Last week’s Victorian State budget committed over $186M to the startup sector, in recognition of the importance that startups will play in the economic recovery of the state.
The most interesting is the Fund of Funds — the Victorian Startup Capital Fund (VSCF), which appears will invest alongside qualified VCs into startups. The fund is launching a raise of $60M of institutional, family office and sophisticated investor capital to be invested alongside the Government’s $60.5M stake to create a fund of $120M. These funds will be leveraged via VC’s into startups, which should have a catalyst effect of releasing up to $180M of funding into startups.
We would hope that the fund is targeted at pre-seed and seed-stage capital raises for Victorian startups, as this is the most difficult stage of capital raising for startups. Later stage funding is well serviced by existing VC’s and family offices for those startups who can show significant traction.
When we discuss early-stage investment with new angel investors we talk about ‘staying in your lane’ by investing in sectors in which the angel investor has particular sectoral knowledge. Everything looks new and interesting and easy to disrupt in industries that you have little or no knowledge about.
LaunchVic and the State Government have previously highlighted MedTech, SportsTech, EduTech and FinTech as areas of focus. We believe that adding SmartEnergy to this mix, to support the State’s net-zero targets and encourage Victoria’s place in the National Hydrogen Strategy would be ideal if the fund focuses on building the sectors where Melbourne has global competitive advantage, rather than spreading the fund thinly across all sectors.
VC Fund of Funds used to successfully grow startup ecosystems and realise economic gains for investors include Israel’s US$150m Yosma FOF Program (1993), New Zealand’s $195m Venture Investment Fund (2002) and Canada’s US$303m Venture Capital Catalyst Initiative (2018) of US$303 million. The Victorian fund is modest in comparison to these, and one hopes that this is but the first step in providing more capital support to Victorian Startups. If we are to be globally competitive in the ever-evolving digital world, then our startups deserve the support that other jurisdictions provide.
The fund is due to launch mid-2021 — this may be too late for some startups that are struggling post-covid, however, it is certainly a welcome boost to the ecosystem.
Venture Growth Fund
The Victorian government is also set to invest $25.7 million directly into the state’s startup ecosystem, via a new venture growth fund.
This fund structured as a loan will provide non-dilutive startup funding to startups. No details have yet been released on the fund, however one hopes that it is not designed to saddle the startup founders with large debts — the best practices here would be to provide non-recourse loans backed only by the startup and not the founders personal wealth.
The criteria for the loan is not yet defined, except that it is targeted at revenue-generating startups.
On the topic of loans, the Victorian Govt will also provide a facility to allow startups to draw forward R&D tax credits, with a low-interest rate. This is a good solution to smooth out cash flows for pre-revenue angel-backed startups and if managed carefully it can provide the startup needed funding to reach milestones necessary to launch the next funding round.
All in all this year’s state budget is the best we’ve seen in terms of startups funds and a great initiative to bridge the funding gap that many Victorian startups face. A nice way to round a tough year for so many entrepreneurs.
You can read more detail about these initiatives on LaunchVic’s website.