COVID-19: The financial future is bright for the brave and the bold

Benjamin Chong aussie startup investment

Right Click Capital partner Benjamin Chong.

As investors and founders stare down the barrel of an uncertain future, the question many are asking is, exactly how bad is this situation we’re all in together?

But as the second half of the year unfolds, there is some solace to be found looking at H1 through the lens of Right Click Capital’s Internet DealBook, an analysis that provides rich insights into the venture capital landscape, tracking Australian companies receiving angel and VC funding.

Internet DealBook has found that the value of startup deals in the first half of 2020 is significantly higher than the same period in 2019, but the number of deals is much lower.

This means fewer investments were done in H1 2020, but investments were larger, on average.

To provide more context, the median value of investments made in the first two quarters of 2020 were $4.4 million and $6.4 million respectively, compared with $1.6 million and $2.1 million for the same periods in 2019.

A total of 94 deals were completed in the first two quarters of 2020 compared with 189 in the 2019 period.

There has been a shift in the types of startups receiving funding and the appetite of investors. And naturally, COVID-19 is the root cause.

The new funding environment

Over the past few years, there’s been a growth in the number of VC firms in Australia. This has been great news for founders wishing to source funding for their scalable startup, and as a result more Australian founders than ever have been able to raise capital from Australian VCs.

As more VCs have emerged, some have decided to focus their efforts on particular sectors or stages and carve out a niche to capture the most sought after startups. For instance, there are now specialist fintech VC firms or those who invest in later-stage startups or even pre-IPO technology businesses. Compare this with ten years ago, when there were few VCs in Australia.

VC firms have also been writing larger investments into existing portfolio companies. As startups progress, VCs are keen to double down by investing into subsequent financing rounds. Startups that are growing quickly, particularly internationally, consume large amounts of capital, and this is a key reason for the increasing median value of investments.

Angels on the sidelines

Smaller deals have evaporated due to withdrawal of angels from the market. Our own firm supports pre-seed or seed stage startups, often alongside angel investors, however many have stood on the sidelines in recent times for a number of reasons.

Access to funds have now dried up. Some angels have traditionally invested capital from a discretionary pool of funds, having generated wealth through their previous careers or investments.

The increased levels of volatility on listed markets has impacted wealth, particularly those with a listed equities portfolio. The S&P/ASX 200 VIX, a measure of the implied volatility of the Australian stock market, increased significantly in late February 2020 with major movements into March and April, mirroring the uncertainty posed by the health and economic shock of COVID-19.

Smaller deals have also dried up due to a decline in the number of founders who are raising capital at the early stages.

Anecdotally, we know from conversations with founders that many have decided to bootstrap at this time. This reflects the competitive market and founders feeling pressure to demonstrate a more polished prototype or greater level of potential customer demand than before.

Founders seem to be spending more time on customer and product development than before, perhaps reflecting feedback from investors indicating they’d like to see more traction before investing.

Future is bright for bold founders

Despite less money flowing to early stage deals this year, strong founders will continue to attract interest from VCs. Experienced investors know that great companies have been founded during similar and uncertain times.

Airbnb, the online marketplace for lodging, was founded in August 2008 during the debts of the great recession. WhatsApp, the cross-platform mobile messaging app, was founded shortly after in January 2009.

Closer to home, Deputy, the workforce management platform, was launched in 2008 and now has customers in over 70 countries.

When reviewing early stage deals, VCs look at team, market and product. Founding teams who exhibit technical, domain and commercial expertise are critical. Having a co-founder with relevant technical chops for the business at hand is key.

The same goes for co-founders with a deep understanding of the customer problem and insights into how they’ll go to market. Together, founders need to show signs that they are moving and learning fast.

Founders need to be chasing a large market with lots of customers so there’s the potential for rapid growth. For most startups, this means making international sales, as there are limited sectors in Australia that are large enough.

As we enter the second half of this extraordinary year, opportunities for funding await brave founders who can anticipate and meet investors’ expectations.

Those with a proof of concept or prototype are better able to illustrate the early signs of their vision, especially if there are positive user reviews. VCs will also be extremely receptive to founders who position the startup optimally for when conditions improve.

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