Steering clear of tech VC fads in Australia, Asia

Venture capitalists take a balanced approach

Unlike other markets where venture capital firms may actively chase investments in sectors perceived to be "hot," Australian firms tend to steer clear of fads in technology or other industries, say longtime observers.

Australian VC firms generally end up spreading their investments across different sectors or industries, with few firms specializing in just one area, said Michael Quinn, CEO of Innovation Capital, a venture capital firm in Sydney. Instead, Australian venture capital firms generally look to invest in companies with strong fundamentals, regardless of their specific business focus.

"We actually go out of our way to make sure we don't get caught up in fads," Quinn said, noting that industry trends often change before investors have an opportunity to exit, hurting the return on their investments.

Australian venture capital firms also tend to manage smaller funds than in the U.S., with Australian funds seldom exceeding US$200 million. Because firms aren't under pressure to invest larger amounts of money, this means that deals are smaller -- frequently less than $5 million -- and partners in the firms can be more "hands on" with the companies in their portfolio, he said.

But that means Australian startups can find it tough to raise B and C rounds of funding, as fewer firms are interested in doing deals worth $10 million or more.

The venture capital industry in Australia is going through a period of consolidation. Investor interest in venture capital funds fell during the financial crisis and has been slow to bounce back, Quinn said, citing the example of superannuation funds that took heavy losses during the downturn and are now being more conservative in their investments.

Even so, the flow of potential investments that Australian venture capitalists see on a daily basis remains strong. Quinn's firm typically sees three deals per day, which tracks the firm's historical average.

More broadly outside the U.S. and Europe, venture capital firms in Asia have widened their investment focus to include different types of startup companies, as most of their attention remains focused on high-growth markets, including China, India and Southeast Asia.

During 2008 and 2009, venture capital firms generally shifted their attention from the Internet to other investment areas, such as clean technologies and biotech, said William Bao Bean, a partner at Softbank China & India Holdings, an early stage venture capital firm.

"The Internet wasn't really that hot last year or the year before," he said, noting the range of investments by venture capital firms are typically "more balanced" than before.

Where firms have continued to invest in the Internet, there has been less interest in online advertising and digital media startups as investors have turned their focus to e-commerce, online games and education companies, Bean said.

Most venture capital firms in Asia are focused on large deals, which typically involve investments in mature companies. As a result, there's a hole in the market, with a shortage of investors interested in smaller investments that involve early stage companies, he said.

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