Venture capital (VC) funding for local tech startups is beginning to wane as investors re-think their strategies following an unprecedented year of cash splashing.
Over $10 billion reached the pockets of entrepreneurs from Australia and New Zealand in 2021, according to data from the Cut Through Ventures newsletter published by Chris Gillings, a record for investor spending in one calendar year.
The trend continued into the early parts of 2022 with $3.6 billion flowing from VC wallets in the first quarter of 2022 – but funding has since slowed dramatically.
A massive March ($834 million) was followed by an average April ($369 million) which has begun a trend of monthly spends well below the previous year.
In May 2021, investors put $657 million toward local startups which was down to $452 million this May.
Likewise, June 2021 saw $701 million in funding, but June 2022 had just $409 million worth of deals.
Central banks raising interest rates has made access to capital more expensive while general economic uncertainty – for example, the value of risk-on asset classes like tech stocks and crypto plummeting – is making investors more wary.
Pauline Fetaui, General Manager of Brisbane incubator River City Labs, said the market has shifted.
“What we are seeing is timelines are longer, entry to investment is higher, pathway to profit is more desirable, and reccurring revenue is a must,” she told Information Age.
“On the upside, there is real opportunity for alternative vehicles of capital to rise, such as revenue-based financing options.
“Unfortunately, as we are already seeing, some won’t survive and we can only expect that, like other downturns, some new giants will rise.”
The Australian Financial Review recently polled a set of influential VCs who admitted they were preparing for rocky times ahead.
Writing in his newsletter this week, Gillings said startups were feeling the strain as VC belts tighten.
“We've heard everything from the ugly (certain unmentionable investors backing away from previously negotiated deals) to the expected (deals taking much longer to close),” he said.
Andrew Wong, founder and CEO of Melbourne-based startup Koba Insurance – which operates out of the ACS Bay City Labs – said he’s certainly noticed an attitudinal change from would-be investors.
“Going back just 12 months ago, we were happily pitching and talking to people already invested in fintech companies,” he told Information Age.
“But now the response we get is that insurtech [insurance technology] is different from fintech and they’re not interested.
“They’re sticking to, or homing in on, their investment thesis a lot more now because we’re at this stage where they don’t know what’s going to happen.
"Things are changing rapidly, and VCs are backing off a bit.”
Wary VCs tends to mean lower valuations, less capital to burn through, and the need to cut costs.
Australian startups are already feeling the pinch. A wave of layoffs has swept through the local sector, forcing small companies to cut up to half their existing staff in response to investor cash drying up.
It’s been a shock for companies like HealthMatch which runs a platform for matching patients with clinical trials and had, in December 2020, raised $18 million before last week announcing it would cut its workforce in half and send 18 people out the door.