SUPPORT | November 2, 2020

Supporting Angel Investment: An Australian Regional Approach

Photo Credit: Photo credit: That Startup Show, WisdomX - Startup Insights, Jun 21, 2020

This post is part of a special entrepreneurship policy series for Global Entrepreneurship Week (#GEW2020). Curated in partnership with the Startup Nations policy community, these articles seek to highlight how public servants can remove barriers to entrepreneurs, by highlighting examples of policy approaches from around the world.

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Results in an ecosystem are all about the combination of different factors.  In Australia's state of Victoria, and its capital city - Melbourne - one key factor has often been support from LaunchVic.

Established in 2016 by the state government, LaunchVic is an independent agency charged with developing the startup ecosystem.  Over its four year trajectory, Victoria's startup agency has made headlines globally for its effective initiatives in favor of Victoria’s startup infrastructure and entrepreneurs.  

As a dedicated agency, it has enjoyed key features, such as being more nimble and being able to take bit more risk than is usually the case with government. Another aspect that has enabled the agency to have a positive impact on the region's entrepreneurial economy is its overall approach to ecosystem building. Instead of investing directly in startups, LaunchVic defines its role as enhancing competition, collaboration, and quality in the ecosystem as a whole, and advocating for the sector with the help of startup founders, entrepreneurs and investors, corporates and universities.  As such, its focus has been on investing in programs that help startups to scale their businesses. 

For example, in 2019, LaunchVic launched a successful program that supports angel investor networks in Victoria.  To learn more details about this approach, we interviewed the CEO of LaunchVic, Dr. Kate Cornick.

 

GEN: What metrics or data have informed this approach to widen the pool of early stage capital?  

Dr. Cornick: We are a member of Startup Genome, which provides us with an annual assessment. For the angel investor networks project in particular, data on raising investment capital showed we haven’t performed as well as we could, so we developed programming to drive an improvement in early stage investing.  For example, we’re supporting six different angel networks in Victoria; we’ve launched four new ones since mid-2019; and we’re working on a Series A venture fund.

 

GEN:  Before this program, did LaunchVic experiment with other policy levers to increase the level of investment?

Dr. Cornick:  What we did previously was angel education, but we had not done anything specifically to raise the level of angel investments.

 

GEN:  We are aware that succesful government approaches often require carefully designed policy. Can you tell us how you went about the policy design process? 

Dr. Cornick: Having discovered from Startup Genome’s deep-dive analysis that our seed and Series A was not very strong, we asked Professor Josh Lerner for help.  One of the things he recommended was that we look to increase the number of angel networks by supporting their operation.  We went to people with angel investing experience and helped them prepare to formalize networks.  Four of these are relatively new, but we’re aware that they are already making investments. 

One of the things about Melbourne is there’s a good supply of startups looking for capital – we do have good quality startups and demand for capital – so these new angel networks don’t have to scramble to find good companies.  It’s more about providing an avenue for investors who don’t have experience investing in startups to learn the process as part of a group.

The entire process until launch of the program lasted about six months.  We began planning the program in 2018.  In Q1 2019, Prof. Lerner conducted in his study and reported his recommendations. In Q2 we designed the program and worked through budgeting.  Because we’re independent, we aren’t encumbered by bureaucracy and were able to move quickly from planning to approvals. 

 

GEN:  This is something that hasn’t always worked in other locations.  Sometimes governments have crowded out angels. In other cases, having too many networks leaves them to cannibalize each other with angels tripping over each other for quality companies.

Dr. Cornick:  Yes, absolutely.  In Melbourne, we only had two angel networks to begin with.  But when we looked at peer ecosystems, ecosystems of a similar size and density, they typically have about 15 angel networks.  We have about 2,000 startups in Victoria, but our two angel networks were only investing in about 10 companies per year each.  So, there was a lot of demand for new investment.  We were conscious of avoiding them cannibalizing each other – so, they’ve taken different approaches, targeting different sectors and different sorts of investments.

 

GEN:  Are there key implementation elements of the effort that you think made a difference?  For example, the involvement of other actors?

Dr. Cornick:  We have very good relationships with various stakeholders – and continually interacted with those angels and the two angel groups in our community.  I think that while implementation does matter, it’s also about knowing the stakeholders’ perspectives and understanding the ecosystem deeply to know what intervention is needed when.  For example, if we had made the investment in angel networks four years ago, we probably wouldn’t have had the supply of high-quality companies that we have now – timing is critical.

  

GEN:  Where did the funding come from for this program?

Dr. Cornick:   Funding is entirely from government.  But, we’ve got flexibility. While we have to report on what we do, we are free to choose how to approach the problem.

 

GEN:  Were there any unexpected or unintended consequences of the program? 

Dr. Cornick:  It’s still too early to tell in terms of our angel networks but we do see unintended consequences of our work.  We’ve supported more than 150 programs across our ecosystem.  Some have done outstandingly well and some haven’t done well.  But, we’ve learned a lot from these challenges.

 

GEN:  What’s your path forward for measuring effectiveness? Is that built into the process?

Dr. Cornick:  We measure the effectiveness of the angel program by looking at how much capital is invested and how well those companies do.

Another metric is how well each group is growing – each group has a set of targets for their number of members.  Some are quite small and others are larger and it depends on the approach that each takes, so we take a bespoke approach to each angel network in determining whether they’re looking for, for example, 20 angels to be part of their network or 200 angels to be part of their network.  That goes to their business plan and long-term sustainability.  We’re very interested that they do become sustainable in the long term.

 

GEN:  Are the angel networks allowed to invest in companies that are outside Victoria?

Dr. Cornick:  Yes, absolutely.  They do have targets for how many local companies they will support, but they can decide to support additional companies that are inter-state or overseas.

We want these angels to invest in great companies that are going to grow their wealth because if they receive good ROI we believe they will continue to give back to our community.  So, we don’t want to restrict them to investing only in Victoria.  We let the market deliver.

 

GEN:   Do you expect to re-fund these networks based on performance?  That is, will there be a grant round 2?

Dr. Cornick:  We don’t expect to re-fund them – they all have business plans that are to see sustainability.  Having said that, we have re-funded other programs in the past and we are always open to making sure that people doing good work in the ecosystem can continue doing that good work.

That isn’t to say we wouldn’t look at conducting another grant round to form yet more angel networks.  But if we’re to do that, we’d be looking to establish networks in specific sectors because a lot of our angel networks are generalists – for example, some are helping women founders – but we don’t have many dedicated to investing in specific industries.

 

GEN:  Do you think this approach would be effective in other places – elsewhere in Australia and also internationally?

Dr. Cornick:  Absolutely.  Time will tell how successful we are, but if other cities/ecosystems have challenges with their investor community this is a very sensible intervention to make because at the end of the day we all need to be increasing our seed capital.

But it does depend on the needs of the ecosystem.  Some have different problems than we did.  I’ve spoken with leaders in other ecosystems who have more angel investors than there are viable seed-stage companies to invest in.  That’s not the problem we had.  Ours was a growing number of high-quality seed companies and not enough growth capital.  So, if that’s the challenge, then this is a very repeatable policy intervention.

One of the beauties for us is we managed to get very strong ROI up front.  We’ve invested about AUS 1.2 million in funding the operations of these angel network and in return the networks have unlocked over AUS 10 million of private seed capital.  So, it’s a very nice leverage for governments to unlock local capital.

 You do need to understand your ecosystem.  In Victoria we have a sizable high net worth community.  We have a lot of people with the capacity to invest.  If you’re in a city without a lot of high net worth people, then maybe this wouldn’t be the appropriate intervention.

 

GEN: Where can members of the Global Entrepreneurship Network learn more about this approach?

Dr. Cornick: We published a report of best practices for angel networks on our website, which includes Prof. Lerner’s and our analysis, and the recommendations of our local angel networks..  

 

Cristina Fernández focuses on integrating policymakers into startup ecosystems across the world, creating platforms for them to exchange ideas… About the author

Peter focuses on building the Global Entrepreneurship Network's capacity to impact entrepreneurship ecosystems around the world. For the… About the author