Changing Policy Mindsets 3: Venture Capital, Startups, Technology, and Economic Transformation—Balancing Australia’s Innovation Priorities

John H Howard, 25 March 2025

Despite the recent boom in VC investment, which peaked at $10.1 billion in 2021, there is an absence of clear evidence regarding its economic impact, particularly regarding job creation, export growth, and productivity improvements.

Policymakers must distinguish between venture-backed, promising, and aspirational startup categories to avoid inefficient resource allocation. They must also differentiate between startup sectors—deep tech, software as a service (SaaS), and capital-intensive industries —stressing that Australia's comparative advantages lie in tangible, production-focused industries rather than low-productivity digital services.

The paper calls for a balanced policy approach integrating VC within a broader industrial strategy, ensuring that innovation investments yield sustained economic value rather than speculative financial gains.

The Growth of Australia's Venture Capital Ecosystem

Over the past three decades, Australia's VC system has evolved from these modest beginnings into a complex and interconnected, dynamic ecosystem[1]. The Venture Capital Dashboard currently lists 17,783 limited partners[2]—individuals or organisations—that commit funds to VC firms (sometimes known as general partners).

In turn, VC firms invest in startups and potentially high-growth businesses. Investor clearinghouse FundComb lists 148 VC firms investing in Australia, of which 76 are Australian-headquartered.

Many of the investee startups and growth businesses have been supported by a wide array of incubators, accelerators, and advisory services that provide mentorship, business development support, and networking opportunities.

The ecosystem is further shaped by government policies, programs, and regulations, including tax incentives, co-investment schemes, and legal frameworks that facilitate investment.

Universities and public research institutions also play a vital role by generating Intellectual Property, fostering talent, and creating spinoffs that attract VC investment.

There has been growth in well-defined exit pathways—such as IPOs, mergers, and acquisitions, as well as trade sales—allowing investors to realise returns and reinforcing the system's ongoing growth and sustainability.

The Australian Investment Council and the Department of Industry, Science, and Resources Venture Capital Dashboard, the Startup Muster 2024 Report, and startupdaily, provide a great deal of information about how much venture capital money has been raised ($4 billion in 2024 and a record $10.1 billion in 2021).

We also know about active venture capital firms, the numbers of businesses assisted and their sources of revenue, and where the funds have been applied across ANZSIC-defined industry categories. With this data, the venture investor lobby has championed the VC asset class as a critical driver of economic growth. But this view requires qualification.

Notwithstanding our comprehensive knowledge about the amount of money flowing into venture capital, we know very little about what is coming out in terms of its economic impact—jobs created, sales (and profits) generated in Australia, exports, R&D undertaken in Australia, and investment in income-producing assets (machinery, plant, and equipment).

Definitions, Distinctions, and Distractions: What is a Startup?

From a policy perspective, it is important to make a clear distinction between what we may term "venture-backed startups", "promising startups", and "aspirational startups".

Venture-backed startups typically aim for rapid growth, scale quickly, and attract substantial investment from venture capital due to their potential for large returns, often emphasising disruptive innovations and scalability. However, they carry significant risks, including high failure rates, substantial capital burn, and prioritisation of rapid exits. They call for policies covering enabling environments for secure Intellectual Property Rights (including enforcement), flexible regulations, and supportive financing infrastructure.
Promising startups are usually smaller, less capital-intensive ventures characterised by incremental innovation, moderate but steady growth, and sustainable business models. They generally rely on internal financing, customer revenue, or modest external investments rather than venture capital injections. Policies for promising startups should emphasise stability, sustainability, access to government financial support (including provisions for repayment), and building innovation management capacity to foster steady growth and economic resilience.
Aspirational startups constitute a large cohort that pursues novel ideas but lacks clear markets, relying on a stream of government grants or casual employment for survival. Often founded by lone entrepreneurs or redundant workers, they struggle to become self-sustaining. Support policies should focus on staged grant funding, market validation, mentoring, industry linkages, and employment transition support to help them evolve into commercially viable enterprises with sustainable revenue streams.

A failure to clearly distinguish between these startup categories can lead to policy misalignment, inefficient resource allocation, and unintended economic consequences. Policy ambiguity may disproportionately favour high-risk, speculative ventures, overlooking the significant economic contributions and stability offered by promising startups.

Clearly defined policy frameworks for differing startup enterprises can ensure resources effectively address specific needs, reducing economic volatility and fostering a more balanced and resilient entrepreneurial ecosystem.

Segments Within the Venture Capital Ecosystem: The Need for Definitional Clarity

As the venture capital ecosystem has grown, several distinct segments have emerged, each with specific technological characteristics. In a policy context, these distinctions are critical

Deep Tech: Technologies based on substantial scientific or engineering breakthroughs, characterised by intensive R&D, high upfront investment, long development cycles, complex IP protection, and transformative potential across multiple industries. It covers semiconductors, quantum computing, advanced materials, biotechnology and synthetic biology, AI, robotics, space technology and aerospace, and energy storage. Examples: CSL, Q-CTRL, Gilmour Space Technologies.
SaaS (Software-as-a-Service): Digital service-oriented companies delivering software solutions online and subscription-based revenue models, characterised by minimal marginal costs, significant scalability, intangible asset dominance (software IP, brand, customer data), and rapid global market expansion. Examples: Atlassian, Canva, Salesforce, Dropbox, Zoom.
Mainstream Tech (Broad Technology): Proven, commercial technologies primarily involving incremental innovations or applications and combinations of existing technology rather than substantial scientific breakthroughs. Subsectors include:
- Consumer Electronics and Devices: Smartphones, wearables, consumer IoT devices (Apple, Samsung, Fitbit)
- Enterprise Software and IT Infrastructure: Traditional enterprise software solutions, databases, cloud infrastructure, cybersecurity products (IBM, Microsoft Azure, Cisco)
- Digital Media and Platform Technologies: Social media, streaming services, digital advertising platforms (Netflix, Meta/Facebook, Google)
- Medtech and Healthcare Technologies (not necessarily Deep Tech): Medical devices and health-tech solutions (ResMed CPAP devices, Cochlear hearing aids)
- Automotive and Transport Technologies: Electric vehicles, autonomous driving (Tesla, Waymo)

Deep Tech companies often supply foundational innovations to these mainstream tech sectors, driving industry transformation and technological advancement.National Security Fund is bei

Other (Capital-Intensive): Businesses involving substantial upfront physical capital investments, longer commercialisation cycles, and infrastructure-intensive supply chains, typically in advanced manufacturing, renewables, agri-tech, and similar sectors. Examples: SpaceX (aerospace), Northvolt (battery manufacturing), and Sun Cable (renewable energy infrastructure).

Within these segments, policy framing and approaches will necessarily differ. For example,

The SaaS segment, which now dominates the VC ecosystem in terms of valuations, may contribute disproportionately less in terms of traditional economic indicators (employment, exports). Precise framing will help policymakers assess genuine economic returns rather than speculative valuations.
The deep tech and mainstream tech sectors may be smaller by valuation but offer significant economic multipliers through higher employment quality, substantial exports, R&D spillovers, and manufacturing capabilities. An accurate definition will help substantiate targeted public investments in innovation infrastructure and research facilities.

After the abolition of the Innovation Investment Fund (IIF) in 2013, public venture capital funds seem to be making a return, with Main Sequence Ventures and Startup Victoria making strong inroads into the deep tech sector. A National Security Fund is currently being mooted.

Due to higher capital intensity, other venture-backed sectors are often neglected in mainstream VC narratives. From a policy perspective, however, these sectors warrant focused policy attention due to their profound impacts on productivity, economic diversification, and regional economic development.

Sector distinctions will support more precise economic evaluations by clarifying each sector's role in jobs, GDP, exports, productivity, and technology diffusion.

The Policy Appeal of Venture Capital: Balancing Political Attractiveness and Economic Realities

For policymakers, VC represents an appealing pathway to economic growth and innovation, largely due to its perceived ability to drive rapid economic transformation with limited government intervention.

Unlike comprehensive industrial strategies, which necessitate extensive sector-specific knowledge, sustained infrastructure investment, and long-term, patient capital, VC is often positioned as a market-driven mechanism that requires only moderate policy interventions such as targeted tax incentives, regulatory simplification, or modest co-investment initiatives.

Government announcements of new venture capital funds, co-investment partnerships, and startup success stories often dovetail neatly with political narratives of fostering innovation and entrepreneurship and positioning Australia as a "global innovation leader." Such announcements offer tangible and politically rewarding milestones without the complexity or accountability involved in deeper structural economic reforms.

However, the political attractiveness of venture capital as a policy solution may inadvertently encourage financialisation within the innovation ecosystem—emphasising capital inflows, valuations, and deal-making rather than substantive economic indicators such as productivity gains, export growth, long-term employment, and infrastructure development.

This financialisation carries risks, potentially leading to a mismatch between venture funding patterns and broader economic goals, skewing investments towards rapidly scalable but economically narrower sectors like software-as-a-service (SaaS) while undervaluing deep technology, advanced manufacturing, renewable energy, and agri-tech, where Australia holds considerable competitive advantages.

Ultimately, while venture capital can indeed play an essential role within a balanced innovation policy framework, policymakers must be cautious not to rely exclusively or disproportionately on venture-driven narratives.

A more nuanced approach that clearly differentiates sectors—such as SaaS, deep tech, and capital-intensive industries—and aligns investment strategies to long-term productivity and sustainable economic outcomes will ensure that political attractiveness does not eclipse substantive economic benefits.

The Media's Enthusiasm for Venture Capital: Shifting Narratives for Real Economic Impact

The media's strong emphasis on VC narratives arises from several interconnected influences.

VC-funded startups naturally provide compelling storylines featuring dynamic entrepreneurs, rapid expansion, groundbreaking innovations, and remarkable financial valuations. These stories resonate strongly with media interests in dramatic and eye-catching headlines, often overshadowing slower-growing, more sustainable businesses.

The Australian media and policymakers often mistakenly adopt Silicon Valley as a model for domestic innovation strategies, captivated by high-profile successes such as Google, Facebook, and Tesla. This imitation frequently overlooks fundamental differences, including market size, investment culture, institutional capacities, and economic contexts, making it challenging to replicate Silicon Valley's unique success anywhere else.

Media coverage excessively highlights dramatic financial achievements—large investment rounds, extraordinary IPO valuations, and record-breaking stock market listings—rather than assessing how effectively investments translate into enduring growth, productivity, employment, and genuine profitability. Consequently, there is a problematic bias towards financialisation and short-term successes at the expense of tangible, lasting economic benefits.

Media and stakeholders should shift attention from headline financial metrics towards a deeper evaluation of genuine economic contributions to foster a more balanced and meaningful conversation.

Emphasising factors such as sustainable job creation, long-term profitability, export growth, and the broader productivity impacts of venture-backed companies can provide a more accurate picture of venture capital's role and value in driving innovation and sustained economic resilience.

Economic Impact Caution: Balancing the Role of Venture Capital

Venture capital is optimally suited to intangible, scalable IP-intensive innovation such as software, biotechnology, pharmaceuticals, and digital platforms but poorly aligned with asset-intensive, tangible innovations like advanced manufacturing, manufacturing engineering, agri-tech, and renewable energy infrastructure, where Australia holds significant comparative advantages.

Consistent with international trends, venture capital investment in Australia typically favours lower capital intensity, higher-scalability industries that offer clear exit strategies via IPO or acquisitions. In particular, Australia's reliance on VC funding for software-centric services disproportionately supports low-productivity growth sectors compared with productivity-enhancing production and infrastructure sectors, which offer greater economic multiplier effects.

In addition, many Australian software-focused companies receiving VC funding undertake their high-value R&D activities overseas, typically in talent-rich jurisdictions with lower development costs. Consequently, the economic returns, particularly high-value jobs in software development, engineering, and product innovation, often accrue offshore, limiting Australia's broader productivity and economic benefits from VC investment.

Government economic policy agencies have consistently advised caution against relying excessively on venture capital as a primary economic growth strategy. Their concern is that VC-driven growth strategies typically pursue rapid scaling, inherently carrying significant risk. With global failure rates among VC-backed startups at 75% or higher, there is potential for resource misallocation and missed opportunities for more sustainable investments, potentially weakening economic resilience and productivity in the long-term.

Moreover, many VC-funded firms prioritise aggressive growth and achieving market dominance over sustained profitability and local economic development, often resulting in foreign acquisitions. This tendency limits the net positive contributions these companies can make to domestic employment, exports, and overall sustainable economic advancement.

Consequently, a more balanced approach is crucial to ensure venture capital complements, rather than dominates, Australia's broader economic and innovation strategy. This approach should emphasise diversification and the strategic allocation of resources, recognising that established companies, mid-sized enterprises, and research-driven innovation generally yield more stable and extensive economic benefits.

Policymakers should strive to achieve a measured investment approach, leveraging the targeted strengths of VC while ensuring broader, long-term economic stability and resilience.

Addressing the Integrity Concerns in the Venture Capital Narrative

The Australian VC ecosystem faced integrity challenges during the venture capital boom starting in 2016, eroding confidence in its effectiveness. These issues included:

A surge in new VC funds (2019–2021) brought inexperienced fund managers with weak governance structures. Investment decisions prioritised compelling narratives over rigorous business fundamentals.
With record capital inflows, financial engineers from corporate finance and private equity entered the VC space, prioritising quick returns over long-term business sustainability.
Capital raising became a success metric, incentivising startups designed for investment rounds rather than operational viability. Many burned cash aggressively, prioritising marketing to investors over building strong products or revenue models.
A rise of mass-produced "venture builder" startups led to a glut of low-value companies designed for resale rather than sustained growth. Some fintech and e-commerce ventures raised millions without achieving meaningful user adoption or profitability pathways.
Startups, particularly in buy now-pay later (BNPL) and fintech, were valued at 20–30x projected revenue, with many proving unsustainable under tighter financial conditions.
Some investors imposed restrictive terms, forcing startups into aggressive, unsustainable expansion or premature exits, weakening Australia's innovation ecosystem.

These and other dynamics undermined VC integrity, prioritising financial speculation over real business development and harming Australia's innovation potential. To maintain credibility, venture capital advocates must acknowledge these integrity concerns and address them in the broader VC narrative.

While venture capital remains an important mechanism for funding high-risk, high-growth businesses, the speculative excesses of the boom starting in 2016 exposed vulnerabilities that cannot be ignored. The presence of marginal players, weak governance, predatory investment practices, and overhyped startups demonstrated the need for a more disciplined and sustainable approach to venture funding.

A Future Policy Agenda

Australia's future innovation policy agenda must adopt a nuanced and integrated approach, aligning VC with broader economic objectives. To achieve sustainable prosperity, policymakers should consider the following key elements.

Differentiation: Clearly distinguish between VC-backed startups and promising, sustainable enterprises, ensuring that resources effectively align with strategic economic goals rather than speculative valuations. Policies should recognise differing risk profiles, growth trajectories, and economic impacts.
Strategic Investment: Target investments strategically in sectors such as deep tech, advanced manufacturing, renewable energy, and agri-tech. These sectors align closely with Australia's inherent comparative advantages and offer significant potential for long-term economic benefits and productivity growth.
Governance and Due Diligence: Strengthen governance frameworks and implement rigorous due diligence processes to mitigate risks associated with financialisation and speculative excesses. This includes fostering responsible investment practices and promoting business sustainability.
Transparency and Accountability: Improve transparency concerning the economic impacts of VC funding, establishing clear accountability measures for assessing tangible investment outcomes, including employment creation, export growth, and productivity enhancements.
Domestic Innovation Capacity: Enhance domestic research, development, and innovation capabilities, ensuring the economic returns from investments primarily accrue within Australia, driving local job creation and industry growth.
Integrated Industrial Frameworks: Embed VC strategically within comprehensive industrial and innovation strategies, fostering resilient and sustainable economic growth beyond transient investment cycles.

Several of the initiatives listed above are underway but lack strategic integration into a venture capital policy that prioritises sustainable sectors, strong governance, transparency, domestic capabilities, and integrated frameworks.

Conclusion

The VC sector must shift focus from headline valuations and funding rounds to long-term economic contributions, including profitability, job creation, export potential, and flow-on investment. All venture investors should prioritise business fundamentals over market hype, while governance structures must improve to prevent speculative, unsustainable ventures from distorting the ecosystem.

A more balanced approach—one that integrates VC investment with broader industrial strategy, patient capital, and sector-specific commercialisation pathways—is necessary to ensure Australia's innovation ecosystem delivers lasting economic value rather than another speculative cycle. By addressing these concerns, the VC sector can rebuild confidence and reinforce its legitimacy as a driver of sustainable innovation.

Footnotes

[1] A detailed early History of Venture Capital in Australia was published by FundComb in 2021

[2] Under the Government’s Venture Capital Limited Partnerships Program, tax benefits are available to fund managers and eligible foreign investors to help stimulate venture capital investment. The aim is to help fund managers attract pooled capital so they can raise new venture capital funds of over $10 million to invest in innovative Australian businesses. Busines.gov.au currently lists 107 registered VCLPs and 18 conditionally registered VCLPs.

This Paper is an updated version first published in @AuManufacturing on 19 March 2025

If you would like to learn more about these and related issues, please get in touch with John Howard at john@actoninstitute.au.

Dr John Howard is Executive Director of the Acton Institute for Policy Research and Innovation. He is an expert in science, research, and innovation policy and advises government, universities, and industry on enhancing R&D and innovation performance. He is also a Visiting Professor at the University of Technology Sydney.