proportion receiving less than $1m has been steadily increasing over the past three survey years. The number of investees receiving at least $20m is the only category to decline, mainly due to some large deals being exited in 2003-04.
PERCENTAGE OF INVESTMENT VALUE BY LOCATION OF INVESTEE
The above graph indicates that most of the venture capital funds continued to be invested in investee companies with head offices in NSW and Victoria (both states with 33% at June 2004). Table 9 shows that $2.1b was invested as at June 2004 in these two states in 524 investment deals. This compares with investment of $2.3b in 527 deals for 2002-03 in these two states. Victoria (down $202m, or 16%) declined significantly after two consecutive years of strong growth, mainly due to significant exits by investee companies located in Victoria during 2003-04. New South Wales stablised its position after a strong decline in 2002-03. Overseas investment remained significant and relatively steady over the survey years.
percentage of total investment by industry of investee
Venture capital investment was undertaken in investees in a wide range of industries and activities. Of the total value of $3.1b invested, Manufacturing and Utilities continued to be the predominant industry of investment, with investments at the end of the year of $810m (26% of the total). There were decreases recorded for Trade and Accommodation (down $138m), Agriculture and Mining (down $118m) and Health and Other Services (down $48m). Transport and Communication (up $109m to 19% of total investments) increased significantly in absolute terms. See table 10 for details of investment by industry.
percentage of value of investment by activity of investee
When analysed by activity, as defined by the Standard and Poors Activity Classification, the Manufacturing and Transport related activities attracted the largest share of investment, with $1,103m or 36% of total investment as at the end of June 2004. Significant exit activity in these industries resulted in total investments falling significantly in 2003-04 (down $437m, or -28%) after steadily growing in relative terms over the first four years of this survey. Partially offsetting this fall were increases for Retail, Services and Real Estate (up $129m, or 18%) and Biotech, Pharmaceuticals and Health (up $95m, or 30%).
This page last updated 20 June 2006