The Australian venture capital sector’s opportunity to lead from the front

The venture capital (VC) sector has always had a symbiotic link with startup founders. As the guardians of capital – the fuel that founders need to launch and scale-up their ventures – VCs are the adjudicator for startup success. After all, rightly or wrongly, a closed fundraising round has become the benchmark by which the world measures startup performance. Yet, ask any founder about their thoughts on Australia’s VC sector and you’ll have very mixed responses.

Australia’s VC sector has mirrored the rise of our startup eco-system, developing rapidly from a low base. In 2020, we have multiple two hundred-million-dollar VC funds – something unthinkable just five years ago. As they have grown, Australian VCs have shown their own innovation – looking to build world-leading operations when it comes to supporting and empowering the founders they back.

As we move through these unprecedented times, VCs are faced with both massive challenges to the status quo, but also the opportunity to build upon their innovation to both support founders but also to build the world-leading companies of the future.

In times of downturn, the biggest disruptive opportunities emerge.

VC investment in Australian startups has yet to slow, according to the KPMG Venture Pulse Q1 2020 report. It shows the first three months of 2020 saw Australian startup investment rise for the fourth straight quarter to US$429 million – in what was the country’s second highest quarter of VC investment after Q2 2014. We continue to see larger deals at later stages. Australia’s largest round of the quarter was a $160 million raise by digital bank Xinja.

In April, we continued to see large raises announced by Australian scale-ups. Adelaide-based space and IoT startup Myriota closed a US$19 million Series B round, Melbourne-founded fintech Airwallex announced a US$160 million Series D round, and Australia gained another unicorn, as Safety Culture reached an AU$1.35 billion valuation in an AU$60.5 million investment. These large deals alone will see the VC investment trend continue to appear strong as we move through the second quarter of the year.

However, these top line figures hide two major issues facing Australia’s startup ecosystem.

Firstly, the continuing trend of fewer early stage VC investment across the board. According to Venture Pulse research, we saw fewer deals in the first three months of 2020 than any quarter since 2013. While many founders have turned to alternative sources for seed funding, seeing the ability of the traditional “friends, family and fools” sector to back early-stage ventures.

Secondly many later-stage founders are facing the very real struggle of balancing opportunity with constraints in a time of pandemic. In the first weeks of the shutdown, they were presented with similar demands from many of their investors. Get ready for challenging times, reduce non-essential investment and preserve cash. While this is smart general advice – not every startup is being impacted in the same way. The cost of slowing down for those who should be speeding up is significant and can have lasting consequences.

At its heart, startup investment is about supporting great people with world-changing ideas to solve major problems and build leading businesses. Australia’s VCs are going play a more important role in Australia’s startup sector over the next 12 months than ever before. This means re-evaluating how we measure opportunity, opening up our minds to new types of investment, and most importantly – supporting founders through the tough choices they will have to make.

Our venture capital firms have already shown their capacity to rapidly build a sector from the ground up, now they must evolve to help Australian innovation grow and flourish and become even stronger through turbulent times.

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