The Role of Private Equity and Venture Capital in R&D Financing

The Australian startup ecosystem has become a hub of innovation, with private equity (PE) and venture capital (VC) firms playing a pivotal role in fuelling research and development (R&D) efforts across various industries. These influential investors provide not only the necessary capital, but also the strategic guidance and industry connections that enable startups to push the boundaries of technological progress.

Venture capital funding for R&D

Venture capital is a key source of financing for early-stage, high-growth startups that are deemed to have significant potential. VC firms provide access to substantial funding, as well as valuable expertise and networking opportunities that can accelerate a startup's R&D initiatives. The advantages of VC funding include the ability to scale rapidly, leverage the investors' industry knowledge, and gain exposure to a broader ecosystem of partners and collaborators. However, the process of obtaining VC funding can be highly competitive, and startups must manage the high expectations for growth and returns set by these investors.

Private equity involvement in startup R&D

Private equity firms, with their deep pockets and extensive industry networks, have also emerged as crucial players in supporting the R&D efforts of Australian startups. Unlike venture capital, which typically targets earlier-stage companies, PE firms often invest in more mature startups that have established a track record of innovation and growth. The advantages of PE investment include access to substantial capital, strategic guidance from experienced industry experts, and the potential for mergers, acquisitions, or public listings that can provide lucrative exit opportunities. However, startups must carefully navigate the potential challenges of aligning with the PE firm's investment thesis, managing the pressure for rapid growth and profitability, and maintaining their entrepreneurial culture and vision.

The VC and PE landscape in 2024

Australia's startup ecosystem has experienced a significant shift in the venture capital (VC) and private equity (PE) landscape over the past year. According to KPMG Australia, total investment in Australian startups reached US$2.54 billion in 2023, down from US$5.44 billion in 2022. This 53% drop in deal value was driven by factors like high interest rates, inflation concerns, and uncertainty around startup valuations.

KPMG's data shows the number of VC deals in Australia fell from 714 in 2022 to 482 in 2023. It’s been a very challenging year for the Australian VC market. The funding slowdown has forced startups to prioritise profitability overgrowth, leading to cost-cutting measures and inside rounds.However, there’s reason to remain optimistic as emerging sectors like AI, clean tech, and health tech continue to attract investor interest.

Aussie startups that secured funding in 2024 

• Diversity Atlas, a Melbourne-based data analytics startup raised $6 million from Canadian VC firm Gener8. The platform's unique insights into diversity and employee engagement have attracted significant interest, empowering companies to improve organisational culture and meet ESG goals.
• In the clean energy space, MGA Thermal secured $5.7 million in funding to advance its thermal energy storage technology. Existing investors like Main Sequence and MeltVentures have continued to back the startup, recognising its potential to contribute to decarbonisation efforts in industries such as mining and manufacturing.
• The accounting sector has also seen impressive VC activity, with Tasmanian startup Sumday raising $5.3 million in seed funding. Led by US-based Planeteer Capital, this investment will enable Sumday to expand its platform that helps accountants upskill and provide greenhouse gas accounting services to their clients.
• Startups in emerging areas like green tech have also caught the attention of investors. Bygen, a University of Adelaide spin-out, completed a $2.6 million Series A round to establish a production facility in Victoria, where it will turn agricultural waste into high-value activated carbon.

Here’s a list of 100 recently funded startups in Australia across various industries.

Tips for attracting PE and VC investment 

Drawing on the insights of seasoned founders, investors, and business development leaders, these strategies outline key ways for startups to position themselves as attractive investment prospects and secure the funding needed to drive their R&D efforts:‍

Establish a compelling value proposition

To capture the attention of PE and VC investors, startups must clearly articulate the unique value proposition of their R&D efforts and demonstrate how these innovations can translate into a sustainable competitive advantage. As Praneeth Kudithipudi of Sacumen noted,

‍"It is critical to put forth what problem your product or service is going to solve, and how it is different from others in the industry."

By showcasing a deep understanding of the market opportunity and the transformative potential of their R&D, startups can make a compelling case for investment.

Build a strong, experienced team

Assembling a talented and experienced team of researchers, engineers, and business leaders who have a track record of successful R&D and commercialisation is crucial in attracting PE and VC investment. As George Earle of Thoughtworks Inc. emphasised,

"Investors view your startup as a private stock purchase. One main aspect is the team, their passion and their 'skin in the game.' You want the founders to have as much risk or more in the venture. They can't just give up and hand the company over to the investor."

Highlighting the team's relevant expertise, achievements, and ability to execute on the R&D strategy can further instill confidence in potential investors.

Develop a robust Intellectual Property (IP) portfolio

Actively managing and protecting the startup's intellectual property, including patents, trade secrets, and copyrights, is essential in attracting PE and VC investment. By demonstrating a clear strategy for leveraging this IP to create value and maintain a competitive edge, startups can differentiate themselves and showcase the longevity of their R&D efforts. As Mark Stiving, Impact Pricing advised,

"You want to talk about your product or your company, but the value is in the eyes of the customers."

Present a detailed and realistic R&D plan

Investors seek startups that can present a comprehensive R&D roadmap, outlining clear goals, milestones, resource requirements, and potential commercialisation paths. Ahmed Ammar of LABS notes,

“Being able to show your company's growth in a story context encourages people to investigate the background behind growth, which creates a buzz about your business and consequently attracts more interested people to investment opportunities.”

Showcase traction and early success

Highlighting any early customer traction, strategic partnerships, or industry recognition that can demonstrate the potential of the startup's R&D efforts can be a powerful way to build credibility and confidence in the eyes of PE and VC investors.

“The one thing that always attracts the investor's attention is traction. If people buy your product, it means you're on to solving a real problem for a real market. This is a must in order to start a conversation with an investor.”

says Janet Todorova of Founder Institute.

R&D funding through Kashcade

If you’re a startup looking for non-dilutive solutions to R&D financing, we’re here to help. Kashcade offers R&D tax incentive-based financing specifically designed for startups in Australia, with the added benefits of:

Retained ownership: You keep control of your vision and decision-making.

Flexible repayments: Repay loans only upon receiving your R&D refund, with no monthly repayments to worry about in the meantime. 

Quick access to funds: Tap into funds in as little as 48 hours via our online platform

Funding that scales with your R&D refund: Access funds part-way through the financial year, then more as your R&D refund accumulates further.
Use our funding calculator to get an estimate of how much funding might be available to your company, or connect with the Kashcade team to discuss your specific needs and whether our solutions are the right fit for you.