This was published 7 months ago
Tech unicorns vanish as start-up funding plummets
By David Swan
Investment in large technology start-ups fell off a cliff last year and no new “unicorns” – billion-dollar start-ups – were crowned as funding from venture capital shrank and short-term pain hit the local sector.
But last year was still the third-highest funding year on record for Australian start-ups, behind 2021 and 2022, although investments in more mature start-ups faded dramatically and deal sizes diminished to one-third of those recorded in early 2021.
The annual State of Australian Startup Funding Report, which compiled data from more than 1000 start-up founders and investors, found that $3.5 billion was invested in Australian start-ups across 413 deals, a precipitous 53 per cent drop in funding from a year earlier.
Folklore founder Alister Coleman said that on many measures Australia performed slightly better than global counterparts. Credit:
The tech sector is weathering its toughest period since the dotcom crash.
Dozens of local start-ups shed staff over the past year as interest rates rose and venture capital funding dried up, with 90 per cent of investors witnessing lay-offs at their portfolio companies. Some 41 per cent of investors reported that one or more of their portfolio companies shut down entirely.
Meanwhile, no new Australian start-ups joined the unicorn club, where the likes of Canva, Airwallex, Culture Amp and Linktree are members.
While the figures paint a dire picture for the local sector, investors said that Australia still fared slightly better than their global counterparts and that following a “wartime” focus in 2023 they are now confident about the year to come.
“Considering the global context, the decline in funding during 2023 was expected,“said Chris Gillings, founder of Cut Through Venture which helped prepare the report.
“Unlike many start-up ecosystems worldwide, Australia continues to go from strength to strength. We have more young people entering the tech sector, more talented executives leaving their day jobs to start companies, and more investors competing to invest in the next great Australian businesses,” Gillings said.
No new “unicorns” joined the club: Canva co-founders (from left) Cliff Obrecht, Cameron Adams and Melanie Perkins.
Cut Through Venture produced the report with Folklore Ventures. Folklore founder and managing partner Alister Coleman said on many measures Australia performed slightly better than global counterparts as the focus on durability, financial prudence and accountability swung back to more traditional investor expectations.
“For those who have only experienced venture investment at its peak, the adjustment was chilling,” he said.
“Folklore holds as much optimism in the year ahead as founders surveyed, with 82 per cent believing they’ll successfully raise in the next one to two years, along with an expectation that many VCs will also top up with new funds in 2024.”
There are green shoots. Investors tipped artificial intelligence as the most anticipated sector for the coming year, but interest in blockchain and medtech start-ups has cratered.
Enterprise software and climate tech were the two winners of 2023 and are set to remain popular investment targets this year.
Signs are also slightly encouraging for female founders, with share of total capital raised by all-female or mixed-gender teams recovering from low levels in 2022.
“In 2024, the new normal will look a lot more like the old normal. The funding levels of 2021 and 2022 were anomalous,” AirTree Ventures partner Elicia McDonald said.
AirTree Partners (left to right) Kell Reilly, John Henderson, Helen Norton, Craig Blair, Jackie Vullinghs, Elicia McDonald and James Cameron.
“The downtrend since then isn’t all bad; it’s a healthy reset to find the balance between too much and not enough capital because both scenarios are detrimental to start-ups.”
“We saw the best companies, like Employment Hero, Go1 and Pet Circle, running counter to the narrative of big deals falling off a cliff by raising rounds at or above their previous unicorn valuations. And after a period of focus on business fundamentals and efficiency, we’re excited to see many start-ups return to the markets to raise [funding] with a more robust and compelling proposition than ever before,” McDonald said.
Blackbird Ventures partner Rick Baker said that after two years of resetting from the peaks of the zero interest-rate period, investment optimism is beginning to rise again. A year ago Blackbird raised Australia’s largest venture capital fund, raking in more than $1 billion from the nation’s largest superannuation funds.
“We’re seeing optimism in our portfolio, with a number of early-stage companies coming back to market and getting good interest from domestic and overseas investors,” Baker said.
Dan Krasnostein, partner at rival venture capital outfit Square Peg, said 2023 was “the year of AI” after ChatGPT’s explosion in popularity put AI into everyone’s pockets, lounge rooms and dinner conversations.
Rampersand partners Helen Souness and Paul Naphtali.Credit: Eamon Gallagher
“There is significant hype and attention around AI, and we are big believers that this is justified, with the potential for its impact to be on a similar scale to other technological paradigm shifts like the birth of the internet or the rise of the mobile era,” he said.
”Whilst the hype is massive, AI and machine learning techniques have been building and developing for decades and we’ve been investing in AI businesses since 2014. We expect this to continue for Square Peg throughout 2024, alongside our other key areas of focus on finding and backing early-stage companies in our other core investment themes of fintech, software as a service and climate tech.”
The next year will likely see a continued decline in start-up valuations and fewer cheques signed, according to Paul Naphtali, co-founder of venture capital firm Rampersand, with investors seeking out high-quality founders with big visions.
“While on the one hand, this could mean fewer investors, on the other it means better investors with the right abilities and motivations in the market to build a more healthy and positive ecosystem,” he said.
“As a mid-sized fund, we’re primed for this trend by finding a good match between founders and investors, and giving investors the opportunity to invest material dollars and effort in the very best Australian companies.”
“For investors, there will be more exciting investment opportunities beyond artificial intelligence. The new spatial computing market is opening up, with some of the most exciting enterprise software and marketplaces in recent decades being built. The underlying computing platforms are evolving and there will be some huge winners, and Australian start-ups are well positioned to be at the forefront,” Rampersand said.
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