Fund of Funds FAQs

About Fund of Funds

  • A Fund of Funds (FOF) is a fund that aggregates capital from a number of investors and invests capital in other funds as opposed to investing directly into companies. In the case of the VSCF, funds will be targeted at investing in early-stage venture capital funds located in Victoria.

  • A Fund of Funds (FOF) is a fund that aggregates capital from a number of investors and invests capital in other funds as opposed to investing directly into companies As with VC Funds, investors are typically Limited Partners (LPs) and have limited decision-making power (in terms of what investments to make) and limited liability. FOFs are managed by specialised funded managers called General Partners (GPs) who make the investment and general management decisions of the fund. As FOFs invest into Funds they act as both GPs (as the fund manager must raise capital from its own LPs) and as LPs in the Funds in which it invests. A typical FOF life is in excess of ten years. In the first few years, the GP makes capital calls as portfolio VC Funds make investments into startups. In later years, portfolio VC Funds will be focused on supporting their portfolio companies to grow and create returns through exits. The FOF realises investment returns when VC Funds realise investment returns, through portfolio startup exits such as initial public offerings or mergers and acquisitions.

  • The Victorian Government has announced it will invest $60 million in the VSCF. The VSCF will invest in Victorian based VC Funds, who in turn will invest in startups. The VSCF will inject investment capital into the Victorian startup ecosystem to support innovative early-stage startups to scale, create jobs and contribute to the State’s economic recovery.

  • - Increase the availability of early-stage capital to support innovative early-stage startups to scale, create jobs and contribute to the State’s economic recovery. - Growing local VC capabilities by attracting new funds to build talent and invest locally. - Expanding the early-stage investor community by exposing new investors to the early-stage startup asset class, and building their confidence to invest directly in startups or VC funds in the future. - Enable investors to access a more diversified portfolio (limiting risk). - Small Limited Partner investors can access quality Funds that they might otherwise be inaccessible, as the ‘cheque’ size of individual investors may be too small to be eligible to invest in a particular fund. - Large LPs avoid the need to undertake due diligence for multiple funds, instead of relying on the services of the FOF to do this work. - FOFs can save investors time and expenses by providing access to FOF professional back-office services (including tax and compliance reporting).

  • Melbourne’s early-stage investor landscape is underperforming when compared to its global peers. There is a lack of early-stage funding for startups and there is a relatively small investor community, including angel investors and early-stage VC’s. The small scale and immaturity of Melbourne’s early-stage sector is limiting the success of Melbourne’s startups, which in turn is impeding ecosystem growth and economic returns including job creation and export opportunities.

  • Data from LaunchVic’s real time database findingstartups.launchvic.org identifies there are 15 Venture Capital Funds in Victoria.

  • Without sufficient capital, startups fail to grow or relocate to other ecosystems where access to capital is more prevalent. Successful startup exits create strong returns for investors are the primary driving force that encourages new investors. With a limited base of early-stage capital, too few startups are supported to scale and achieve a successful exit. This sets up a vicious cycle where the lack of success disincentivises investors to invest, which in turn limits the ability of startups to scale and exit, creating strong returns for investors. This limits ecosystem expansion.

  • Startup investing does carry a high risk, and we do expect that some startups that receive VC Funds will fail. However, the returns from successful startups are expected to more than make up the losses from startups that fail. It is also important to note that failure is not bad. While some startups do fail, they also prove to be excellent training grounds for future founders and startup talent. Many international VCs actually prefer to invest in founders who have failed and learnt from previous mistakes.

  • While the key performance metrics of the VSCF are yet to be determined they are expected to include: Increase in early-stage funding for Victorian startups. Increase in job creation in Victoria. Increase in active angel and early-stage venture capital investors in Victoria. Increase in the number of skilled VC talent in Victoria. Contribution to Victoria’s economic recovery and return on investment.

Government Involvement

  • The early-stage startup investment sector is inherently difficult and slow to establish organically. Governments around the world have been integral for catalysing successful early-stage capital markets. This is primarily because only governments are prepared to invest in the indirect benefits of early-stage startup ecosystems (including knowledge, expertise, talent attraction, jobs and economic growth) until there is greater proof of startup ecosystem success. Without intervention, too few startups are supported to scale and achieve a successful exit. This sets up a vicious cycle where the lack of success disincentivises investors to invest, which in turns limited the ability of startups to scale and exit, creating strong returns for investors. This limits ecosystem expansion.

  • The Government will invest $60 million as a Limited Partner (LP) into the Victorian Startup Capital Fund of Funds (VSCF).

  • The VSCF is the first VC Fund of Funds established by a State Government in Australia.

  • A 2013 survey of OECD members found that government equity investment measures have been increasing over the past five years, especially fund of funds and co-investment funds, with 21 out of the 32 surveyed having Fund of Funds. Some examples of startup focused FOFs include: CANADA (Venture Capital Catalyst Initiative) US$303 million. EUROPE (Pan-European Fund of Funds) US$457 million. BARCELONA/SPAIN (FOND-ICO Global) US$1.3 billion. UNITED KINGDOM (The UK Innovation Investment Fund) US$187 million. HONG KONG (Innovation and Technology Venture Fund) US$255 million. INDIA (Fund of Fund for Startups) US$1.4 billion. NEW ZEALAND (New Zealand Venture Investment Fund) US$157 million. ISRAEL (Yozma Group VC Fund) US$100 million.

Operations

  • With funding announced, plans will progress on a detailed Business and Implementation Plan in consultation with the VC community, and startup sector more broadly.

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