Start-ups turning to bank of mum and dad as VC funding dries up, Airwallex report reveals

Australian fintech Airwallex says the transfer of wealth from baby boomers to their millennial children should foster not only property ownership but also entrepreneurialism.

Airwallex co-founder and CEO Jack Zhang started the company in a cafe in Melbourne.

Australian start-ups are feeling the cost of living crunch, with more than a third turning to the “bank of mum and dad” to keep their fledgling operations afloat, a new report reveals.

Airwallex has released what it says is the largest study of its kind – which it completed in partnership with global public opinion and data company YouGov – to gauge the health of Australia’s start-up ecosystem.

The report surveyed 500 start-up founders and revealed that 92 per cent were struggling financially, with 40 per cent turning to family and their professional networks for financial advice and support as venture capital funding dries up.

While “bootstrapping” is not unusual in the start-up sector – Atlassian founders Mike Cannon-Brookes and Scott Farquhar relied on credit cards to launch their business – Taylor Fox-Smith, head of Airwallex for Startups, said the survey results were surprising.

Taylor Fox-Smith, head of Airwallex for Startups, said 40 per cent of survey respondents were accessing capital from the bank of mum and dad to support their operations.

She said they raised questions about the transfer of wealth from baby boomers to their millennial children to foster not only property ownership but also entrepreneurialism.

“In the first quarter of this year we saw funding drop to a six-year low and then bounce back in Q2 with the strongest quarter since Q4 2022,” Ms Fox-Smith said.

“Accessing capital has been a core part of this ecosystem’s success and maybe what we haven’t spent a lot of time measuring or understanding is confidence as a health check or measure of success.

“What really surprised me is where start-ups are accessing capital. We have almost 40 per cent of respondents accessing capital from the bank of mum and dad, and we’ve got this great conversation and discourse happening around a transfer of wealth between parents and their children for the purchase of property – but what we’re not considering or talking about as much is the transfer of wealth for people to explore entrepreneurialism or the launching of start-ups.”

The Airwallex survey came as KMPG revealed that the venture capital raising environment remains subdued, with investment increasing from $US1.2bn to $US1.4bn in the half year to June 30. Overall deal volumes were weak, falling to 7691 – the lowest level since the third quarter of 2016.

The Reserve Bank has continued its tough talk on interest rates to rein in sticky inflation, placing it at odds with its central bank peers, including the Federal Reserve. Fed chair Jerome Powell’s speech at Jackson Hole last week showed that rate cuts are imminent, saying the “direction of travel is clear”.

RBA governor Michele Bullock, however, says it’s “premature to be thinking of rate cuts”. Ms Fox-Smith said while this has placed start-ups under economic pressure, “a strong sense of optimism still shines through”.

Atlassian co-founders Scott Farquhar and Mike Cannon-Brookes launched their company more than 20 years ago with credit card debt.

She said about 78 per cent of founders surveyed said they are likely to expand their businesses globally in the next 12 months, despite the economic challenges.

“The findings are illuminating and speak to a time that is both challenging and full of opportunity,” Ms Fox-Smith said.

“Almost half of respondents marked a frustration of the banks not having products that are tailored to start-ups needs.”

One of the biggest friction points for any business – particularly start-ups – is the inability to earn a return on funds held in other currencies, unless they open a separate bank account overseas, which is a complex process.

To this end, Airwallex – which Jack Zhang founded in a Melbourne cafe eight years ago – launched a new “Yield” product late last year that allows businesses to earn interest on US dollar balances without needing to open an overseas bank account.

The company has so far attracted more than $100m in funds under management from business customers, exceeding expectations. While Ms Fox-Smith said it was popular among start-ups, founders still needed to “build a community” that they could draw on for financial support and advice.

“Community is at the core of the financial readiness and financial confidence of start-ups. Community, I think, can manifest in two ways. One, I think our social forums and networks like LinkedIn are increasingly becoming part of the way that founders early and later stage are accessing information on financial savviness, and then I think the second piece is community engagement like events. So panels, breakfast forums, we’re kind of in a boom era of events.

“We found in our report that bootstrapping is still very much part of what founders are doing to try and get their ideas off the ground. Sometimes Australians can be proud when it comes to asking for people to back their ideas. But certainly, what we’re seeing is a new confidence to be able to lean into your personal communities to access funding.”