Domestic Institutions as Capital Allocators

Stoic VC

To dovetail from our previous release, the tech sell off has many investors running scared. The sugar rush of investing in the fintech darlings of the last ten years is giving their backers a hangover, as the business models prove to be unsustainable over the long term (particularly as inflation returns) and/or regulators start to take an interest as they reach critical mass. Many Software as a Service (SaaS) business valuations are being pressured by rising rates. However, there are other venture capital sectors that are not as volatile or fashionable, but are more enduring and valuable.
Life sciences & deep tech are non-software orientated venture capital. It is a long-term investment. It’s investing to where the future problems are (such as climate change, health, longevity, hardware tech, space) rather than simply automating present labour-intensive manual activities as software does. And it is often ‘socially good’ investing.
We’ve historically invested a large pool of our funds into university spinouts. These are often in complex sectors such as healthcare, hardware and climatetech. These innovations support us in our quest for longer, healthier lives, but have previously been less financially attractive in the short-term than software such as fintech (eg crypto and Buy Now, Pay Later), or SaaS automation. But this is reversing, as investing in something the world actually needs, rather than something it can be convinced it wants, is a long-term, sustainable strategy, with the potential for associated higher returns. These investments also meet the new cultural maxim… they are more ‘ethical’.
Superannuation funds in Australia are gargantuan thanks to Australia’s compulsory super arrangements. While they have significant and growing pools of capital to invest, they have historically avoided allocations to domestic venture capital, seeing it as a sector that lacks the depth they require. Superfunds need to invest well AND for the long term, to match the duration of their liabilities. That also means they are not all about the quick buck (whatever the quarterly league table writers might think). They can be patient and wait out the process of a startup growing to a growth investment, then maturing to a profitable global market leader. Logically, superfunds are a perfect fit for Australian life sciences investment.
At present, the Australian superannuation funds invest overseas for a lot of their long-term investments to diversify geographically in what are perceived as deeper markets, particularly for venture capital (principally into the US technology sector). But that doesn’t need to be the case (at least not to the same extent) if they take steps to invest in our local deeptech companies.
The research organisations we’ve invested in thus far have spent nearly $4 billion on research, making up over 40 per cent of the total research spend at 67 research organisations in Australia. Together, these organisations accounted for nearly 500 invention disclosures (34 per cent of total) and 500 new registered IP rights filed (45 per cent of total) over the same period.
Let’s think deeply as a finance sector, with government and independent regulators alongside, how we bring some part of these massive pots of money into the venture capital space, to get good returns over the long term, supporting good outcomes in deeptech sectors. Done right, this is a virtuous circle… if the people whose money is used to invest in innovations now will have longer, healthier lives as a consequence, this would facilitate them also then having the funds in retirement to enjoy them. That really is ‘win, win’!