Why aren't local VC funds investing into fintech?

Last week, we highlighted the massive fintech opportunity in Oceania. While large funding rounds still happen, they’re mostly led by angels, family offices, CVCs, and international funds—not local VCs.

Fintech startups face additional challenges compared to other sectors. They require more capital, operate in regulated environments, and need specialised due diligence expertise. Unless a VC fund has hired fintech experts, it often has to rely on a knowledgeable limited partner or pay an industry professional to assess a business’s viability. However, these risks are not unique to Australia—global VC funds invest heavily in fintech.

So what's the difference in Australia? It's how the funds themselves are structured.

The key difference in Australia is how funds are structured. Most use either an Early-Stage Venture Capital Limited Partnership (ESVCLP) or a Venture Capital Limited Partnership (VCLP). These structures provide tax exemptions to incentivise startup investment. However, when they were created, regulators sought to ensure that investors could reasonably understand what they were investing in.

Imagine it's 2011: as an investor, it might be reasonable that you could understand the business model of a B2C dating app. But could the same be said for a neo-bank?

So they came up with something we call the Regulated Product Exemption rule. If a startup operated under a regulatory environment (i.e., it needed a license, qualifications, etc.), then a fund could still invest in the company. But they had to acquire an exemption from AusIndustry.

The goal then was to ensure investors could reasonably be expected to understand what they've invested in. Today, this has left not just fintech but any regulated industry without the support of local VCs.

In our conversations with VCs and law firms, AusIndustry consistently says no to most exemption requests. Without the exemption, the fund loses its tax exemption on its entire fund. Due to the tight margins funds operate under, this would be a death knell to most, and investing in fintech or any regulated product becomes a non-starter.

Many fintech products are regulated and thus directly affected by this rule. But there's a corollary—what if you're not a regulated product but might become one in the future? We call this the Afterpay problem. If a fund invests in a business that eventually becomes regulated and then loses its exemption request, it loses its tax exemption status.

If you've followed the industry, you'll see the distinction: local VCs lack fintech in their portfolio, but Corporate Venture Capital (CVC) funds do not. To get around this, most CVCs operate under another fund model, usually a Unit Trust. They do not offer the same fantastic tax exemption status but provide some tax protections.

This is why Triple Bubble was set up as a Unit Trust: to take advantage of this opportunity.