Journey into the young yet burgeoning space of venture capital, with VC leaders Leila Lee (BCom, BA 2008) and Nicole Small (BCom and BEng 2005; MBA 2010).
“We are seeing a few really important trends develop in Australia in the Venture Capital (VC) space,” says Leila Lee, Head of Distribution at Square Peg Capital.
“There is an increase in the number of ambitious tech companies being founded by exceptional entrepreneurs; there is an expanding talent pool in the tech sector which enables companies to grow locally; and there is a greater pool of venture capital than there has ever been to invest in high-growth tech companies.”
Katelyn Sharratt (BA 2014 and MIB 2018), Director of Innovation and Enterprise at Wade Institute of Entrepreneurship, sees the potential in the current dynamics. She observes Australia’s entrepreneurship ecosystem as being at a unique juncture, where there are a huge number of start-ups, but not enough VCs, which creates opportunities for VCs to be able to connect with lots of founders and really shape the ecosystem.
“Because the ecosystem is so young VCs still have the opportunity to be strategic, whether that means investing in female founders, medtech or elsewhere”, she says. “There's huge opportunity for VCs to influence where we can impact change”.
It’s an incredibly exciting time for the ecosystem - it’s now about unlocking that potential and getting the community to recognise venture capital as a legitimate asset class ripe with opportunity.
Jumping onto the Venture Capital Bandwagon
For Leila, the move into VC was a result of realising she had a fascination with technology, and from observing the gap in VC investments, over the course of a nearly decade-long career in Asset Management at Goldman Sachs.
She found herself particularly interested in the scalable nature of software tech business models and the high growth trajectory of successful companies, which were also often backed by VC early in their journeys.
“I was also becoming increasingly aware that in the tech sector, the successful companies were often dominating globally rather than just locally,” Leila explains. “So I was of the view that Australia needed to have our own tech success stories that achieved global reach, such as Atlassian and Canva, to be part of the future generation of value creation.”
Additionally, in speaking with Australian investors, venture capital was a small or non-existent part of their asset allocation. I thought it could be really interesting to be part of helping an industry grow.
Nicole Small, Investment Director at Rampersand VC, also lists technology-based companies as her organisation’s preferred avenue to pursue investment.
“We back founders who are creating data-centric, technology-based companies that improve everything from organic waste processing or e-commerce package deliveries, through to spatial computing and payments,” says Nicole. “Our founders are addressing the hardest emerging problems for individuals, companies, and societies.”
Women in VC
While it is still rare to see women as investment partners in VC, both Nicole and Leila are confident things are moving in the right direction.
“In Australia, VC is a new profession that is less than 10 years old,” Nicole explains. “And the pathways into VC have traditionally been through investment banks or successful technology founders, which are typically heavily male-dominated.”
However, as Nicole herself has proven, the pathways into VC can be more varied than that. A former strategy consultant for SEEK, she says that although her former and current roles are very different, the skillset and approach often prove to be a good fit.
“In VC, I am interrogating a start-up through the same lens that I would use when solving strategic problems,” she explains. “And similar to strategy consulting, I still assess and validate a company’s go-to-market strategy, their value proposition and target market.’
“As Investment Director, I use my experience to determine the problem to be solved and interrogate the proposed solution and its defensibility.”
She also believes the industry is aware of the lack of women in leadership roles, but that there are an increasing number of women moving through the ranks of VC firms. Like her, while many are not yet partners, they hold senior investing roles with VC firms.
“I am hopeful that in the next five years, there will be a woman partner in most Australian VC firms,” she says. “It may not bring parity, but it will show the industry is moving in the right direction.”
Leila agrees. “In fact, at Square Peg Capital, out of our 7 partners, 2 are women,” she explains. “Amanda Hjorring joined us in 2015 and made Partner in 2018; she is an operating partner, and Piruze Sabuncu joined us as an investment partner in 2020."
I would say that it is a wonderful industry for women and hope more get involved. I’d also really like to see more female founders of ambitious tech firms.
Nature of the beast
VC returns tend to follow a power-law distribution, where approximately 80 per cent of returns are generated by only around 20 per cent of the companies.
“For successful VC funds, it is the performance of a small number of outstanding companies that drive returns,” Leila says. “This contrasts with most other asset classes which follow a normal distribution.”
What this also implies is that a large number of companies don’t contribute to returns as they either deliver average performance or unfortunately fail. This is very normal for venture capital.
She further explains that VC firms tend to take significant minority positions in companies, for example 10-20 per cent of holdings, and have a board seat. “Whilst they can advise companies and be sounding boards for founders, they are ultimately backing the company management to lead and change strategy when things aren’t going to plan.”
“Additionally, many VC firms reserve capital to invest in the subsequent capital raises of their portfolio companies that are performing well,” she says. “So, an important decision VC firms have is whether to continue investing in a company.”
The Venture Capital Catalyst Program
How should investors evaluate their decisions then? Both Nicole and Leila are guest speakers for VC Catalyst, a specialist investor education program delivered by the Wade Institute of Entrepreneurship. VC Catalyst has been designed specifically to provide early-stage investors with the skills, knowledge and networks to develop an investment thesis to evaluate angel and venture opportunities.
The program intensive features a world-class selection of local and international VC experts, and includes 6-months of 1-on-1 mentoring.
“Raising capital is often a lesser-understood role at venture capital firms,” Leila says. “So I really enjoy being able to share my enthusiasm for the role and what it involves.”
Nicole adds that VC Catalyst is vital to supporting and growing the start-up ecosystem in Australia. “There is a lack of funding for early-stage companies,” she says. “I love the mission of the program to help educate and equip early-stage investors, and help close the gap.”
Katelyn says that what makes the VC Catalyst special is the program’s practical and experiential format, the access participants receive to Australia’s entrepreneurial and investor networks, and the way in which the program is tailored specifically for the Australian context.
“Our Australian ecosystem is still young, and in the nascent stages of its development,” she says. “VC Catalyst gives active investors the practical knowledge, tools and network to help them succeed in this unique context.”
“While VC Catalyst obviously supports investors to be able to make good investment decisions, I think the nature of our broader Wade community adds another element to that opportunity.”
A major contributing factor to the success of VCs is the founders. Here at Wade, we have a community which fosters the development of both sides of that coin, investors and founders.
To get the most out of the program, both Nicole and Leila have one major tip for participants: ask lots of questions!
“Early-stage investing is often hidden behind closed doors,” Nicole reminds us. “Unless you have worked in a VC role or raised numerous rounds of capital from VC firms, the process, strategies, deal-shaping and valuations will be unknown.”
Being a part of the VC Catalyst program is a highlight. I love the opportunity to share my investing experience and knowledge, and really enjoy the connection with other VCs and the opportunity to mentor participants.
The VC Catalyst is a specialist investor education program delivered intensively over a period of 10 days, over two 5-day sprints. It includes a blend of online and face-to-face components.
Apply today for the Autumn Program: 3-21 May 2021