Australian start-ups: Many that survived 2023 are delaying inevitable, VCs warn

AirTree, where Mr Blair is a partner, was a major backer of MilkRun and :Different, which last raised capital in a $25 million round led by Commonwealth Bank’s x15ventures and Antler in 2021. Recent filings with the Australian Securities and Investments Commission show :Different’s administrators, KPMG, realised $3.4 million from the sale of the company’s assets late last year.

“It is incumbent upon us as VCs and an industry to recognise that failure is a part of the system, but that when they happen they are terrible,” Mr Blair said. “It really hurts founders and is a big financial hit to them and their teams, but we need to accept that taking on risks is how you also find these incredibly large companies.”

Despite the pessimism, Mr Blair expects investors – local and international – will make bigger commitments this year than last. AirTree usually raises funds on a three-year cycle, meaning it will this year ask prospective backers for financing.

Investment in Australian tech start-ups declined by more than $4 billion in 2023, in a continuation of a dramatic slide that began early in the previous year as interest rates rose and publicly listed tech companies were sold off. Mr Blair said he expected “at least a handful” of raises over $100 million, at increased valuations, this year.

Rick Baker, a co-founder at Blackbird Ventures, said the last two years had been the toughest for the industry since the dotcom crash, but that cost-cutting, company failures and significant layoffs had forced the sector to mature.

“Since we reset the industry about 10 years ago, this is the first really tough time that we have been through,” he said. “If you think back through some of the storylines, like the valuations of Canva and other companies, the scrutiny on the super funds, we have all got way better at doing our valuations.”

More recently, Blackbird has changed how it values larger companies in its portfolio. Now, they are benchmarked against public companies by an independent auditor from one of the four major accounting firms every quarter. “That is a huge change from 2021, where we held valuations at the last funding round level,” Mr Baker said.

“When markets are going down strongly like they started to in 2022, those valuations become stale really quickly because the multiples they were set on change, and that is where we got caught,” he said, adding that valuation discussions with founders would continue to be delicate, particularly for those that had hired staff on share packages.

Liquidity and Canva

He said he hoped the sense of shame associated with a falling valuation would diminish in private tech companies, and that founders and industry observers would see that this was correlated with public markets, and not always an indication of poor performance.

Blackbird, like all the major VCs, has begun paying out money to the limited partner backers of their earliest funds. It cashed out significant profits from Canva in the form of secondary share sales last year, when The Australian Financial Review revealed the local sector’s biggest company did not plan to go public until 2025 or 2026.

Canva’s eventual IPO will be a key moment for the local venture capital industry, and Mr Baker said US investors were already warming up for its debut.

“I am not authorised to speak too much on it, but I think your general view of not this year, but the year after, is what people are thinking,” he said. “When they were over in the US at the Goldman Sachs conference, I have had word from a number of different attendees who said Canva really was the company everyone wanted to talk to.

“A lot of different work is involved in being a quality listed company, and they are doing a really good job of building that expertise within the organisation.”

AI wave

Mr Blair and Mr Baker said the surge in interest in artificial intelligence would continue to define the market this year. Image generation start-up Leonardo Ai cemented its position as one of the local market’s hottest start-ups late last year, with significant interest in a Blackbird-led funding round in December.

Even start-ups that are not explicitly selling AI-based products are investing in ways to use AI to operate more efficiently, and incorporate it into their products.

OneVentures managing director Michelle Deaker said any software company not implementing AI would be left behind, adding that the technology was becoming a “differentiator” for start-ups in crowded markets.

“Even Employment Hero is implementing AI to do things like smart matching, or lowering the cost of implementations. So SaaS [software-as-a-service] companies are going to become so much more profitable with the implementation of AI,” Dr Deaker said.

Global investors

“They can code a lot faster, for 10 per cent of the cost potentially, and there’s so many areas where you are either cost saving, adding new revenue streams, adding new products, or managing your risk and compliance better, all through the use of AI.”

Dr Deaker said more global investors would be entering the local market this year – but in a more disciplined way than the last big wave of financing, in 2021, when Tiger Global, Insight Partners and some US private equity firms competed aggressively.

“Australia has always been quite disciplined, but some of that international money wasn’t, and it forced the hands of some of the local investors,” she said.

“Some of those players were coming in and doing a deal in three days. I mean, you just can’t do adequate due diligence under those circumstances, and the valuations didn’t make any sense on a forward-looking profile.

“Now the new entrepreneurs of 2021 have had a reality check of what the real world is like, and are happily more realistic about what funding markets are, that capital isn’t cheap or free, and that you have to earn the right to the capital and respect it.”

Asked if funding rounds had become too expensive for founders in Australia, Square Peg founder Paul Bassat said the market was approaching a reasonable level, and that quality companies would be sustained, while less marginal investment bets would be made.

“The reality is that, in this market, if you’re a top quartile company, you’re going to get funded pretty easily,” he said.

“If you’re a second quartile company, you will get funded, but it’s going to be a little bit slower and harder, and if you’re a third or fourth quartile company, it is much harder than it was before.”

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