As value creators (EBITA maximisers) and exit planners, the latest venture capital (VC) trends should be on a CFO’s radar. Major transformation in the CFO’s role means articulating emerging trends to the Board for driving strategy is just as important¬†as their role of financial controller preparing financial results and forecasts.
The VC ecosystem has seen an unprecedented boom across the globe. For a CFO who is steering their organisation to either attract capital to grow and maximise the value of their business or prepare their business for sale, the latest Venture Capital Funding Report shows some interesting trends.
So, what type of returns are investors expecting, and at what stage of the business lifecycle are they investing?
A report by William Buck shows expected returns from capital funding investments is increasing, particularly for VC and angel investor groups. Their direct experience with transactions in the Australian market in 2018 shows the expected rate of return from capital funding investments by VC groups was between 30 per cent to 50 per cent, while the expected rate of return by angel investors was 35 per cent to 65 per cent.
As shown in the Pepperdine Capital Markets Report chart (above), there’s a clear correlation between the size of loan or capital and the cost of borrowing ‚Äì as the size of loan or capital increases, the cost of borrowing decreases.
Mark Calvetti, Director of Corporate Advisory at William Buck, says expectations depend on funding type, with earlier stage investments having a higher expected rate of return.
“There’s a wide range of investment returns depending on the type of investor and stage of investee business,” says Mark. “Angel investors are receiving the greatest returns, generally due to the greater perceived risk.”
In 2018, the top Australian deals were dominated by software and biotechnology, coinciding with global trends, which were led by healthcare and biotechnology businesses (39 per cent of target investments), followed by information technology (32 per cent).
“Most VC investments are seen in the seed, start-up or early stage businesses, with each VC investor making an average of two to five investments in a year and, typically, in the range of $1 million to $4 million, depending on the stage of the business being invested in,” says Mark.
However, there is an interesting change ‚Äì capital investment appetite, both in Australia and globally, saw a growing trend for mega-funds investing in late stage companies.
“There is a lot of VC activity globally,” continues Mark. “VC-backed companies raised approximately US$330 billion during the calendar year in 2018. In comparison, that’s around 55.7 per cent over the US$212 billion capital raised in 2017. There’s also a growing trend for mega-funds investing in late-stage companies, with late-stage rounds continuing to grow as a percentage of VC investments,” says Mark.
“Globally, the late stage rounds contributed 58 per cent of the dollar value in 2018, compared to 49 per cent in 2017. Interestingly, however, late stage rounds represented only seven percent of the total VC deals in 2018.”
In recent years, Australian private businesses are accessing more funding through Venture Capital: “Historical data shows there’s a continued trend in Australia, and globally, of a declining number of deals but an increase in average deal sizes, with the global median deal size reaching US$40 million.”
VC investments in Australia reached A$3.1 billion across 161 deals over the 2018 calendar year, with an average deal size of A$20 million. This is more than double the value of VC investment in 2017 of A$1.4 billion across 183 deals, with an average deals size of A$7.5 million.
Contrary to the small investment size appetite of a VC investor, Australia’s recent investments have been dominated by few large size VC investments in software and bio-tech.
Some of the top Australian transactions in 2018 included:
- Deputy ‚Äì a Sydney-based workforce management software company that recently raised US$81 million (A$111 million) in one of Australia’s largest Series B rounds;
- Clinical Genomics ‚Äì a US based bio-technology company specialising in colorectal cancer (CRC) diagnosis raised A$33 million in a Series B round, essentially in convertible notes.
Mark Calvetti says CFOs should be looking towards these industries for opportunities and assessing how they will impact their organisation.
“When it comes to accessing funding, the type and source of capital depends upon various factors relevant to the individual requirements of each lender type ‚Äì including stage of business, amount of funding required, expected rate of return, outlook of the business and other things such as the value-add of lender experience.”
These findings give CFOs a guide to managing those expectations and analysing various funding options.
What does this news mean for a CFO?
A CFO is no longer constrained to managing finance and cashflows. They must innovate when it comes to the finance function and the strategies they employ, to ensure continued profitable growth and to maximise operating margins and returns for their investors.
If a CFO is aware of the latest financial capital trends within their industry, as well as various types of investment options and/or exit options available ‚Äì including attracting funds from angel, VC or private equity ‚Äì they add a lot more value to the Board’s key decisions in meeting their business requirements.
Tracking VC trends helps a CFO two-fold. Not only does it allow them to keep tab on ways to fund future growth and maximise returns, it also provides guidance on changes taking place in the business landscape, including other competitors in their market.
“VCs generally invest in growth businesses with good management that provide innovative products and services that are capable of changing the landscape for an industry (eg. Afterpay, Zip, Uber, etc),” says Mark Calvetti. “Keeping abreast of trends in an industry, and where VC investors are targeting in your industry, will keep a CFO appraised of any disruptive change, which might possibly have a disruptive impact on an existing business, if they do not evolve,” says Mark.