Venture capital veteran says start-ups must come to terms with an expected severe downturn

The co-founder of one of Australia’s top venture capital funds says start-ups need to be more sceptical about what investors say and face up to the downturn.

AirTree co-founder Daniel Petre. Picture: Stuart McEvoy

The co-founder of one of Australia’s top venture capital funds says the country’s start-up ecosystem needs to “grow up” and come to terms with what’s expected to be a severe downturn, amid concerns that the local sector is ill prepared to grapple with the prolonged pain to come.

Two of the nation’s leading venture capital firms, Blackbird and Square Peg, closed nearly $2bn in combined funds in the past month alone, and Daniel Petre, a former Microsoft executive and partner emeritus at the Sydney-based AirTree, said questions need to be asked whether our local start-up ecosystem can cope with at least $500m in new investments per year over the next three years.

“The analogy I use is a tree … you plant a tree but if you use too much fertiliser you kill it; you have to feed it gradually so it can absorb all the nutrients,” Mr Petre said.

“It’s the same with your start-up ecosystem. You’ve got to feed it at the speed at which it can absorb the money and produce enough returns that make people want to play again.

“This all comes down to maturity. And our sector hasn’t really seen a downturn, so it doesn’t know how to be open and mature about saying, ‘hey, we’re in a down period, we might raise a smaller fund for example’. It’s all been sweetness and light. And I don’t think that’s healthy.”

Daniel Petre says local start-ups, which have been hit by widespread lay-offs over the past six months, need to now be more sceptical about what their investors are telling them.

Speaking ahead of a panel at Blackbird’s Sunrise summit in Sydney on Friday, Mr Petre – himself an investor across Blackbird, AirTree and Square Peg – said the global financial crisis did not leave much scar tissue for Australia’s start-ups or venture capital firms, which he said have enjoyed a decade of sustained growth.

He said local start-ups, which have been hit by widespread lay-offs over the past six months, need to now be more sceptical about what their investors are telling them.

“If you’ve been a VC since 2012 then all you’ve seen is growth,” Mr Petre said. “So much of the money has been raised since 2012, and most of the money being invested now is by people who haven’t been through downturns.

“There hasn’t been this sort of muscle memory built into the ecosystem in a system way, to know how to cope with this.

“Everyone talks about their fund being founder friendly, but that’s pretty meaningless when everything’s going well.

“Once the music stops, do you truly lean in and help a founder who has decent unit economics and decent growth but not stellar growth and is running out of cash? Or do you just put more money into the things that are going super well?

“There are companies that are struggling now, that should be kept alive to get through this, that may not get the capital because people are just being asset allocators.

“I don’t know one VC firm that has sacked someone because we’re in a correction. But I can tell you about 30 companies that have sacked hundreds of people. So the sense that this is sort of mutually experienced pain is just bulls..t. Right now it’s bad for people (in venture capital) but it’s far worse for the founders who are struggling.”

The downturn has caused local VC funds to rethink their valuation methodologies. Blackbird co-founder Rick Baker described the current environment as an “unwinding of the manic activity of last year”.

“I think we’ve got another year of pretty challenging times from a macroeconomic point of view, which doesn’t stop innovation, but it just means you’ve got to innovate in a different framework than you were last year, and the money is not as available,” Mr Baker said.

Blackbird Ventures founders Niki Scevak, Bill Bartee and Rick Baker.

“It doesn’t mean it’s not available, but … last year was a crazy year where there was too much money flying around the ecosystem, and now we’re much more back to normality.”

The comments come amid new statistics from data and analytics firm GlobalData showing 327 venture capital funding deals worth a total of around $3bn were announced in Australia during January to October 2022, which was a 12 per cent growth in volume but a 9.6 per cent decline in value compared with the same period in 2021.

An analysis of GlobalData’s Financial Deals Database showed Australia has been witnessing fluctuating month-on-month VC funding trend in 2022, and although October showcased some improvement in funding value despite a decline in volume, it was not enough to offset the decline experienced during some of the previous months.

“The decline in value despite growth in volume suggests that investors have become cautious for committing big investments,” Aurojyoti Bose, lead analyst at GlobalData, said in a statement. “The volatile market conditions globally seem to be weighing heavily on the investor sentiments.

“In fact, the average size of VC funding deals stood at $9.3 million during January-October 2022 compared to $11.5 million last year.”

Australia-based start-ups raised $294.3m though 26 VC funding deals in October 2022, the data showed, which is a 6.3 per cent improvement in value but a 13.3 per cent decline in deal volume compared to the previous month.

Mr Petre said he was a huge fan of both venture capital and what technology companies could do for the nation, but that “we need to be more honest with ourselves”.

“We need to be a bit humble, stop the bulls..t and mature,” he said. “We need to grow up from adolescence into adulthood.”