Even with Australia’s biggest venture capital fund under his wing, Blackbird Ventures partner Niki Scevak admits the game has changed for founders looking for investment.
“We expect the market to be tougher next year than it was this year, it’s not just going to fall back into the euphoria of 2021,” he said.
Likewise, while remaining optimistic about the future of the industry, Alister Coleman, partner at Folklore Ventures, warned of difficult days ahead.
“There’s plenty of capital available and plenty of incentives to invest it quickly, but we could see it invested more patiently than we’ve seen before,” he said.
“It will likely mean fewer companies invested than before, and it will certainly mean the re-emergence of a seed-stage gap that closed for a year. [in 2021] … I think we will unfortunately see a significant contraction in angel investment.
Preliminary test
The ability of early-stage founders to raise capital will be tested next year, with a new survey from Herbert Smith Freehills revealing that many founders plan to raise seed or Series A in 2023.
However, most are undecided about whether they should pursue a funding round with awards, or try to dodge the tech wreckage valuation crisis by accepting bridge funding instead.
The survey of 40 mostly early-stage founders found that 76% planned to raise funds in the next 12 months, but 27% planned to do a seed round and a further 50% didn’t know which structure. they would use.
Laurence Schwartz, partner at OIF Ventures, said there would be a moment of truth in 2023 for the many companies that successfully raised capital in 2021 and thus avoided having to return to the market in 2022.
They will be back in front of investors in 2023, when valuations and financing terms are unlikely to be as generous.
Mr Schwartz said it was ‘unrealistic and simplistic’ to claim the industry was ‘all rosy’.
“There are geopolitical material hotspots in Europe, Asia and the United States. There are macroeconomic conditions to consider around monetary policy tightening, and the big question mark is still whether there will be a recession in 2023, in which economies and to what extent,” a- he declared.
“In the short term, there are big question marks.
“You can’t be reckless both ways. You have to manage all the results, and I think it’s prudent to continue to be capital efficient and focus on unit economics and the track.
OIF was one of the first homegrown funds to anticipate the depth of this year’s tech correction, sending a note to founders in January encouraging them to raise capital quickly if they needed it, before the market hit. don’t change.
Valuations have now fallen across the start-up spectrum, with early-stage companies being hit the hardest.
Homegrown venture capital funds slashed Canva by 36%, while top US investor T. Rowe Price was more aggressive, slashing its value by a total of 44%.
Despite this, many companies were still able to rise at higher or stable prices, with their growth matching or more than offsetting market movements.
In May, Shippit tripled its valuation, unicorn Go1 rocketed to a $2 billion ($3 billion) valuation, and in October, Airwallex raised another $100 million and maintained its previous valuation of 5, $5 billion.
Consequently, the Herbert Smith Freehills survey found that 85% of early-stage Australian founders remain confident that their next round will be at a higher valuation.
Clayton James, partner at Herbert Smith Freehills and co-director of his local venture capital practice, said there were very few seed rounds in 2022, but that was partly due to the high volume of stint rounds.
“Bridging isn’t just emergency, disaster funding, it’s investors making the company stronger and giving the founders some space by making them stronger,” he said.
“But the founders are naturally optimistic people, many are young and they haven’t been burned by [market] forward cycle.
“There are only so many transition rounds you can do. If you do too many bridges, you can have strange and unexpected results with your calculations…you don’t want to suddenly do the conversions and realize you’ve given more away from your business than you think.
The amount invested in local start-ups is still down from 2021 levels, according to the most recent figures from Cut Through Venture, but comfortably exceeds the level of investment in 2020.
While most local VCs say 2021 was the most outlier 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 facing the consequences of the blip of 2021.
Where previously revenue growth was the preferred metric for startup investors, the HSF survey found that 72% of founders believed they would need to reach profitability faster due to market conditions.
Less competition
A positive aspect for local venture capital funds – but not necessarily for start-ups – in the global slowdown has been a reduction in competition from American investment firms keen to tap into the booming start-up sector. Australian ups.
US venture capitalists have been particularly aggressive with US investments in 2021, leading some to wonder if local companies will struggle to compete.
Elizabeth Henderson, partner at HSF and co-head of the venture capital practice, 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 entering the first round. A few years ago they tended to wait,” she said.
Blackbird’s Rick Baker said that although his company had co-invested with US funds, it put his company and other Australian investors in a stronger position now that some had pulled out.
“What’s happened with COVID is, especially US VCs, have learned to do business on Zoom, where before they felt they had to fly here and meet the founders face to face. “, did he declare.
“In 2021 they all started chasing Zoom, and we had to play that game and make some really quick decisions. I think we prepared here and competed very well, but had to match the condition sheets with higher prize money due to competition.
“What we’ve seen this year is that a lot of these US venture capital firms have retreated to their home market. The U.S. market was so hot in 2021 that these investors were looking elsewhere, but that competition has dropped significantly now, and they’re busy looking in their home markets again. »
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