Reports reveals fewer VC funding deals sealed for startups in 2017, more sources of alternative funding sought
Friday, January 19, 2018/
Two reports on funding for startups and young tech companies in Australia during 2017 have revealed a drop in the number of venture capital deals rolled out and an increase in the amount of alternative funding sought by companies.
The first report, KPMG’s Venture Pulse, reveals the total amount of venture capital invested in Aussie startups rose 1.4% in 2017 when compared with 2016, coming to $US555.63 million ($697.9 million). However, the number of deals executed dropped from 185 in 2016 to 135 last year.
The larger overall investment amount shows a maturing of the Australian investment scene, says KPMG’s head of high growth ventures Amanda Price, along with a shift from investors to focus on pre- and post series A funding rounds.
“With seed and angel funding still a vital part of our startup ecosystem, we are hopeful that the decline in deal number is a temporary shift rather than a major structural change in the VC market,” she said in a statement.
While the figure of close to $700 million is an impressive one for a year’s worth of venture capital funding, another report from startup directory Techboard revealed Aussie startups found themselves $720 million from various funding sources in the December quarter alone.
From October to December last year, startups looked to options such as debt financing, venture capital, share placements and government grants to rack up that significant figure. Emerging funding options such as initial coin offerings (ICOs) and crowdfunding also played a part.
Over half of this funding was raised by startups in New South Wales, with Victorian and Western Australia startups following in second and third place as the states with the most funding over that period.
More funding options being explored
The disparity between the figures in the reports and the perceivably large amount of funding outside of the venture capital space may suggest local startups are seeking different pastures when it comes to helping grow a business.
This includes recently emerging options such as ICOs and equity crowdfunding, with the latter recently becoming more accessible to startups with ASIC granting the first seven licenses to platforms such as Equitise and Birchal last week.
Speaking to StartupSmart, founder and chief executive of prominent Australian accelerator BlueChilli, Sebastien Eckersley-Maslin, says there are definitely plenty of other forms of funding available for startups locally, and says founders should be prepared to go down all avenues.
“Companies should make available to them all sources of financing, though, obviously, customer financing is always the best,” he says.
“But founders should always understand the difference and motivation behind who’s providing the financing.”
Eckersley-Maslin believes venture capital will continue to win out as the preferred source of funding for startups – despite it not being the “cheapest” in terms of equity parted with – due to the potential for growth provided by venture capital firms.
VC will stay popular, but equity crowdfunding a contender
Getting something like a government grant or debt financing will see startups missing out on support from people who are financially motivated to see the venture grow, says Eckersley-Maslin, as parties involved in this kind of fundraising only care if the startup fulfils the grant or pays back the debt, he says.
“Good VCs are going to help you unlock channels and unlock future funding, many of them can provide a foothold into the US and support a company overseas,” he says.
“A good team at a VC firm will actually help you build value into your company.”
As for equity crowdfunding, Eckersley-Maslin says he’s excited now that licences have been issued and retail investors can get on board, saying if an adult can “go blow $5,000 on the pokies and lose it all, they can go spend that much on an emerging startup”.
The challenge, he says, is the obligation for companies to disclose things to investors, which he believes is one of the reasons companies delay going public.
“In introduces significant financial and time overheads for teams, and can be quite a burden to startups with just 40 employees,” he says, believing that equity crowdfunding is best complemented by an additional larger funding round from other sources to help startups get the resources.
Overall, there will always be mainstay “pillars” of funding for new ventures says Eckersley-Maslin, which will stay constant as new and volatile funding sources, such as ICOs and crowdfunding, come into the space.
“New sources of funding will continue to pop up, and startups will continue to jump on them because by their very nature startups are disruptive,” he says.
“I look at trends as being more important than any number at a certain point in time. If there’s overall more activity and more investment in the space, that’s a good thing.”
“What I’d like to see more of is a higher number of exits. A couple more Aconexs, it would help fill out the entire ecosystem.”