Venture debt pool for Aussie unicorns ready to make waves

Australia has a thriving start-up and scale-up ecosystem, with big name global firms including online graphic design behemoth Canva and software support tech leaders Atlassian with their roots Down Under.

Evidence of the increasing maturity of the sector is the rise of new forms of finance, such as venture debt.

Venture debt is a source of non-dilutive capital, which means existing shareholders’ interests in a company are maintained when it raises funds this way. This is in contrast to a capital raise, which can reduce existing investors’ equity in a company.

This form of finance can help diversify a company’s capital base and reduce the overall cost of capital, at a time when it’s not yet mature enough to attract senior, secured bank debt.

“Venture debt is best suited to scale-ups that have previously raised equity during early stage funding rounds,” says Alan Watters, tech sector lead Australia and New Zealand, HSBC.

“They are typically looking for complimentary funding solutions to their existing capital stack to help accelerate growth and extend their cash runway.”

“Global Insurtech Cover Genius is an example of a business that has successfully raised funds with venture debt.

Cover Genius enables the world’s largest digital companies to offer insurance and other types of protection to their global customers by providing a platform and technology solution that easily integrate their products or services. This includes things like travel insurance for a booking platform or device protection for a gadget retailer.

Founded in 2014, Cover Genuis has had HSBC’s support as it has expanded around the world. In August 2023, HSBC and Cover Genius closed a $US15 million venture debt facility to support the company as it grows.

Venture debt is just one type of growth capital available to early stage ventures, with other options including grants, equity, convertible securities and other hybrid debt solutions. Different funding methods suit companies at different stages of their growth cycle.

Tech Council of Australia CEO Kate Pounder emphasises how critical it is for emerging Australian businesses to have access to the right funding sources.

“We need to invest urgently, because we're in the middle of a global tech arms race,” Pounder says.

“It's now both a security and economic necessity to have a strong local tech ecosystem, producing, attracting and training globally competitive products and people.”

The emergence of new sources of funding such as venture debt in the Australian market is vital to ensure ongoing support of the local tech sector.

HSBC is the only bank offering this form of debt finance to Australian tech scaleups, announcing an initial A$228 million in late 2023 to help drive innovation and growth. Venture debt is expected to become an increasingly appealing option for tech scale ups, at a time when growth equity is scarce.

“The introduction of venture debt enhances Australia’s standing as a leading start-up hub, providing additional funding avenues to assist scale-ups go global earlier. As a leading international bank in Australia, it is only natural for HSBC to extend this support to the private, scaleup sector,” says Watters.

As a global bank, HSBC has a deep understanding of the nuances of high-growth tech companies,

“Growth always presents challenges, and more so when a company enters new markets and its banking needs become more complex. This is an area we thrive in,” says Watters.

“Through our global network of relationships and our presence in 62 countries and territories, we can help connect Aussie scale-ups with new customers and break into new jurisdictions.”

As for the future, Australia has all the ingredients to become a top 10 digital economy by 2030. As Australia’s third-largest industry, the tech sector is projected to account for 13 per cent of GDP by 2030.

Australia is currently ranked sixth globally as a fintech hub and considered to be a global leader in quantum technology. The nation also ranks first among OECD countries for its capacity to attract and retain highly educated talent.

With appropriate access to capital and the right funding structures to support the ecosystem at all stages of growth, the outlook for the Australian tech sector is bright.