The number and value of venture capital (VC) investments in the technology and communications industry increased by 54% in the 2012 financial year, according to new research from AVCAL, the peak association for VC and private equity in Australia.

However, the number of opportunities being funded are still lower than they were between 2008-10. According to the report, the average size of new investments has increased to $1.2 million, and subsequent investments are likely to be less, averaging $0.8 million.

The report attributes the increase in the number and volume of transactions to a “growing domestic startup scene”, and the support of the Government’s IIF program, which assists VC funds to commercialise Australian research and development (full list of funds here).

“However, as the IIF programme draws to a close and the difficulties VC funds have had securing money from the private sector become apparent, VC funds are increasingly looking beyond their traditional investor base for funds,” it says.

The report states VC funds have started looking to self-managed super funds, high-net-worth individuals and sovereign wealth funds, however Anne-Marie Birkill, a partner at OneVentures, one of the funds which benefitted from the IIF program, doesn’t think the confidence or willingness to invest by these groups has returned to what it was a few years ago.

“The institutional investors aren’t flocking back to invest in VC just yet, so we really need to find a way to continue the IIF program in some form for the foreseeable future to provide that all important leverage,” she says.

Anne-Marie Birkill, General Partner & Executive Director, OneVentures

At the end of the financial year, Australian VC and private equity firms were managing $29 billion in investments, across 500 portfolio companies.

The report asserts the growth of deals in the past year has been driven by a recovering startup scene: “One of the drivers behind higher levels of new activity in FY12 has been the resurgent domestic start-up scene which has helped drive investments in the technology sector.”

Birkill isn’t convinced: “The report provides no evidence whatsoever of a resurgence in the startup scene, so I would be interested to understand the basis for such a claim,” she says. “We have three years of qualitative data recording deal flow coming to us and I can’t see any significant increase in flow in any particular sector.”

The IIF program, which matches VC investment dollar for dollar, to encourage VC funds to fund the commercialisation of Australian R&D, recently closed, after supporting 16 fund managers to invest in more than 100 new companies. As the Government outlined in 2011, the program has invested around $300 million in early-stage companies, alongside Australian VC funds. Its conclusion could have significant implications over next few years.

“Wrapping up the IIF program has the potential to seriously damage what little momentum we have in the VC industry. The next crop of funds will give us a bit of short term activity, then in 3— 4 years’ time there will be a great funding void,” says Birkill.

“OneVentures was one of the first IIFs to pursue co-investment from alternative sources, and it is fair to say that without the leverage of the IIF funding many of them wouldn’t have invested. I don’t think things have changed a lot, there is still a market gap here and investors require leverage to commit to this risky asset class.”

The report found the majority of investments between FY06 and FY12 were in health sciences and life tech ($431 million), followed by technology and communications ($353 million).

And the reason for the increasing number of investments in technology startups? Well, it could be the fact they are becoming less expensive to start. Birkill says tech startups are becoming less capital intensive, and this may be driving the increase in deals; they require less cash than other sectors.

“Most of the current crop of VC funds are relatively small and overall funding is scarce, we are looking for deals where we can deploy our capital efficiently. Tech sector deals often meet that brief,” she says.