Are startup investors coming out of survival mode into growth mode?
Remco Marcelis asked three investment experts for their thoughts on the state of the market, and how startup founders can get the edge on equity raising.
After a rollercoaster few years in Australia’s startup scene – including a flurry of big-money deals in 2021 and early 2022 – the investment market has reverted to something like 2020 levels.
During the September quarter this year, Australian startups announced $739 million in capital across 77 deals, according to the Cut Through Quarterly venture capital report. That’s compared to $924 million across 101 deals in the same period last year.*
Meanwhile, the number of fundraising rounds under $5 million slid dramatically in the September quarter, with both seed and Series A and B valuations falling by about a third on average.
But while capital may be scarce, it’s certainly not all doom and gloom, with signs of more investment activity. Many startups are showing signs of great health, and are less reliant on pure venture capital.
With the market finally stabilising, and international investors popping back up thanks to the cheap Aussie dollar, there’s plenty of potential for plucky founders and investors to negotiate high-calibre deals.
I asked three investment experts for their thoughts on the state of the market, and how startup founders can get the edge on equity raising.
Have valuations hit rock bottom?
Taryn Pieterse, a principal investor for early-stage tech VC firm Rampersand, says it’s difficult to make that call.
“In the US they are seeing an improvement in valuations in the last quarter. But the data in Australia is just not as transparent,” she says.
“We don’t have that insight yet, but we have a feeling that things aren’t going further down. I think stabilisation is probably the right word.”
From our view at Standard Ledger, we see founders realising that valuations are down — no longer over-asking on price. Therefore, negotiations are happening much quicker than they were earlier this year.
After some wobbles, where is the market at?
“The pre-seed market in Australia is getting healthier,” says Matthew Browne, managing partner at Black Nova Venture Capital.
“In the first two quarters of this calendar year, there were very few people writing cheques.
“I think everybody kind of choked for a good 12 months while they rebalanced. A lot of people were sitting on capital, but weren’t quite sure where the market was going to go.”
While many economists predicted interest rates and inflation might begin to even out by now, that hasn’t been the case, he says, and everyone has had to adjust.
Out of survival mode and into growth mode?
Zachary Lazarus, business development manager at Aussie Angels, says after a quiet last quarter, he’s seeing an increase in deals.
“The funding is pretty stable. I think it’s high-conviction deals that are coming in. It’s equity deals and they’re kind of getting where they need to be.”
Browne believes while Series A and B rounds have slowed down, they’re now “absolutely thawing out”.
It’s also now quite normal for startups to raise money in smaller stages – for example, A1 and A2 rather than going directly from Series A to B.
Pieterse says the path to Series A has changed for many businesses. Sometimes that’s about reducing costs, or just not increasing costs as revenue grows.
For others, it might be raising bridging funds so there’s “more runway to get to a really exciting Series A”.
“Or maybe it’s the market’s not there for you at the moment, slow down your burn, and let’s see how it’s looking in 2024.”
Should startups be taking as much investment as they can get?
Browne says founders need to back themselves. “So the investment advice is, yes, make sure you’ve got enough money to survive and thrive into your next round.”
But he recommends that startups that want to keep a larger chunk of their company try to do more with less in the early stages – and raise their metrics before staging an A or B round. That’s particularly the case for experienced founders with strong networks.
From an investor point of view, Pieterse says a decent period between capital raises –12 months might be too short, for example – is probably a more attractive proposition.
But the main thing is that businesses are aligned with their investors.
She notes that many startups are also taking more of an interest in research and development grants.
Working at the very early stage, Lazarus advises founders to ask for 20% more than they think they’ll need.
“They need to back themselves but they also want to be in a position where they don’t fall short.”
What’s on the horizon in 2024?
Lazarus says amid more challenging times, the quality of deals – and the opportunity they present – is high.
“The deals have increased by volume, but also by calibre. It’s really high-quality deals and I guess an outcome on the investor side of things is they get access to better deals.”
Browne says it’s a “great time to build a business if you’re brave enough”.
“It (artificial intelligence) is probably the biggest wave of technical change we’ve seen since cloud and so I think from that point of view, it’s really exciting.”
He says it’s also a fantastic time for investors, who no longer have to battle skyrocketing prices and conduct super-speedy deals, to back early-stage businesses.
Watch this space.
* This figure was achieved by adding the values for July, August, and September 2022.
Remco Marcelis is the founder of startup accounting and CFO firm Standard Ledger.
