Incubators ‘must produce results’

Two of our most seasoned and respected technology investors have delivered a wake-up call to the local sector.

Craig Blair and Daniel Petre of AirTree Ventures. Picture: James Croucher

Two of the nation’s most seasoned and respected technology investors have delivered a wake-up call to the local sector, warning that the growing number of firms nurturing start-ups must produce quality companies that generate strong revenues and employment.

Daniel Petre and Craig Blair, who together have built almost 25 technology businesses over the past 15 years, said they were excited by the prospect of more than $1 billion in venture capital being raised this year by funds looking to invest in local and international start-ups.

But they warned that the more than 30 start-up incubators and accelerators that had opened in Australia in recent years needed to do far more than simply generate “energy and enthusiasm’’ about a new local technology ecosystem.

“There is going to be a moment of truth for incubators and accelerators — how many quality companies did you produce? It is great there is energy and enthusiasm and getting young people in, but at the end of the day it has to produce companies that are hiring a lot of people and generating lots of revenue,’’ Mr Petre, a former Microsoft executive and founder of the Packer family-backed internet firm ecorp, told The Australian.

It comes as their local venture capital firm AirTree Ventures is preparing to formally announce the details of its second investment fund, which is expected to be worth over $200 million. Importantly, it will be backed by some local superannuation funds as well as high-net-worth investors. AirTree invests in businesses underpinned by software, with a bias towards marketplaces, e-commerce, and firms disrupting health, education and financial services. Its first fund two years ago raised $60m, which is now invested across 14 companies.

Mr Blair, a former managing director of Expedia Australia, stressed that AirTree had always been a strong supporter of local accelerators and said he and Mr Petre were simply issuing a polite “reality check’’ for the sector.

“We are spending a lot of time with accelerators. We want them to succeed. But this whole ecosystem is fragile. We all want it to succeed so Australia becomes an innovative nation. But we need to focus on metrics. This is serious,’’ Mr Petre said.

“Because we have been through two crashes, we know how this party ends if you don't focus.’’

A number of Top 100 ASX companies have established accelerators, which nurture start-ups by providing co-working spaces, connections to larger firms and seed capital.

Muru-D is the start-up accelerator backed by Telstra, while Myer family Investments (MFI), the holding company for the Myer family’s investment portfolio, has invested $5m in Sydney start-up accelerator Blue Chilli.

Blue Chilli takes shareholdings of up to 30 per cent in local start-ups in exchange for seed capital, creating the technology product and access to a start-up development program. Sydney-based Fishburners is a community of co-working, events, training and accelerator classes for rising start-ups.

At the same time, a range of companies including AirTree, Square Peg, Blackbird, Thorney Investment Group, One Ventures and Carnegie Venture Capital and a number of smaller firms have been raising hundreds of millions of dollars for new funds to invest in the technology sector. While Mr Petre said the value of funds pouring into the sector was a “good sign’’, it was questionable whether the Australian ecosystem could absorb the money.

“There is no question there is money going into some funds that has a very high probability of blowing up, because some of the people running those funds have never invested in venture capital successfully or start-ups successfully, or have any proxy by which they could be a decent bet,’’ Mr Petre said.

“You see guys raising funds and they are very smart ex-Aussie equities guys, or ex-investment bankers. But they have no domain experience. Now they might pull it off. But it is so bloody hard to do this.’’

There have been growing calls for Australian super funds to invest more in the local venture capital industry, but the funds argue they have been hamstrung by the standard risk-return model and their investment mandates. Last week Thorney Investments founder Alex Waislitz said the lack of super investment in VC was a “critical flaw’’ in the local technology ecosystem, while Square Peg co-founder Paul Bassat said it was “negligent’’ for funds with tens of billions of dollars in capital “not have some focus on disruptive new business models”.

While he declined to comment specifically on AirTree’s new fund, Mr Petre said: ‘’The good news is that super funds are starting to look at the sector again on a very selective basis.

“There are a handful of funds getting support from the super sector and it is up to those funds to show a return.’’

But he warned: “If those that are getting the support don't show a return, we have probably blown this up for another generation. It was in the late 90s the super funds were in this space and it blew up and they said, ‘Bugger this for a joke, we are out of here’.’’