Aussie VC investment is on the up again, but early-stage startups may be missing out: Report

Benjamin Chong

Right Click Capital partner Benjamin Chong. Source: Supplied.

Investment in Australian startups has increased for the fifth consecutive quarter, with $447.4 million ($US318 million) invested across 27 deals over the past quarter, according to the KPMG Enterprise’s Venture Pulse Q3 2018 report.

The result is the most investment in Australian startups in one quarter since Q2 2014, when $479.13 million ($US340.32 million) was invested in 38 deals.

It also represents the fifth consecutive increase in startup investment in Australia, quarter-on-quarter, and a significant increase on Q2 2018, which saw $281.5 million ($US209.09 million) invested.

However, the number of deals invested in the past two quarters remains the same, at 27, meaning the average deal size has increased.

In Q3 2018, the average deal size was $16.57 million ($US11.77 million), up from $10.74 million ($US7.63 million) in Q2.

A year ago, in Q1 2017, the average deal size was just $4.08 million ($US2.9 million), with $163.34 million ($US116.02 million) in VC funding raised across 40 deals.

In the past quarter, notably large deals included Airwallex’s $109 million Series B round and Culture Amp’s $54.3 million Series D, both in July.

GO1 also raised $10 million in August, and Gilmour Space Technologies raised $19 million earlier this month.

While the initial result may look positive for Aussie startups, this move towards fewer, larger deals may actually be a red flag for the ecosystem.

Benjamin Chong, partner at Right Click Capital, says it’s not enough of a discernible trend just yet, but if it becomes one “I would be a bit concerned”.

We could end up in a position where “not enough early-stage companies are getting the funding they need”.

The increase in funding in Australia reflects “a maturation of the market”, Chong says, with more startups growing and going on to raise larger Series B or C rounds.

At the same time, “there is a greater proportion of funding coming from corporate venture capital funds”, Chong says, many of which are large funds that “tend to be writing cheques to slightly later-stage startups”.

It’s not that this is necessarily bad news, Chong says.

“It’s wonderful to see companies getting later-stage funding too … but we’ve got to make sure that we continue to look after the very early stage,” he says.

“There are great companies we see coming out of incubators and accelerators — we need to make sure that they’re also being funded,” he adds.

“If we spend all our time admiring the beautiful roses but don’t go and plant, and cultivate for the next season … then we could have a problem,” Chong says.

And this is not an issue that’s unique to Australia. According to the report, the numbers of first-time VC investments into startups has dipped to the lowest point since the first report in 2010.

There have been 2,751 investments in 2018 so far globally, compared to a high of 7,352 deals recorded in 2014.

However, again, the dip in the value of deals is not proportional.

In 2014, global VC investment totalled $19.71 billion ($US14 billion). In 2018, although the number of investments has more than halved so far, the value of investments has only dropped to $19.89 billion ($US12 billion).

This trend in Australia is arguably reflective of the Asia-Pacific region (APAC). According to the Venture Pulse report, of the biggest 13 VC capital raises (including six that tied, raising US$500,000 each), nine were from Asian startups, and eight were in China.

Two of these top raises were $US1 billion ($1.4 billion) deals, while the largest deal globally was a $US2 billion ($2.8 billion) investment into Singapore car-sharing startup Grab.

The report also shows the increasing prevalence of APAC in the global startup ecosystem. In 2013, just 14% of global VC funding, in terms of value, was invested into APAC, compared to 17% in Europe and 69% in the Americas.

In 2018 so far, 42% of all investments are into APAC startups, according to the report. This compares to 48% of investments going into the Americas and 10% going into Europe.

“There has been a huge amount of capital poured into the Chinese tech companies,” Chong says.

“Enormous injections of capital into companies like Grab have made life so much easier for them to go an invest in that market — and possibly reduce competition,” he adds.

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