Start-up Funding Rebounds as Two-Speed Sector Emerges

New data reveals early indications of a recovery in tech funding, with Australian start-ups raising 30% more capital this year compared to the same period last year. However, the overall number of deals has declined, indicating the emergence of a two-speed tech sector.

In the first five months of 2024, local start-ups secured $1.7 billion, surpassing the $1.3 billion raised in the same timeframe last year. This figure is still less than half of the $4.1 billion raised during the same period in 2022, the peak of the pandemic-era tech boom.

Data exclusively compiled for The Australian Financial Review by Cut Through Venture indicates that the number of deals fell to 144 by May 31, compared to 151 in 2023 and 243 in 2022.

The figures suggest that venture capitalists are making fewer but more strategic investments to ensure companies have enough funds to reach their milestones. At the same time, there is a gradual return of mega deals, which were scarce last year. Notable examples include Honey Insurance raising $108 million and cybersecurity firm Bugcrowd raising $156 million.

These insights were released ahead of The Australian Financial Review Entrepreneur Summit, where investors from Airtree Ventures, Square Peg Capital, and Flying Fox Ventures, along with founders from Employment Hero, Gilmour Space, and Me&U, will discuss the state of the local start-up ecosystem.

Investor interest in artificial intelligence is also revitalizing fundraising efforts. AI and big data start-ups raised $75 million, representing 5% of the total funding across 11 deals.

“AI start-ups need to raise larger rounds to invest in the latest technology to stay competitive with their US counterparts and the capital they have access to,” said Zeb Rice, managing partner at King River Capital, which led Relevance AI’s $15 million Series A round.

“Investors have become more discerning, with high-quality companies reaching Series A and beyond attracting significant interest from both Australian and global investors willing to write larger cheques for fewer companies.”

Gender Imbalance Persists

All-male founding teams claimed 85% of the capital raised in the first five months of the year. In contrast, all-female founding teams secured only 5% of the capital, while companies with at least one female founder raised 10%.

The pace of activity picked up throughout the year after deals dropped to a six-year low in the first quarter. The average and median value of investments from the seed stage onwards increased significantly year-over-year.

Rachael Neumann of Flying Fox Ventures predicted 2024 to be a “solid, well-considered, well-balanced year for investing.”

“Great companies will surface and get funded. Companies without a clear product-market fit or go-to-market strategy will struggle and possibly fail,” she noted. “Investor and founder expectations around valuations and milestones are mostly aligned. Things feel stabilised and are performing in a healthy way.”

Return to Normalcy

Bevin Shields, a partner at ASX-listed fund Bailador, observed that bridging rounds, which dominated the market over the past couple of years to help start-ups avoid a “down round,” are now giving way to more traditional investment rounds aimed at funding growth.

“Many of the better-quality companies that raised at peak valuation multiples during the COVID period have grown into their valuations, alleviating some concerns about raising at lower valuations than previously achieved,” he said. “We feel conditions have improved, and with a significant amount of ‘dry powder’ in the market, there should be ample funding support for high-quality businesses seeking to raise from the local market.”

Matthew Koertge, managing partner of Titanium Ventures (formerly Telstra Ventures), commented that the current market environment is more favourable than in 2021, when start-ups achieved massive valuations.

“Deal volumes are significantly lower, and valuations are significantly better,” he said. “When you have a lot of people throwing money around like drunken sailors, it’s really not ideal because prices are just too high. We are seeing a lot of exciting companies right now with reasonable financing terms, which we believe will result in some great deals over the coming years.”

Excluding start-up accelerators (which make numerous small investments in very early-stage companies), the most active investors so far this year were seed-stage investor Skalata Ventures, participating in 13 raises, Blackbird Ventures with 10, and Investible with eight.