Williams, who lost in last year’s Australian Open final to sister Serena, suffered her third first-round defeat in Melbourne in five years
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Bencic won her final three tournaments of 2017 in Thailand, Taipei and Dubai and continued that form to take the opening set 6-3.
The second set opened to a string of breaks of serve but Bencic came through against the seven-time Grand Slam winner.
Bencic: You have to play at your limit to beat Venus
The 20-year-old Swiss played the 37-year-old American great to perfection, soaking up the fifth seed's firepower and attacking her wavering serve with abandon under the roof at Rod Laver Arena.
In a tense Grand Slam opener that felt more like a final, Venus battled to keep touch in an enthralling second set but Bencic unleashed two blazing forehand winners to close out the match in the 12th game.
The resurgent Bencic will meet the winner of Johanna Larsson and Luksika Kumkhum in the next round.
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