Australian Venture Capital Funding - Q1 2023 Review

Cut Through Venture recently published their Australian Venture Capital Funding Report for Q1 2023, providing insight into the Australian venture capital (VC) funding landscape. The report reveals that Australian start-ups experienced a slow start in Q1 2023, with a total capital of $661 million raised across 82 deals. This is less than half of Q1 2021 and only a fifth of Q1 2022. The decline in funding can be attributed to various factors, including concerns over interest rates, economic growth, and the recent collapse of Silicon Valley Bank, which further undermined investor confidence in the market.

As a result, many investors evaluated fewer deals during the quarter, but 79% of them anticipate completing the same or more deals in 2023 compared to the previous year. Given the current conditions, many VC firms are recommending founders to raise a bridge round from current investors (57%), while 65% of portfolio companies have taken on venture debt to manage their capital needs.

VCs have outlined their priorities for the next quarter, including investing in new start-ups, ensuring that their current portfolio companies are well-capitalized, fundraising from limited partners (LPs), focusing on marketing and business development, and initiating internal firm initiatives.

In terms of deal counts, announced deals up to $50 million dropped to levels not seen since Q3 2020, and deals over $50 million slightly surpassed the two-year low set in Q3 2022. The sharpest decline in deals occurred in the $5 million to $20 million range, which fell by over 50% compared to the quarterly average from 2020 to 2021.

There has also been a significant impact on deal sizes with average deal size, which is influenced by outliers, falling dramatically at the Seed through Series B+ stages, and marginally at the Angel/Pre-Seed stage. However, the median deal size at the Angel/Pre-Seed and Series A stages has bucked the broader trend, marginally increasing compared to Q1 2022.

Valuations have continued to come under the spot light with 85% of VCs believing that valuations will fall for the rest of the year. Median valuation changes from a year ago are estimated to be a 30% fall for Seed-stage companies, a 40% fall for Series A and B-stage companies, and a 50% fall for Series C+ stage companies. This reflects the changing capital markets landscape and the evolving investor sentiment.

Fintech has re-established its dominance, accounting for nearly a third of total funding and one in ten deals. HealthTech has shown strength in deal count, and Agriculture/AgTech has sustained its recent funding popularity. VC firms expect investors to focus more on industries that demonstrate capital efficiency, solve real-world problems, and improve productivity in the next few years. Sectors such as AI/Big Data, Enterprise, Cyber/Privacy, Deep Tech, and Design/Publishing/Collaboration are expected to be popular among investors seeking sustainable long-term results for their LPs. On the other hand, sectors such as Crypto/Web3, Food/Beverage, Consumer Products, E-commerce/Retail, and Social Networking/Media are expected to be least exciting for VCs for the remainder of the year.

Large deals have also experienced a freeze in Q1 2023, following a resurgence in Q4 2022. Overseas investors, who have participated in many of the largest rounds in 2021 and 2022, were less active in the Australian market in Q1. Many later-stage start-ups have shifted to cost-saving mode, resulting in fewer large deals in the market, and the deals that did emerge are taking longer to secure funding.

One positive trend in Q1 2023 was the rebound of female founders, who reached a two-year peak in total funding share. Seed and Series B+ deal shares achieved highs, while Series A share marked a five-year low. This indicates progress in diversity and inclusion in the start-up funding ecosystem, with more funding going to female-led start-ups.

Looking ahead, while the current conditions pose challenges, there are opportunities for start-ups and investors to navigate the evolving landscape of the Australian VC funding ecosystem. Start-ups need to be strategic in their fundraising efforts, while investors should carefully assess investment opportunities based on the changing market dynamics and shifting sector preferences. Despite the uncertainties, good companies with strong value propositions are expected to continue to raise capital, albeit at potentially lower valuations compared to previous years. It is important for start-ups and investors alike to adapt to the changing environment and take a long-term perspective in building sustainable businesses and portfolios. Overall, the second half of 2023 may present opportunities for investors to deploy capital and support the growth of the Australian start-up ecosystem. As the market evolves, staying informed and adaptable will be key to raising capital.

#VCtrends #startupecosystem #investing #diversityandinclusion #capitalmarkets #opportunitiesahead #Australianstartups #Australianventurecapital #australianinvesting