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Special Article - Venture Capital Survey

• Investors have committed $5.0 billion to venture capital investment vehicles including $2.3 billion in commitments for future investments. Table 1

• The survey identified 100 active venture capital fund managers who were managing 127 surveyed venture capital investment vehicles. Table 14

• The value of investment in venture capital investment vehicles was $2.8 billion at 30 June 2000. Table 3

• The 127 venture capital investment vehicles reported investment in 651 investee companies. Table 7
• Of the $2.6 billion invested in investee companies, $684 million was invested in new projects during the 1999-2000 financial year, with additional investments in existing projects of $165 million. Table 1 and Table 5
• A total of 18,348 hours were invested in the investee companies by the venture capital managers during the year.
• There was venture capital investment in a wide range of industries and activities; the value of investment in finance and property being $560 million and manufacturing and utilities industry of $526 million of the total project value of $2.5 billion Table 8 and Table 9

• Venture capital investment is not about investing in private equity, it is an exercise in matching interests and personalities and combining a good idea with the financial resources to allow that good idea to flourish.

• There were 206 forms sent out to various Venture Capital organisations, this included AVCAL members, Venture Capital Guide 2000 participants, registered and operating PDFs and venture capitalists mentioned in the Venture Capital Journal who did not appear in any of the above publications. Table 14

TABLE 1. SOURCE OF FUNDS OF INVESTMENT VEHICLES - AT 30 JUNE 2000
	COMMITMENTS BY INVESTORS		DRAWDOWNS FROM INVESTORS		UNCALLED COMMITMENTS
	Active		Active
	Investment vehicles	Value	Investment vehicles	Value	Value
Source	no.	$m	no.	$m	$m
Residents
Banks	19	340	18	229	111
General government	6	120	5	60	61
Public trading enterprises	10	125	10	63	62
Private trading enterprises	29	358	28	221	136
Superannuation funds	51	1,783	49	895	888
Life insurance offices	9	183	9	92	91
Trusts	12	88	12	50	38
Funds of funds	20	336	19	183	153
Other	56	418	56	343	75
Not stated	18	199	18	199	-
Total resident	. .	3,950	. .	2,335	1,615
Non-residents
Superannuation funds	6	24	6	21	3
Other	27	1,010	25	293	717
Total non-resident	. .	1,034	. .	314	720
Total	127	4,984	127	2,649	2,335
The table shows the number of investment vehicles which reported receiving funds from each type of source of funds. There were a number that access funds from more than one source. Therefore, the totals are not the sum of the individual components. The not-stated source has been used for those companies that could not give a source because their investors are shareholders. They were able to give a total paid-up capital, and this figure is used for commitments and drawdowns. The committed capital is the overall capital of the fund; the drawndown figure is the amount of money that has been called on from the investors and in most cases passed on to investee companies or used for management expenses.

TABLE 2. PROGRAM PARTICIPATION, by Investment Vehicles - 1999 - 2000
	Active Investment vehicles	Assets
Program	no.	$m
Pooled Development Fund	48	569
Other Government programs	7	91
None	72	2,130
Total	127	2,790

• 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 develops further, and demonstrates a product and market, full commercialisation is the next step. 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 usually 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;

• finally, 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.

• 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 have a small number of highly trained staff. With many approaches there may be 5 or 10 that are investigated thoroughly or perhaps due diligence undertaken. 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.

• There are a number of reasons why such a large number of these proposals do not gain funding; it may be personality; it may be they have overvalued their business or the perceived market for their product; or it may be they have taken their proposal to the wrong investment manager; some venture capital seekers apply to many investment managers.

TABLE 3. BALANCE SHEET OF VENTURE CAPITAL INVESTMENT VEHICLES - AT 30 JUNE 2000
	Active Investment vehicles	Value
	no.	$m
ASSETS
Resident assets
Cash and deposits	87	310
Debt securities	25	212
Listed equity	40	392
Unlisted equity	105	1,351
Other VC funds	6	67
Other equity	8	56
Other financial	53	75
Non-financial	19	12
Total resident assets	. .	2476
Non-resident assets
Unlisted equity	23	198
Listed equity	9	74
Other	5	41
Total non-resident assets	. .	313
Total Assets	. .	2,790
LIABILITIES
Borrowings	9	30
Other	67	80
Total liabilities	69	110
NET ASSETS
Total net assets	. .	2,680

• The value of assets shown in this table does not necessarily reflect market value. Generally, it reflects the value of the original capital invested. Investments in unlisted equity are illiquid, with the exit process the only opportunity for a real valuation.

• ABS has imputed a domestic balance sheet for cases where a local agent of a global venture capital fund manages, but does not legally own, the investment.

• The net asset figure is not a reflection of the total capital that has been drawndown. Amounts drawdown are also used for management expenses of the investee company.

TABLE 4. SELECTED INCOME AND EXPENDITURE OF VENTURE CAPITAL INVESTMENT VEHICLES - 1999 - 2000
	Active Investment vehicles	Value
	no.	$m
Expenditure
Management fees	76	57
Performance fees	10	52
Interest payments	11	3
Other outlays	67	42
Income
Interest receipts	70	34
Other inflows	44	148

TABLE 5. INVESTMENT BY VENTURE CAPITAL INVESTMENT VEHICLE IN INVESTEE COMPANIES - 1999 - 2000
	Active Investment vehicles	Value
	no.	$m
Investments at beginning of year	. .	1,884
Additions to value during year
New projects	82	684
Follow-on investments	48	165
Unrealised gains in investee companies	50	245
Exits and other decreases in value
Trade sales	21	137
Initial public offers	13	353
Buyback	4	8
Write-offs	13	45
Investments at end of year	127	2,480

• This gives us a view of the market whereby the 100 investment managers operated 127 funds.

• After some enquiries it was established that the write offs for the 1999-2000 year were investments entered into in a previous year.

TABLE 6. INVESTMENT VEHICLES, by Type of Legal Organisation - 1999 - 2000
	Investment vehicles	Assets
Legal organisation	no.	$m
Listed company	18	565
Unlisted company	59	780
Trust	45	1,366
Other	5	80
Total	127	2,790

• 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.

• Buyout (LBO/MBO/MBI): a fund investment strategy involving the acquisition of a product or business, from either a public or private company, utilising a significant amount of debt.

TABLE 7. LOCATION OF INVESTMENT
	Investee companies		Value
State/Territory	no.	% share	$m	% share
NSW	245	37.6	1,164	46.9
Vic.	204	31.3	598	24.1
Qld	43	6.6	210	8.5
WA	66	10.1	137	5.5
SA	16	2.6	46	1.9
Overseas	56	8.6	284	11.4
Other	21	3.2	41	1.7
Total	651	100	2,480	100

• The figure shown for other includes Tasmania, Northern Territory and Australian Capital Territory.
• The location was determined by using the post code of the head office of the enterprise.

TABLE 8. INVESTEE COMPANIES BY INDUSTRY - AT 30 JUNE 2000
	Investee companies		Value of investment
ANZSIC Industry	no.	% share	$m	% share
Agriculture & Mining	84	12.9	167	6.7
Manufacturing & Utilities	149	22.9	526	21.2
Construction	25	3.8	305	12.3
Trade & Accommodation	66	10.1	212	8.5
Transport & Communication	106	16.3	373	15.0
Finance & Property	142	21.8	560	22.6
Government Services	79	12.2	338	13.6
Total	651	100	2,480	100

Download the above data in Microsoft Excel format...

TABLE 9. INVESTMENT BY ACTIVITY - AT JUNE 2000
	Investee companies		Value of investment
Activity	no.	% share	$m	% share
Manufacturing/Transport	193	29.6	686	27.7
I.T., Media, Electronics, Communications	262	40.2	884	35.7
Retail, Services and Real Estate	109	16.7	487	19.6
Biotech Pharmaceuticals & Health	63	9.7	196	7.9
Energy	24	3.7	226	9.1
Total	651	100	2,480	100

Download the above data in Microsoft Excel format...

GRAPH 10. PERIOD OF INVESTMENT IN THE INVESTEE COMPANY (NUMBER)

GRAPH 11. PERIOD OF INVESTMENT IN THE INVESTEE COMPANY (VALUE)

GRAPH 12. PERCENTAGE OF INVESTEE COMPANY OWNED BY VENTURE CAPITAL VEHICLE

GRAPH 13. CURRENT VALUE OF INVESTMENT BY VENTURE CAPITAL INVESTMENT VEHICLE IN INVESTEE COMPANY

TABLE 10. WEIGHTED AVERAGE FOR INTERNAL RATE OF RETURN (% pa) 1999-2000
	Weighted Average	Low	High	No of investments
Current Stage
Seed	35	12	316	15
Early	55	-100	418	19
Expansion	134	-41	805	65
Late	75	2	373	21
Turnaround	9	-30	28	6
LBO/MBO/MBI	50	-72	100	22
Overall	88	-100	805	148

• weighted average means the internal rate of return (irr) has been weighted against the asset size and then averaged.

• the figures under "low" and "high" are the minimum and maximum rates of return reported on deals by fund managers.

• Fund managers were able to provide an irr for 148 (of the 651) deals. Where the venture capital investment vehicle had exited the investee company, the rate of return was generally available; some other fund managers calculate the expected rate of return on a regular basis, using their estimates of the sale price of the investee company were they to exit.

TABLE 11. WEIGHTED AVERAGE OF DAYS SPENT PER MONTH BY INVESTMENT MANAGER BY ACTIVITY OF INVESTEE COMPANY 1999-2000
	Weighted Average	Low	High	No of investments
Activity
Manufacturing,Transport	4.4	1	20	139
Retail & Services	5.2	1	30	78
I.T. Media, Electronics, Comm.	3.6	1	30	168
Biotech., Pharmaceuticals	2.3	1	28	51
Energy	2.5	1	10	17
Overall	4.0	1	30	453

• weighted average means the days spent has been weighted against the asset size and then averaged

TABLE 12. NUMBER OF INVESTEE COMPANIES BY NUMBER OF DAYS SPENT BY INVESTMENT MANAGER 1999-2000
	Less than 1 day	1 day	2 - 5 days	Greater than 5 days
Stage	no.	no.	no.	no.
Seed	11	14	20	8
Early	59	40	58	16
Expansion	68	51	107	22
Turnaround	7	8	6	3
Late	43	24	28	1
LBO/MBO/MBI	10	28	12	7
Total	198	165	231	57

TABLE 13. WEIGHTED AVERAGE OF NUMBER OF INVESTEE COMPANIES BY NUMBER OF DAYS SPENT BY INVESTMENT MANAGER 1999-2000
	Weighted Average	Low	High	No of investments
Stage
Seed	3.1	1	28	42
Early	5.4	1	30	114
Expansion	4.4	1	30	177
Turnaround	2.3	1	30	17
Late	2.2	1	10	53
LBO/MBO/MBI	3.9	1	10	47
Overall	4.0	1	30	453

• usually investment in an innovative business in its early stages;

• investment not only of money but also of skills and time;

• short to medium-term investment with the potential of high capital gains on divestment (rather than long-term investment involving regular income streams).

• investment not only of money but also of skills and time;

• usually investment in an innovative business in its early stages;

• short to medium-term investment with the potential of high capital gains on divestment (rather than long-term investment involving regular income streams).

TABLE 14. SURVEY RESPONSE
	INDUSTRY ASSOCIATION		OTHER		TOTAL
	Investment managers	Investment vehicles	Investment managers	Investment vehicles	Investment managers	Investment vehicles
Response type	no.	no.	no.	no.	no.	no.
Out of scope	56	-	29	-	85	-
Nil	7	-	15	-	22	-
Operating in year	43	62	56	65	99	127
Total	106	62	100	65	206	127

• 16 had ceased involvement in venture capital or had been merged with another respondent;

• 56 were providers of services such as education, insurance, legal, accounting or executive recruitment. These respondents did not invest in venture capital projects directly; and

• 13 were introductory agencies who undertake selection and due diligence for venture capitalists and business angels, but do not themselves manage the venture capital investment.