Venture capital investment into Australian startups jumped 36% last year, to reach a record high of $1.25 billion. But, as the average deal gets bigger and bigger, the findings raise questions about whether there’s enough support for the little guys.
According to the KPMG Enterprise Venture Pulse Q4 2018 report, venture capital investment in Australia totalled US$899 million ($1.25 billion) in 2018, compared to US$576.1 million in 2017.
That’s despite a notable drop in investment activity in the last quarter of the year, which saw 15 deals totalling $US147.1 million.
However, the downturn followed a bumper Q3 2018, in which 41 Australian VC investments totalled $US325.2 million.
Although startup investment increased on a global scale, the report warns of an uncertain future, suggesting it may be tough to keep the momentum of last year flowing into 2019.
However, speaking to StartupSmart, Justin Lipman, investment director at Equity Venture Partners (EVP), says he doesn’t expect this to be an issue in Australia.
The Australian VC space is still in its fledgling stages, and an “underweighted asset class in Australia,” compared to in more mature markets such as the US and China.
That means “growth rates are relatively easy to maintain compared to other markets in the world,” Lipman adds.
At the same time, several Australian VCs are raising their second or third funds, suggesting there’s plenty of capital in the pipeline.
“There’s a fair bit of growth to come in the industry,” Lipman says.
“I don’t expect it will slow down.”
But, while total investment in Aussie startups is on the up, the number of investments in 2018 was down on 2017, with 114 deals in total, compared to 132 in the previous year.
This means the average deal size in 2018 was just under $11 million, a significant increase from the average of $6.1 million the previous year.
It’s worth noting the figures may be skewed by some of the biggest deals of the year. At the end of November, HR startup Deputy raised $111 million in Series B funding, while Airwallex bagged $109 million in July and SafetyCulture secured $60 million in May.
Even so, the research echoes the findings of KPMG’s Venture Pulse Q3 report, released in October. At that time, Benjamin Chong, partner at Aussie VC firm Right Click Capital, told StartupSmart if average deal sizes continued to increase “I would be a bit concerned”.
“It’s wonderful to see companies getting later-stage funding too … but we’ve got to make sure that we continue to look after the very early stage,” he said.
“There are great companies we see coming out of incubators and accelerators — we need to make sure that they’re also being funded,” he added.
There’s also concern a change in the economic climate could put a halt to other sources of funding for early-stage startups.
Earlier this week, Les Szekely, a colleague of Lipman’s at EVP, noted in a StartupSmart article there may be a recession on the way, and this could have serious ramifications for the startup ecosystem.
If this is the case, Lipman suggests it will be startups in the earliest stages that will suffer most.
“If liquidity dries up in the markets and there is a bit of a downturn in the economy, which everyone is seeming to predict … It will be harder for angel and early-stage seed investors,” he says.
“People with a few hundred thousand dollars to splash — they just won’t have that cash anymore. There might be a bit of a dearth of funding in early-stage private angel investment.”
At the same time, those potential angel investors now have the ability to diversify, by investing in a VC fund.
“Previously, if you wanted to invest in tech you had to do it yourself. Now there are managers who can do it for you,” Lipman says.
While 2018’s figures may be skewed by some of the gargantuan deals of the year, Lipman predicts that in 2019 and 2020, access to capital is only going to get trickier for early-stage ventures.
“If you’re trying to raise $25,000 for an early idea or early proof-of-concept, I think it might be touch going,” he says.
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