Recent reports have hailed an influx of venture capital funding into Australian startups to record-breaking levels, but new research from Right Click Capital’s Internet DealBook suggests investment into Australian tech startups has taken a bit of a hit.
So what is it about tech companies that’s putting VCs off? And should startups be worried?
According to the Right Click Capital report, Australia’s tech companies received $282.4 million in investment in the second quarter of 2018, down from $339.3 million in the same period last year.
According to the report, the average deal value in Australia has also dropped from $10.3 million in the second quarter of 2017 to $9.4 million in the second quarter of 2018.
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The findings take a different view of the figures than other reports. KPMG’s Venture Pulse report on global VC trends, released earlier this month, suggested Australian venture capital firms are investing more into Australian startups than ever before.
The KPMG report found that a record $848 million ($US630 million) was invested into Australian startups in the 2017-18 financial year, and cited a similar figure to Right Click Capital of $281.5 million ($US209.09 million) invested in the second quarter of 2018.
The report focused on this as a significant increase compared to the first quarter of 2018, which saw investment of $228.57 million. However, the second quarter figure was actually also down on the second quarter of last year, which according to KPMG, saw $312.24 million invested.
Separately, a report from the Australian Private Equity and Venture Capital Association (AVCAL) published in November last year showed venture capital fundraising doubled over 12 months, to reach $1.32 billion.
This report also found that total fundraising across private equity and venture capital increased from $2.74 billion in 2016 to $3.35 billion in 2017.
Benjamin Chong, founder, investor and partner at Right Click Capital, tells StartupSmart that, while tech investment may be down slightly, there are other changes that are perhaps more notable.
Focus on SaaS
Chong admits he thought the results were surprising “given that Q1 started off with a bang”, and he draws particular attention to the imbalance of the investments this quarter.
There has been a notable decrease in the amount of deals going through in the hardware, infrastructure and marketing sectors, with no deals going through in the past quarter.
In the software and services sector, on the other hand, there has been a 450% increase in the value of transactions, including both investments and acquisitions, with the total deal value rising from $60.1 million in the second quarter of last year to $353.6 million this year.
Mobile and app startups also saw no investments in the past quarter, but Chong says this is partly due to an evolution of technology.
“There are a lot less people making a noise around these apps,” he says.
“Software-as-a-service (SaaS) [is] likely to drive big revenues.”
Software-as-a-service startups can drive revenue through a quarterly subscription model, and these figures reflect the increasing popularity of this strategy.
In May this year, SaaS startup Safety Culture raised $60 million in Series C funding, in what the Right Click Capital report billed as the third-biggest transaction of the quarter. In February, Simble listed on the Australian Securities Exchange, raising $7.5 million in its “heavily over-subscribed” IPO.
“In Australia there has been a real level of investment in software over the last five-plus years,” Chong says.
“It’s not necessarily a bad thing,” he adds.
Hardship for tech startups?
Chong is aware of the reports heralding the increase in VC funding in Australia, and while he says this dip in tech investment is small — transaction value as a whole, including acquisitions, only fell by 3%, according to the Right Click Capital report — he has some ideas as to what’s behind it.
There are some companies that “have raised and have chosen to keep that private”, he said, and so are not included in the data.
Some VC firms, including Right Click Capital, have been “pretty active in investing overseas”, he adds, and there’s also been a focus on “other sectors in the economy”, such as life sciences and biomedical startups.
Indeed, the AVCAL report found that some 33% of all investment in 2017 went into the healthcare and life sciences space.
“I don’t think it’s all doom and gloom,” Chong says, “nothing can keep going on forever.”
According to Chong, it’s not a case of Australian VCs stopping investing in tech startups, this is just one quarter where they happened to invest a bit less. Ultimately, tech founders should not be disheartened.
“Finding money from investors is always competitive, but there has never been a time that there has been so much VC capital in Australia that’s looking for a good home,” he says.
“It’s a growing market, and of course, there tends to be more startups, unfortunately, than there is money,” he adds.
Chong’s advice is to “building a meaningful, enduring company”.
“Make sure you’re chasing a real problem, your solution is one that affects a lot of people, people in multiple geographies, multiple markets,” he says.
“Investors are looking for strong investments,” he adds.
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