MARCH 16 2022

Published in the Australian Financial Review

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A rush of venture capital funds are fronting Aussie investors this week, with OneVentures and OIF Ventures joining Blackbird and Square Peg looking to collectively raise more than $2 billion for new tech-focused funds.

OIF Ventures is raising $100 million for its third fund – its second in a year – on the back of its success from its first $50 million fund, which will have paid out 3.5 times invested capital in cash to investors, with eight portfolio companies remaining, thanks to the acquisition of Instaclustr by NetApp late last week.

In good news for founders who want to buy themselves time before diluting their equity any further, at the same time OneVentures is making the case for its second venture credit fund.

The Dr Michelle Deaker-led fund is tapping investors to raise $150 million for its new fund, which is a lower risk, lower return product than a typical equity fund, and also generates a regular yield from interest payments.

It closed its first venture credit fund, which had a five-year investment timeline, in April 2019, but deployed all the capital quicker than expected.

“We now have 15 companies in the portfolio, and we’ve worked with many of the other VCs,” OneVentures partner and credit practice leader Nick Gainsley said.

“We see it as a complimentary form of capital. Side by side with equity, it’s way cheaper, about five times cheaper … and we’re seeing increased adoption and familiarity with the product in the market.”

Venture credit exists as a category because “banks just wouldn’t provide the money”, Mr Gainsley said. Banks like to see a company’s track record, or for a company to have assets to lend against, which does not fit with the start-up model.

OneVentures first credit fund provided loans to the likes of digital health tech company Eucalyptus, e-bike business Zoomo, Blackbird-backed company Hivery, Shippit and even a small group of listed companies such as LiveTiles.‍

“[Venture credit] gives you longer to run your business and hit certain proof points, at which time you can attract certain investors,” Mr Gainsley said.

“We also don’t set strict restrictions or covenants along the way. The banks may say every quarter that they want to know what rate a company is growing at, or they need them to maintain a certain amount of cash. But with a young tech business we know that’s really hard to predict.”

Like equity funds, venture debt funds also attract institutional and high net worth backers. Mr Gainsley predicted it would take OneVentures six months to raise this fund.

He would not reveal the yield the fund pays to investors, but said he expects “healthy returns” that are “not as high as VC, but toward that way”.‍

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Third OIF fund‍

The new funds being raised by OneVentures and OIF Ventures will swell the already large pools of capital available to local start-up founders, and reflects the ongoing positive sentiment about private market tech investing, despite the listed tech equities sell-off.

This, OIF partner Jerry Stesel said, was evident in the fund’s ability to raise the first $50 million of its fund in 24 hours.

“There’s a lot of activity in Australia and the sector doesn’t feel like it’s slowing down,” he said.

“We see 30 deals a week. It’s incredible to see, and the large unicorns like Canva and Atlassian are driving this flywheel faster, with people leaving to start their own businesses.”

OIF investors are predominantly made up of successful entrepreneurs, with the majority of founders of its portfolio companies tipping in their own cash.

The fund has four partners – Mr Stesel, Laurence Schwartz, Geoff Levy and Com Tech Communications’ David Shein – all of whom have previously founded and sold companies.

OIF’s portfolio includes edtech unicorn Go1, cyber security company Kasada and robotics start-up Advanced Navigation.

In the last year, it has had four exits (including sales to secondary funds), including Instaclustr, Assignar, XM Cyber and Eftsure.

The local VC likens itself to US fund Benchmark Ventures, which is renowned for its egalitarian approach to running its fund, and its choice to keep fund sizes small (at least by Silicon Valley standards).

“We could raise more money than we’re targeting. In fact, we could have raised more for fund one, and for fund two we targeted $75 million, but closed at $120 million,” Mr Schwartz said.

“But we consciously keep the fund size focused to spend quality time with the founders. We want to be able to talk to the founders daily, or weekly, and for them to know we’re available 24/7, be it helping on legal contracts or winning their largest customers.”

While its still early days for its second fund, OIF has already registered a 90 per cent internal rate of return and had one exit thanks to its position in XM Cyber.

One of OIF’s selling points to investors is its deep connections in the US market, helping companies with their US expansion plans and connecting them with US funds.

“Their support was key to us raising our first institutional capital round, which was a gateway to bringing on strong partners in the US and building out our business globally,” Instaclustr CEO Peter Lilley said.

Likewise, Go1 founder Andrew Barnes said OIF had added value on top of the capital provided, especially in thinking through strategic partnerships and modelling its entry plan for different markets.

OIF and OneVentures join Blackbird Ventures and Square Peg on the fundraising circuit, with the latter two funds raising $1 billion and $740 million-odd respectively.‍

Street Talk revealed late last month that Blackbird’s raise would be split across three funds – two focusing on new Australian and New Zealand investments and a third dedicated to follow-on investments. This follow-on fund will make up its largest pool of capital, accounting for $700 million of the capital raise, with a $1.3 billion hard cap.

In the first three months of the year, Australian start-ups raised at least $3.6 billion, according to Cut Through Venture statistics.

Average deal sizes are increasing, with seed funding rounds now averaging $7.5 million in value, up from $3.5 million last year. Likewise, the average size of a Series B rounds soared to $100.3 million – up 180 per cent on 2021’s $35.8 million average.

While both fund sizes and rounds are getting bigger, Mr Schwarz said OIF Ventures prefers companies that are not out to raise the largest rounds.

“The type of founder we’re looking to back isn’t just optimising for the largest round size, but are considering how much capital they need to get to the next milestone and looking at it through a capital efficient lens,” he said.