Venture capital and the illusion of economic transformation: Balancing Australia’s innovation priorities

The venture capital 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, argues John H Howard. Here he looks at the growth of VC in Australia, its appeal to policymakers, journalists and others, and calls for a balanced appreciation of its role.

In 1997, my team at Coopers & Lybrand (now PWC) was commissioned by the Australian Venture Capital Association and AusIndustry to undertake the first-ever survey of The Economic Impact of Venture Capital in Australia. 

The survey covered 12 venture capital investors and more than 100 of their SME investee companies. It sought information on the standard program evaluation indicators of sales, jobs created, exports, and new investments. Despite the methodological limitations of the survey, the results were impressive and highlighted the significance of this asset class in Australian economic development. 

In 1997, the Government launched the Innovation Investment Fund (IIF), one of the first major government interventions to stimulate VC investment by providing matched funding to private investors. It continued until 2013, when, despite being acknowledged as highly effective, it fell victim to the Abbott Government’s Commission of Audit. 

Since then, as a policy analyst and adviser, I have kept close to the venture capital ecosystem through commissioned projects and studies of innovation, my own research, and presenting papers at conferences, events, forums, and meetings on innovation. 

The growth of Australia’s venture capital ecosystem 

Over almost 30 years, Australia’s venture capital (VC) system has developed and matured into an ecosystem with multiple interdependent components, including:

• Over 17,000 limited partners—people or organisations who commit funds to a venture capital firm, which then invests in startups and high-growth companies on their behalf. The Australian Investment Council received responses from 168 professional startup investors to its 2024 survey. 
• A very large number of early-stage companies are seeking VC funding to develop, commercialise, and scale innovative products, services, and business models.
• A similarly large number of incubators, accelerators, and advisory services that provide mentoring, networking, and business development support to VC-backed firms.
• A suite of government policies, programs, and regulations, including tax incentives, support for venture capital limited partnerships, co-investment schemes, and legal frameworks that shape how the ecosystem operates.
• Growing commitment among universities and public research institutions in a role of creating intellectual property (IP), talent, and spinoffs that often serve as the foundation for VC investment.
• Exit markets and pathways for investors to realise returns, typically through IPOs, mergers, or acquisitions.

The venture investor lobby has championed the venture capital (VC) asset class as a critical driver of economic growth. But this view requires qualification. 

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

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, and investment in income-producing assets (machinery, plant, and equipment). 

The policy appeal of venture capital: A shortcut with political upsides

For some policymakers, venture capital offers a politically attractive model. It promises an opportunity for rapid economic transformation without requiring large-scale government intervention. 

Unlike national industrial strategies, which demand deep engagement with specific sectors, long-term infrastructure investment, and patient capital deployment, VC is often framed as a market-driven solution requiring only targeted incentives, such as tax breaks or co-investment schemes. 

Governments and industry bodies frequently champion VC activity to demonstrate their commitment to innovation and economic growth. Announcements of new funds, co-investment programs, and startup success stories align with political messaging about Australia becoming a “global innovation leader.” 

This appeal aligns with broader policy trends towards market-based innovation strategies, where governments seek to act as facilitators rather than active participants in economic development. However, this approach carries risks. 

At the extreme, this approach could result in an innovation system that is increasingly skewed towards financialisation—measuring success in terms of investment flows rather than tangible economic outcomes such as productivity growth, export performance, and sustainable job creation.

The media’s enthusiasm for venture capital

The media has a preoccupation with reporting “news” on venture capital, which stems from several interrelated factors:

• The Appeal of “Hero” Narratives: VC-backed firms often present compelling, high-growth success stories that align with journalistic storytelling preferences. These stories feature dynamic entrepreneurs, disruptive innovations, and rapid valuations—all elements that make for engaging headlines. 

The media’s preference for dramatic narratives favours the meteoric rise of VC-backed startups over the slow, steady growth of more traditional and sustainable businesses.

• Influence of the Silicon Valley Model: Australian media and policymakers have long been captivated by the mythology of Silicon Valley, where venture-backed firms like Google, Facebook, and Tesla became global powerhouses. 

The Sand Hill Road freeway exit in Silicon Valley, California (credit Coolcaesar, CC BY-SA 4.0)

However, this model is often misapplied to Australia, which lacks the same ecosystem depth, market scale, and investment culture. The assumption that copying Silicon Valley’s approach will yield similar results ignores fundamental economic structure and institutional capacity differences. The uniqueness of the Palo Alto innovation ecosystem has never been replicated—anywhere—notwithstanding the efforts of many cities and regions to do so. 

• Financial Metrics as Success Indicators: Much media coverage tends to highlight capital raised in VC rounds rather than how effectively funds are deployed. While some outlets do engage in deeper analysis, the prevailing media narrative often prioritises headline-grabbing funding milestones over long-term business outcomes. 

Reports on new VC funds, major capital raisings, eyewatering IPOs, and NASDAQ valuations dominate coverage, while discussions about profitability, job creation, and long-term sustainability receive less attention.

For a more balanced and meaningful discourse, media and industry stakeholders must shift focus from funding rounds and valuations to real economic impact—highlighting which businesses thrive beyond their initial investment and contribute meaningfully to national productivity and industrial growth. Without this shift, the VC narrative will remain a self-perpetuating cycle of hype rather than a genuine driver of innovation and economic resilience.

Economic impact caution

While VC-backed firms contribute to innovation in specific sectors, broader economic analysis indicates that much of Australia’s business growth, job creation, and productivity improvements arise from established firms, mid-sized enterprises, and industry-led research commercialisation. 

Recognising these dynamics, government agencies have often expressed caution regarding an overexuberance of VC as a primary economic driver. Established firms, mid-sized enterprises, and industry-led research commercialisation play a far greater role in economic transformation than the small subset of companies that secure VC backing. Their reluctance to embrace the VC-driven narrative stems from several concerns:

• VC’s Limited Economic Footprint: VC is very important in certain sectors (notably technology and biotechnology) but represents a small fraction of overall business investment. Established firms, infrastructure projects, and non-VC-backed technology growth businesses account for a very much larger share of employment and GDP. 

Venture capital is important in those sectors where innovation is characterised as the application of knowledge on knowledge—software, algorithms, apps, molecules, devices, etc. It is not well suited to innovation that involves the application of knowledge on capital—expensive materials, machinery, equipment, 3D printers, robot arms, etc—often with proprietary software embedded. This includes advanced manufacturing, agri-tech, and renewable energy, where venture investors are reluctant to invest but where Australia has significant competitive advantages. 

• Short-Termism and High Failure Rates: VC operates on a model of rapid scaling and high attrition. Globally, about 75 per cent of VC-backed startups fail. A policy focusing on long-term economic resilience would avoid the risk of excessively emphasising a funding model with such high volatility. 

Moreover, the frequent failure of venture-backed firms raises concerns about resource misallocation and lost opportunities for alternative, more sustainable investments. Some analysts suggest that a significant proportion of VC investment fails to generate sustained economic value. 

• Limited Contribution to Employment and Exports: VC-backed firms often prioritise scale and market share over profitability, leading to “growth at all costs” strategies. While these firms can generate significant revenues, their net impact on job creation and exports can be overstated. 

Many Australian VC-backed firms ultimately exit via acquisition by foreign companies, leading to limited long-term contributions to the domestic economy. 

Picture: credit Captain Albert E. Theberge, NOAA Corps

Thus, while VC-backed firms drive innovation in select sectors, their overall economic impact is limited, with established firms and industry-led research contributing far more to growth, jobs, and productivity. High failure rates, short-termism, and limited domestic economic benefits reinforce the need for a more balanced investment approach.

Addressing the integrity concerns in the venture capital narrative

The Australian Venture Capital (VC) ecosystem faced integrity challenges during the 2016–2024 venture capital boom, 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 startups by “venture builders” 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 lobbyists 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 2016–2024 boom 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.

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. Venture investors should prioritise business fundamentals over market hype, while governance structures must improve to prevent speculative, unsustainable ventures from distorting the ecosystem.  

Lobbyists and industry advocates must also acknowledge that not all innovation requires VC funding. Established businesses, research-driven enterprises, and midsized firms often grow sustainably without venture backing. 

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.

Acknowledgements: Helpful comments by Anne Howard, former CEO of the Australian Venture Capital Association (1995-99), on an earlier draft of this paper are greatly appreciated. Thanks also to Rajesh Gopalakrishnan Nair for reviewing the paper and suggesting some further insights. 

If you would like to learn more about these and related issues, please contact John Howard at [email protected]  

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, advising government, universities, and industry to enhance R&D and innovation performance. He is also a Visiting Professor at the University of Technology Sydney. 

Main picture: credit Lucas