June 10, 2015

Why invest in tech in Australia

1. Game-changing policy

Major changes to the Significant Investor Visa program were announced on May 15, 2015:

Whereby from July 1, 2015:

  • SIV investors must now invest a minimum of $500k into “eligible Australian venture capital or growth private equity fund, investing in start-up and small private companies”;
  • This is expected to increase to $1 million for new applications within 2 years;
  • At least $1.5 million in eligible managed funds or Listed Investment Companies that invest in emerging companies listed on the Australian Securities Exchange.

This is a “game-changer” according to BusinessInsider and many other sources.

For those that are not familiar, the SIV program has already delivered over $3.7 billion of foreign direct investment (FDI) into Australia (by way of over 750 granted SIV visas), with an immediate $2.5 billion in pipeline. (Dept of Immigration stats – www.immi.gov.au).

Going forward, it is estimated that if the growth rate of +300% p.a. in SIV applicants continue, Australia could well be on the receiving end of $15 – $45 billion of FDI inflow within 2-3 years.

If 10 – 30% of this FDI inflow are going to be channelled into early-stage venture capital, it’d be quite the catalyst to the current domestic industry – which saw *only* $516 million in nation-wide venture capital deployed during FY 2013-14.(According to AVCAL. *This figure includes a $250 million investment in a single deal – that of CampaignMonitor by an US VC firm. Excluding this, the indigenous industry saw only $266 million of capital deployed)

In other words, a likely 300% – 900% increase in a few short years.

 


 

2. Largest recipient of FDI from the world’s largest and (still) fastest-growing economy

That’s right. Australia is the largest recipient of foreign direct investment out of China – still the world’s fastest-growing major economy.  (China was also ranked by Forbes as the “world’s largest economy at $17.6 trillion on PPP terms” in Oct 2014)

AUS as #1 destination of Chinese FDI

No wonder the Chinese Premier Xi JinPing has nominated Australia as the first nation in the world to handle direct settlements of free-floated RMB trades from late 2015.

This coincides with the establishment of a Sino-Australian Free-Trade-Zone in the same timeframe, the first such FTZ between China and another major world economy.

Credit Suisse has commented on this trend thus:

“Australia is on the doorstep of the greatest wealth creation in three Centuries.”  (Credit Suisse in AFR, May 7, 2015)

 


 

3. Local Advantages

Australia has:

  • A highly skilled and educated workforce
  • One of the best rated education systems in the region
  • Great adoption and penetration of cutting-edge technology
  • Only Western country in the Asian timezone – great early test-bed for global expansions

Sydney / NSW has:

  • Larger GDP than Hong Kong, Malaysia or even Singapore
  • Largest state of Australia by population and GDP
  • Greatest concentration of finance, tech, and creative sectors
  • Most number of Fortune 500 company headquarters
  • Superb tech talent that is much cheaper than Silicon Valley
  • Most vibrant tech entrepreneurial community with ever-increasing numbers of incubators (Fishburners, StartNest, Tankstream Labs, Hub, etc) and accelerators (Pollenizer, StartMate, PushStart, Founder Institute, ATP, IgnitionLab, etc)
  • Greatest concentration of home-grown, globally significant tech brands, including: Atlassian; MYOB; OzForex; RealEstate.com; Freelancer.com; DesignCrowd; 99Designs; Canva
  • Greatest concentration of venture investor community in the country.

 


 

4. Hunger and pent-up demand among local investors for tech company floats on the ASX

  • Some recent public and backdoor listings of tech companies on the Australian Stock Exchange (ASX) has clearly demonstrated a level of investor hunger for tech stocks that is rarely seen on other public markets. In the last year alone some 20+ tech companies have floated on the ASX through backdoor listings (reverse takeover of junior mining companies), including foreign tech companies such as MigMe from Singapore and 1-Page from the US.
  • AFR_Record numbers queue up for backdoor listings on ASX
  • The ASX is one of the largest exchanges in the world, with $1.6 trillion in market cap (comparable to the Deutsche Bourse). Previously this exchange (and much of the national attention & wealth) into the “mining boom”, with large number of newly listed small-cap mining companies dominating the mindshare of most investors. Now with the mining boom definitively over (see below chart on iron ore prices – the most important commodity to the Australian economic for most of the past decade), investor attentions are turning into new directions.
  • Iron ore price trends_MacroBusiness
  • Some recent ASX tech floats of note include Freelancer (FLN), which on its IPO day recorded a peak of 520% on its IPO price of $0.50 (at $2.60, with an implied valuation of A$1.1 billion at the height of trading). This is effectively a price-to-revenue-ratio of 61 times at $18.3M estimated annual revenue, compared to 25 times for LinkedIn and 20 times for Google (prices as of at the time). Even the first day’s closing price of $1.60 is still 38 times price-revenue.
  • Freelancer share price on IPO day
  • On a PE ratio basis, the valuation seems even more incredible, given its paltry $470k of *estimated* annual profit after-tax:
    • PE at opening:  463x
    • PE at peak of trading:  2407x
    • PE at closing:  1388x
  • These ratios has led to commentary from the AFR that the IPO is “impressive but over-priced!“, but clearly it is not dampening some incredibly forward-looking and clearly very optimistic investors!

 

With the dissipating mining boom, ongoing foreign direct investment capital inflow, and still one of the world’s largest Superannuation savings pools (at $1.94 trillion or 4th largest in the world) and not enough good avenues to deploy all the capital, tech remains one of the most promising and buoyant sectors for investor demand in the Australian economy, and will be for the foreseeable future.