Even though he manages Australia’s largest venture capital fund, Blackbird Ventures partner Niki Scevak admits the game has changed for founders looking for investment.
“We expect the market next year to be tougher than this year, not just to return to the euphoria of 2021,” he said.
Likewise, while remaining optimistic about the industry’s future, Folklore Ventures partner Alistair Coleman warned of tough times ahead.
“There’s a lot of capital available and a lot of incentive to invest it quickly, but we may see it being invested more patiently than we’ve seen before,” he said.
“This will likely mean that fewer companies will be invested than historically, and it will certainly mean that the early-stage gap that closed for a year will re-emerge [in 2021] … I think we’re going to see a significant decline in angel investment, unfortunately.
Early stage testing
The ability of early-stage founders to raise capital will be tested next year, and a new survey by Herbert Smith Freehills finds that many founders plan to raise a seed or Series A round in 2023.
However, most are undecided on whether they should continue with the pricing action, or whether they are trying to avoid the tech wreck’s valuation crisis by taking on transition financing instead.
The survey of 40 mostly early-stage founders found that 76 percent plan to raise funding in the next 12 months, while 27 percent plan to transition, and another 50 percent were unsure what structure they would use.
Lawrence Schwartz, partner at OIF Ventures, said 2023 would be the moment of truth for many companies that had successfully raised capital in 2021 and thus avoided the need to return to the market in 2022.
They will be in front of investors again in 2023, when valuations and financing terms are likely to be less generous.
Schwartz said it’s “unrealistic and simplistic” to pretend the industry is “all rosy.”
“There are material geopolitical flashpoints in Europe, Asia and the US. There are macro conditions to consider in relation to tighter monetary policy, and a big question mark remains whether there will be a recession in 2023, in which economies and to what extent,” he said.
“There are big question marks in the short term.
“You can’t be reckless in any direction. You have to overcome all the results, and I think it makes sense to continue to be capital efficient and focus on unit economics and runway.
OIF was one of the first local funds to predict the depth of this year’s tech correction, sending a memo to founders in January urging them to raise capital quickly if needed before the market turns.
Valuations have now fallen across the start-up spectrum, with late-stage companies the hardest hit.
Local venture capital funds have reduced Canva by 36%, while top US investor T. Rowe Price has been more aggressive, reducing its value by 44% overall.
Despite this, many companies have still been able to increase price at higher or flat prices, with their growth matching or more than offsetting market movements.
In May, Shippit tripled its valuation, unicorn Go1 was pushed to a $2 billion ($3 billion) valuation, and in October Airwallex raised another $100 million and maintained its previous valuation of $5.5 billion.
As a result, a survey by Herbert Smith Freehills found that 85 percent of early-stage Australian founders remain confident that their next round will be valued higher.
Clayton James, partner and head of domestic venture capital practice at Herbert Smith Freehills, said there was very little downside in 2022, but that was partly due to the large number of transitions.
“Fulfillment isn’t just emergency, catastrophic funding, it’s investors backing the company and giving the founders a little bit of space by backing them,” he said.
“But founders are inherently optimistic people, many are young, and they’re not burned out [market] cycles before.
“You can only do so many transitions. If you bridge too many times, your calculations can produce strange and unexpected results… you don’t want to suddenly convert and realize you’ve given more of your business than you think.
According to the latest data from Cut Through Venture, the amount invested in local startups is still consistently below the 2021 level, but is well above the investment level in 2020.
While most domestic venture capital funds say 2021 was an unusual year and 2022 should be seen as a return to more normal investment conditions, founders in Australia, the US and around the world are still dealing with the aftermath of 2021.
While revenue growth has previously been the preferred metric for startup investors, the HSF survey found that 72% of founders believed market conditions would require them to break even sooner.
A positive for local venture capital funds – but not necessarily for start-ups – in the global slowdown is less competition from US investment firms looking to tap into Australia’s booming start-up sector.
US venture capital firms have been particularly aggressive about US investment in 2021, leading some to question whether domestic firms will struggle to compete.
HSF partner and head of risk practice Elizabeth Henderson said international funds had been less active in Australia this year.
“One thing that was unusual about 2021 and 2020 was the number of US funds going into the first round of pricing. Going back a few years, they tended to wait,” she said.
Blackbird spokesman Rick Baker said although his company had co-invested with US funds, it put his company and other Australian investors in a stronger position as some had pulled out.
“What happened with COVID, particularly in the U.S., VCs learned how to do deals on Zoom, whereas before they felt like they had to fly here and meet the founders face-to-face,” he said.
“2021. , they all started looking for Zoom and we had to play that game and make very quick decisions. I think we prepared and competed very well here, but as a result of the competition we had to match the term sheets with higher prices.
“This year we’ve seen a lot of US VCs pull back on their home market. The US market was so hot in 2021 that these investors looked elsewhere, but now that competition has diminished significantly and they are now fully occupied again looking only in their domestic markets.