TVP ponders

A Fishy Venture

2007-12-11T16:58:00.000+11:00

It is a good idea to encourage busy teams to take time away from the business to reflect on their strengths and weaknesses, and reassess priorities and objectives. At TVP we have tried different formats over the years, and often combine our navel gazing with some R&R in an offsite location. This November we decided to go to New Zealand to visit one of our portfolio companies (Eurekster, a leader in customised social search), and to do some fly fishing as we pondered over the state of venture capital downunder. Over the course of an eventful three days, there were some interesting lessons learned, which have relevance to venture capital investing........

1. Focus on a niche in a big market

NZ offers a huge variety of fishing types and locations. You can literally spend months chasing wild brown trout and rainbows in the lakes, rivers and estuaries of North and South Island. Whether you are a worm fisherman or a dry fly purist there is something for everyone. So you need to carefully chose your location and time of year to suit your fishing preferences. You can do some market research at Fish & Game New Zealand. We wanted to sight fish crystal clear rivers for the elusive brown trout ("salmo trutta" ) using dry fly or nymphing techniques. The region of Southland in the South Island offers world class fishing of this type with rivers such as the Mataura and the Oreti. We chose to set up base camp in Mossburn, a 2 hour drive from Queenstown, in the heart of this region with easy access to a wide variety of fishing to suit all skill levels. November is spring in NZ so the rivers are generally affected by some snow melt, and the weather can be unsettled. The trade off is that the fish have received less attention from visiting anglers since the season only commences in October and you gain first mover advantage.

2. Pick the right team

You need a balance of experience, skills, shared vision, and enthusiasm in any high performance team. Our team comprised Allan Aaron (newbie fly fisherman); Mike Zimmerman (reasonably experienced and on his 4th fishing venture to NZ); and John Murray (experienced with multiple ventures in NZ and Scotland). We quickly established the need for a local advisory board and recruited the talented Chris Dore. Chris offers a first class guiding service around Southland, and most importantly is full of enthusiasm and knowledge of the local conditions. If you are entering a new market you need this local expertise. Allan was also encouraged to do some background work on his casting skills, attending a course in Sydney prior to the trip. It's also worth checking out Sexyloops for some excellent online help on casting.

3. Be flexible and adapt your plans

We had planned our market entry for months and thought we had all the angles covered. However as the famous Scottish poet Robbie Burns once said:

The best-laid schemes of mice and men gang aft a-gley

We had not counted on external factors such as the NZ weather! Ideal fishing conditions are light winds, moderate temperatures, and a little overcast. Well, we had 3 solid days of cold, strong, north westerly winds blowing straight down the major rivers. This makes it very difficult to sight fish, and to cast upstream. There was also no insect hatch of any description and all the fish were lying tight and deep. Well you don't just give up! You change tactics - in this case we exploited Chris's knowledge of the region to pick out backwaters and sheltered spots; used weighted nymphs and shorter lines etc.

Roadblocks are inevitable in any new venture, and you have to use the team to figure a way round these on the fly. Offroad, heading for a secret spot in a river somewhere, we almost killed our venture with this unexpected mishap.

However good teamwork and a bit of heavy lifting enabled us to escape with nothing more than
a slightly dented ego for our inimitable guide.

4. Learn from your experience and try again

Although our venture was not a 10 bagger return (we only caught 3 fish), we all had a great time and learned much from the experience. Allan managed to catch his first trout on the fly, a lovely 3 pound brown. Like any great entrepreneur he has caught the bug, and will return with the rest of the team, in pursuit of the next big fish.

The charm of fishing is that it is the pursuit of what is elusive but attainable, a perpetual series of occasions for hope. ~John Buchan

AVCAL September 2007

2007-10-16T15:29:00.000+10:00

By Allan Aaron,

TVP Director

AVCAL Board Member

The Annual Australian Venture Capital Association (AVCAL) conference was held on the Gold Coast in Queensland last week. There were 700 odd (yes!) attendees the majority of whom came from the buyout/PE sector. AVCAL streamed the working sessions into early stage and late stage and I think about 170 people registered for the early stage. Of course, for most, its not about the working sessions - its about the networking and the cocktail party (and, of course, the dinner and golf). This event goes from strength to strength, I'll write a little about some of the highlights later but in the meantime, I've put up the slides from the presentation session that I chaired. We invited Jean-Bernard Schmidt from Sofinnova in France to present on the Global VC Scene. He is a very passionate and animated Frenchman (is there any other kind?). I thought he did a great job talking about the evolution of the VC industry, where we stand today and his thoughts on the future. Probably a little grim in some respects - as we know VC investment and valuations are well down and certainly not keeping pace with PE. J-B has a great background in VC and Sofinnova runs one of the largest VC funds in Europe. He started with Sofinnova in Paris in 1973 and 1981 he became chairman of Sofinnova Inc. in San Francisco before returning to Paris to head the Sofinnova group. Today he is managing partner of the firm and past Chairman.

Unfortunately, Bill Evans (Westpac Economist) ran over time and so our session started a bit late and also ran over time, so we didn’t end up with a lot of time for questions. Poor chairmanship on my part I guess.

Broadly, my introductory presentation presented some analysis of investment trends and tried to draw some conclusions from these trends. My overall conclusion is that Australian VC has the legacy of having commenced at a difficult era for venture capital (late '90's) and really needs some more time to demonstrate its performance. Trouble is that this is a very familiar refrain from the local VC community and I'm sure that the local LP's got tired of hearing this years ago. But I don’t think we are too far off demonstrating performance finally. There have been some good successes lately in the market in both the ITC and bioscience space and I think more will come.

I presented about a dozen slides which overviewed some local and global trends and presented some statistics that underpinned the performance of the venture industry in Australia vs our global peers. I thought it was important to understand the facts related to our industry’s relative growth, size and performance over the past few years. The slides can be seen at www.TVP.com.au/news and the following narrative may only make partial sense without them (and may have made no sense whatsoever when I gave the presentation).

The key observation I would make, and its almost a truism to VC’s in Australia as compared to VC’s in the USA who are only starting to recognise the fact, is that our industry, much more so than the later stage PE sector, is truly global. Our exits are typically international and our companies are competing in global markets. This requires us to think about new business models, affiliations, partnerships and forms of investment which probably could be regarded as additive to risk.

A second observation is that having come out of the doldrums following the tech crash in 2000, we’re now seeing renewed strength. I tried to identify some of the underlying drivers of this strength for the ITC sector. The trends have been reflected in strong M&A activity over the past couple of years, which has yielded some very exciting exits and valuations such as A&B’s recent Hitwise sale and the rumoured acquisition of Facebook for $10bn.

One of the identified trends is “exploding geographical markets”. The ITC industry in the Americas is growing at only slightly more than 1/3 the rate of growth as Asia-Pacific and the US share of global ICT spending will shrink to below 40% in 2009. in contrast, China’s share of world trade in ICT has grown ten-fold in ten years to US$330bn in 2004 and in 2006, China replaced France as the 5th largest spending ICT country and will be the third largest ICT spending country after the USA and Japan within the next two years.

It was interesting to compare where VC investment dollars are going? Software continues to dominate as it has for a couple of decades with communications and networking remaining particularly strong. Bioscience and other sub sectors of the ITC space also attract substantial investment interest. Interestingly, energy and cleantech in particular have seen the highest growth rate in VC investment but remain a relatively small sector overall.

Relative to the rest of the world, and relative to the size of our market and population, the Australian VC pool is very small. Would it be unfair to expect that as our market matures, Australian venture investment should approach, maybe half, that of Israel or Canada? All of the venture pools I compared remain dwarfed by the USA, which committed approximately $24bn to venture in 2005.

I presented some data on expectations for global investment by Venture firms and why are they investing outside their home countries? The data shows that non-US investors are more active and expect to remain more active global investors. Having said that, last year nearly 90% of US VC’s claimed to have some proportion of their portfolio investments in domestic businesses with overseas operations - primarily china and India and this was almost twice as many as last year. But, that proportion, for most US VC’s is fewer than ¼ of their companies.
The key reasons they are investing offshore were to get access to higher quality dealflow, they recognise the emergence of new entrepreneurs, they want to diversify risk and obviously access foreign markets. So, one interesting question to ask is if US and European VC’s with established track records in home markets are starting to invest in foreign markets, why shouldn’t Australian VC’s investing outside of the USA and Europe have an expectation of similar prospects of success?

In terms of funds raised, its clear that VC has little positive momentum. The disparity between PE and VC fund raising is stark. The average fund size for VC’s while by necessity smaller than PE due to deal size, remains, in my opinion, below the critical mass necessary for most VC’s to run a long term globally competitive VC firm. I think we are kidding ourselves if we think we can run globally competitive firms with funds less than $100m. I also think the recent IIF program relaunch will exacerbate this issue. This comment raised a few heckles from the audience (well, not really, but I think it did stir some of the Government folks a little). I'll discuss this in a future post.
Given the relatively small amount of VC dollars at play vs PE (probably about 1/10th), VC’s invest in about 1/3 the number of companies that PE firms invest in. Clearly we’re a lot busier – making a larger number of smaller investments.

The bulk of new funds were raised around 2000. In the VC space, many of these funds are only starting to mature around now again supporting my contention that we need a little more time to mature as an industry. As we know, we haven’t seen the payoff for this activity – yet.

But, as one leading local LP told me sympathetically recently
“more than two-thirds of Australian VC money was raised in “crash” vintages or is too early to produce results vs 25% for the USA”
” Vintage comparisons indicate “Aussie VC is similar to top quartile US VC”1

So, one conclusion I would offer to the LP’s in the audience is to hang in there and give the VC sector yet more time to prove that it can perform.