The second annual State of Australian Startup Funding report says the highs of 2021 were derailed by a global economic slowdown in 2022. While the Australian landscape is robust and maturing, there is much to do for gender equality and diversity.
Report co-author, founder of Australian start-up funding data specialist Cut Through Venture, and investor with Five V Capital, Chris Gillings, said 2022 was a mixed bag for start-ups.
“2022 was a challenging year for some founders on the funding front. Some start-ups still thrived, but others had to close their doors. Others had to alter their operating model to be less funding dependent,” Gillings said.
For Gillings, who was based in New York for nine years until returning in 2022, said the local start-up funding ecosystem was “unrecognisable” compared to a few years ago.
“More investors invested in the earlier stages in 2022 than ever. Dept at the later stages is improving too – there is a growing cohort of at-scale local funds that can lead later rounds with sizeable cheques,” he said.
Report co-author and found and MD of Folklore Ventures, Alister Coleman, said the start-up environment had experienced “astonishing growth and change” in the last decade, but “there is much to do to improve diversity”, with funding outcomes for women, and under-represented founders improving from a low base. Women-led start-ups account for 24 per cent of total investments and 33 per cent of early-stage investments.
The report draws on input from more than 500 founders, angels, and investors to offer a view of the local funding environment, its diversity progress, and a sense of the scale of the Australian start-up ecosystem.
The 10 things to know
- In the same boat – Equity funding followed the global trend and fell 29 per cent from the 2021 high;
- Resilience is real – Australia’s funding system showed resilience compared to listed and international venture markets;
- Good to be early – It’s a great time to be an early-stage founder, with its funding ecoysystem more active than ever;
- Cautious spending – Record new VC funds announced, but a more conservative investment cadence is at play. The appetite is there though;
- Keeping healthy – VCs are prioritising follow-on investments to ensure portfolios stay healthy, 55 per cent said more than half their investments were in existing portfolio companies;
- Fintech’s fall from favour – It’s still in top spot, but its funding almost halved and it accounted for almost 40 per cent of the funding fall. Enterprise SaaS rose to within $100m of it. Climate and Cleantech remain top Angel and VC picks;
- Still no parity – While female founder participation in deals reached an all time high in 2022, funding share fell to its lowest levels. Only one female-founded start-up was in the top 10 raises. Early stage funding did increase dramatically;
- Indigenous ground – The exponential growth in Indigenous start-ups has been fuelled by new and traditional investment mechanisms;
- New channels for next-gen angels – Angle investing is still growing with new vehicles to make it easier to invest together and reduce the required minimum spend; and
- Debt demand – A record year for venture debt and crowd funding as the search for non-dilutive options led a surge in venture debt demand. The increase in successful crowd funding campaigns was driven by food and beverage.
In the Australian venture capital market in 2022, there were 712 deals and $7.4 billion in funding. New South Wales accounted for 57 per cent of the action and Victoria, 30 per cent. There were six new unicorns (a start-up valued at more than $1 billion), and more than a third of investors (34 per cent) saw a portfolio company fail.
(Worth noting that in the 12 unicorn deals in 2022, only one – Airwallex – had a female founder.)
Food and beverage didn’t make the top five in terms of capital raised, with Fintech ($1.3bn), Enterprise/Business Software ($1.2bn), Hardware/Robotics/IoT ($554m), Blockchain/Crypto/Web3 ($510m), and Biotech/medtech ($387m) topping the list.
In fact, food and beverage was 12th, with $216 million invested, accounting for 7.69 per cent of the year’s funded deals.
Female participation up, funding down
Only 10 per cent of equity capital raised was in female-founded start-ups, even though female participation in deals increased five per cent on 2021, to 23 per cent. A third of angel and pre-seen funding was received by women, up from 21 per cent in 2021.
One-in-three of top venture capitals did not invest in a female founder in 2022. Only six of the 50 most active VC funds allocated more than half of their investments to women-founded start-ups.
Giant Leap partner Rachel Yang said, “Research shows that if women and men participated equally as entrepreneurs, global GDP could rise by up to approximately six percent, which makes sense given diverse teams outperform.”
The percentage of total capital invested in start-ups with at least one woman founder was 25 per cent in 2020, 21 per cent in 2021, and 10 per cent in 2022.
The report said there was “reason to be hopeful”, with the fall “almost entirely due to a small number of record-breaking deals conducted by all-male teams at the beginning of the year”.
That said, only a third of female founders felt supported in the start-up ecosystem, compared to 50 per cent of males. Another third of women said they didn’t feel supported compared to 26 per cent of men.
LaunchVic and Alice Anderson Fund CEO Dr Kate Cornick said, “We are seeing an increase in women stepping up to found their own companies and with the various ecosystem initiatives, including LaunchVic’s own Alice Anderson Fund, more women are being supported.
“However, there is more work to be done including seeing this translate into later stage investments and more women-led scale-ups.”
The report said more women were entering the ecosystem, and grassroots efforts like VC Women Down Under, Startmate’s Women’s Fellowship and Scale Investors’ Scale EducateED should see the trend continue.
It said there was a “sizeable delta” in the support felt by male and women entrepreneurs. Only five per cent of women founders - compared to 28 per cent of men - believe there are many funding options available to founders.
In terms of support, 83 per cent of women believe their gender has impacted their ability to raise external capital for their company compared to 14 per cent of men.
Startmate CEO Michael Batko said, “Hope alone won’t drive change for women founders. It’s all our responsibility to actively provide opportunities and support through initiatives like Startmate’s Women Fellowship. The Fellowship has helped 500+ women jump from consulting, banking, hospitality, or retial to start-ups. The program surrounds Fellows with role models, expands their horizons, and gives them confidence to take the leap of faith into an early-stage start-up. Belief, support, and ambition are the catalysing ingredients for meaningful life changes.”
Indigenous experience
The report “passes the mic” to prominent people and organisations that are supporting and investing in Indigenous founders, with the hope it will prompt investors to consider their role in improving access to capital for Indigenous communities.
“If Australia is the establish itself as a truly innovative and sustaining entrepreneurial ecosystem, it must welcome and include talent from all backgrounds, communities, and stages of life. Greater representation drives greater opportunities for all Australians. But to get there, we need better data and transparency about where we are today,” the report said.
Five things to know
- Meaningful and accurate data is lacking;
- Indigenous-founded start-ups are on the rise
- alternative capital pathways are increasing, e.g. crowdfunding;
- dedicated organisations (Minderoo Foundation, Ochre Ventures, First Australians Capital, Barayamal, and Indigitek) are stepping up to bridge the gap between Indigenous entrepreneurs and access to capital; and
- still room to improve and a long way to go.
First Australians Capital MD and chair Leah Armstrong said, “It is not a matter of Indigenous communities not having the power, knowledge, experiences and solutions; fundamentally, it’s about power without wealth, equality, and justice.
“A new economy that values First Australian’s cultural values and knowledge is essential for a sustainable, equitable, and inclusive future for all Australians.”
Record high early stage funding
The unprecedented funding momentum from 2021 that continued into the early months of 2022 was derailed by the global slowdown in Q2. By year’s end, funding was down 30 per cent on 2021 ($7.4bn vs $10.6bn).
Still, for early-stage funding, 2022 saw a record high deal count and funding capital. Kylie Frazer, co-founder and partner of Flying Fox Ventures, said, “There has been a real maturing in Australia’s early stage investing landscape. Now, we just need to make sure we have the funds to support through the pre-Series A valley of death.”
What was early-stage’s gain was late-stage deal’s pain, with many of the country’s largest start-ups sitting on the funding sidelines. In terms of being more competitive in 2022, the report found 35 per cent of investors felt that pre-seed and seed deals became more competitive, 17 per cent for Series A and B, and just two per cent for Series C+.
Uncertainty breeds inaction
Meanwhile, there are more Australian venture capital funds sitting on more undeployed capital - ‘dry powder’ - than ever before. The report said most venture funds have a seven to 10 year lifespan, so professional start-up investors have the luxury of taking their time to deploy.
“Uncertainty often breeds inaction, so while global uncertainty persists, one should expect many funds to remain on the sidelines,” it said.
Afterwork Ventures principal Jessy Wu said while the amount of VC funding deployed in Australia had increased exponentially, the growth in the number of VC funds has been “linear at best”.
“We still lack a ‘market maker’ for first time funds; a fund-of-funds that can cornerstone funds, encouraging the deepening bench of credible and diverse prospective GPs to shoot their shot,” Wu said.
The report also found some divergent viewpoints between investors and founders. For example, 47 per cent of investors said the most decisive factor in winning in a competitive deal situation was brand and reputation of the fund, while only five per cent of founders said it was the most important.
And 47 per cent of founders said the most important factor when choosing an investor was alignment of vision/purpose compared to 11 per cent of investors.
More than half (59 per cent) of founders felt there weren’t enough funding options available in Australia, 58 per cent said they didn’t feel supported by the wider entrepreneurial community and start-up ecosystem, and 62 per cent said investors haven’t lived up to the ‘promises’ of non-capital value-add they said they would provide.
Optimism in the market
With the growth of Australia’s start-up ecosystem over the last decade, the report found a level of optimism for the future.
Square Peg co-founder and partner, Paul Bassat, said, “We may see further cyclical declines in 2023 but the rise of the start-up in Australia is an inexorable trend with deep roots.”
Main Sequence partner Gabrielle Munzer said even though the year ended with a lot of uncertainty in the venture capital market, “good companies will endure”.
“This is especially true for deep tech companies that can prove true differentiation through novel science and engineering innovation. Although not immune to market changes, companies whose value stems from solving deeper issues or the planet, through proprietary science and engineering, will likely see better commercial returns in the long run.
“For any founders who are navigating this tumultuous time, it’s incredibly important to stay focused on their mission and continuously refine how to be a magnet for customers, capital and talent that can propel growth in the year ahead,” Munzer said.
