Start-up investment craters, more lay-offs to come, Cut Through Venture investor survey finds

New figures detail a dramatic decline of investment in Australia’s technology sector and there’s more pain on the way.

Cut Through Venture founder Chris Gillings.

A new survey of Australian family offices and venture capital firms has painted a dire financial picture for the nation’s tech start-ups.

The sector has reported the lowest amount of funding since before the pandemic, and the fewest number of deals reported since 2019.

Local start-up investment cratered in the first quarter of 2023, according to the report from Cut Through Venture which was published on Tuesday, There was $661m in funding reported across 82 deals – a dramatic drop compared with $3.3bn for the same period a year earlier.

The results of the survey of about 140 investors, including start-up accelerator programs, angel syndicates, family offices and venture capital funds, suggests that valuations in later-stage private start-ups have fallen by up to 50 per cent, which in some cases would mean billions of dollars wiped from market capitalisations.

More lay-offs are likely as more than half of those surveyed reported that some of their portfolio companies have either already laid off staff during the quarter or were planning to. Australian start-ups have collectively laid off thousands of staff in the past 12 months – with Mr Yum, Zoomo, Immutable, Milkrun and Till Payments each cutting their workforce by double-digit percentages.

Statistics show more workers in tech were laid off in the past year than in 2020 and 2021 combined despite relatively low unemployment rates, and unprofitable start-ups were forced to cut costs after hiring too quickly during the pandemic.

The vast majority of investors – 119 out of 140 – said they expected start-up valuations would fall during the remainder of the year. Thirteen said that one or more of their start-ups had been forced to close entirely in the quarter.

Mr Yum chief executive Kim Teo. Picture: David Crosling

“Though Australian valuation data isn’t public, the survey responses aligned to what’s been reported globally, that later-stage valuations have fallen by up to 50 per cent, while early-stage valuations, less inflated in 2020-21, have decreased but to a lesser extent,” Cut Through Venture founder and Five V Capital venture capitalist Chris Gillings told The Australian.

“Over half of investors advised their portfolio companies to seek bridging rounds from existing investors before pursuing full rounds. Given the nature of these rounds, many of these transactions likely remain unreported.”

A bridge round is an interim financing round between large funding rounds, and often implies financial difficulty.

Mr Gillings said that start-up founders who secured funding in 2021 or early last year now faced the challenge of reducing costs sufficiently to delay the need for more external capital, without hindering growth.

Some founders were now facing the prospect of a dreaded “down round”, in which they have to raise capital from their investors at a lower valuation than their previous funding round, and sell shares at a lower price, he said.

“Many of the founders we work with seem to be managing this balancing act effectively, however, it would be unrealistic to expect uniformly positive results for everyone,” Mr Gillings said.

Cut Through Venture, which began as a newsletter in early 2021, has evolved into a publisher of less frequent, yet more in-depth publications focused on start-up financing – including Cut Through Quarterly and The State of Australian Startup Funding.

The company manages an angel investment syndicate called Cut Through Angels, comprising more than 300 angel members.

When those surveyed were asked what sectors investors were most excited about for the remainder of the year, many responded artificial intelligence, climate tech and big data.

When asked what sectors they were least excited about, the most common answers were blockchain, cryptocurrency, Web3 as well as medtech.

The vast majority of respondents said that the recent news surrounding Silicon Valley Bank would not affect their approach to investing next quarter.