According to Kara Frederick, one of the most successful venture capital funders working in the Australian market at present, the tech rout has taken the heat out of the market but don’t think investment in this sector is anywhere near done.
Frederick, who led the private to public transition for the tech unicorn Tritium, the global leader in EV charging infrastructure, says the energy transition is still the most exciting space relative to any sub-sector within venture capitalism at the moment.
Kara Frederick will speak at Tomorrowland 22 – register here
Right now, she says, we are experiencing a drop in risk appetite coming off from tech globally, which is not as good as it has been in the past. The furore has died down. But this isn’t necessarily bad news, Frederick says. Think of it as a correction of the market.
“It’s a much more rational place,” she says.
This is despite or maybe because of the new landscape that now includes: the highest interest rates in 40 years, the NASDAQ down 35 per cent this year – the largest decline since the dot com boom – and that next year valuations may bottom as we experience the greatest pull-back in tech valuation in a decade.
There’s still more investment now in Australia than we have ever seen, Frederick says.
“Ten years ago you would have a tenth of the amount of capital available than there is now. Now you have $10 billion of annualised capital employed, which only a few years ago was $2 billion.
“The quantum is still large in terms of dry powder.”
In the 2022 Budget, she points out, Australia introduced several initiatives to boost innovation and commercialisation, including $1.3 billion to the Medical Research Future Fund (MRFF).
The aim is to “shape global critical and emerging technology standards”, and $3.9 million over two years to “support women to pursue career opportunities in Australia’s growing tech workforce”.
That’s pretty good news.
This came off the back of a boom in Australian innovation over the past five years, which went up five times in total dollar value during that period, partly accelerated by a pull-forward of demand because of the effect of the pandemic on supply and risk.
The bad news is that there is still a huge discrepancy in gender, with female founders still wildly disadvantaged in funding. And that’s an issue that Frederick likes to lead on.
“We believe we are the only team that is consistently tracking (since 2020) and benchmarking (with US data) gender diversity data,” she claims.
So how can start-ups navigate these waters?
How innovation can be encouraged
But despite the government’s 2022 Budget investment towards innovation, “there’s still too much talk in politics and not enough action”.
If we compare the state of innovation in Australia to what’s going on in the US (Kara’s homeland) we can look for a roadmap by which we can catch up to our transpacific cousins.
The US recently passed a series of bills to supercharge innovation.
There’s the Inflation Reduction Act of 2022 that will invest approximately US$300 billion (A$467b) in Deficit Reduction and US$369 billion (A$574b) in Energy Security and Climate Change programs over the next 10 years.
Then there’s the CHIPS and Science Act that invests US$280 billion (A$435b) towards STEM (science, technology, engineering and mathematics), in particular clean energy.
Frederick reckons Australia should follow suit.
“The US recently passed three large bills that represent $1 trillion in the value chain. We need to see the Australian government do something directionally similar.”
And while an acute supply chain squeeze has been impacting the value chain over the past 12 months – particularly with semiconductors – said things are improving, but are still affected by lockdown policies.
According to Frederick, the two imperatives for Australia are decarbonisation and deglobalisation:
“Australia needs to bring more of the energy value chains on shore, which would de-risk the current supply chain squeeze.”
How do venture capitalists assess start-ups for funding?
At Tomorrowland Frederick will unpack some of the key metrics she and her peers use to assess investment potential.
Meanwhile here are some tips to attracting investors:
- The founders. Business is all about the people. Are you subject-matter experts? Are you iterative? Can you pivot and take market feedback into your business model to improve? That is the strength of dynamism without which you cannot move fast and create a competitive advantage.
- The product-market fit. Companies need to think about this from day one, and ensure your product offering satisfies a strong market demand. What is it about what you’re doing that you believe there will be a strong – and, importantly – global, demand for it? How can you give yourself appropriate time to meet that demand?
- The moat. Your company must have a defensible IP that makes it difficult for the next company with the same idea to beat you. It must be able to fend off competition and maintain profitability into the future. It must be set apart from its competitors to preserve its market share.