Startup funding in decline, but early-stage hits peak in Aus

Early-stage funding reached record levels with a growing number of founders backed in 2022. The Pre-Seed and Seed stages proved to be particularly successful, defying the fall in overall investment by accumulating around $3.2 billion. 

Startup funding in Australia experienced a decline of 30% in 2022 ($10.6 billion – to $7.4 billion), according to the second annual edition of The State of Australian Startup Funding report by Cut Through Venture and Folklore Ventures. 

Despite the mid-year slow down, 2022 was a record year for the very early deals. There has been real maturing in Australia’s early stage investing landscape.

– Kylie Frazer, Co-Founder and Partner, Flyin Fox Ventures

Here’s a bit of recap:

• Startup funding hit $7.4 billion in 2022
• 30% fall from record 2021
• Investors made 712 deals
• Great time to be early-stage
• Female founders get more deals, but way less dollars
• Record year for venture debt and crowdfunding
• 6 new unicorns crowned

Early-stage hits a record high

Even with a 3% drop in the number of deals announced in 2022 compared to the record number in 2021, sub-$5M rounds saw a growth of 13% while $5-20M rounds remained steady. However, deals larger than $20M experienced a significant decline of 27% from 2021 levels. Interestingly, Australia bucked the trend of dropping funding for pre-seed and seed stages in the US and Europe.

One notable aspect is the flourishing of Australia’s early-stage funding scene. The country now boasts a robust pool of local professional venture funds, family offices, angel networks, and experienced individual investors willing to invest in startups at their earliest stages. This includes both new funds and existing funds that shifted their focus to earlier stages or doubled down on their early-stage mandate. Moreover, conditions were favourable for launching a startup or raising a small early-round in 2022, against local and global funding market uncertainty.

Despite the promising outlook, investors reported longer fundraising processes, indicating a longer time to decide on investments, even with a strong appetite to invest. Additionally, early-stage deals were reported to be more competitive than ever, according to more than a third of investors. The top three funds Airtree, Blackbird and Square Peg raised $2.4 billion in new funds last year, with Blackbird raising Australia’s first $1 billion VC fund. This highlights the continuing interest and investment in the Australian startup ecosystem.

To modify Bill Gates’ quote to describe the Australian startup ecosystem: you will overestimate the data from a year and underestimate it over a decade. To look back and see the rise of our ecosystem over the last decade has been unimaginatively stunning. I can’t wait for the next one.

– Niki Scevak, Co-Founder and General Partner, Blackbird VC

The report co-author and founder of Cut Through Venture, Chris Gillings, stated that while there is plenty of dry powder in VC wallets for the years ahead, it is being deployed more cautiously. This is because limited partners (LPs) in VC funds now demand a more conservative investment cadence and portfolio companies have been told to reduce costs. And with all this, more than 60% of founders still plan to raise their next capital round in 2023.

Regardless of the decline in overall investment, the Australian startup funding environment remains competitive, with early-stage investment booming. The growth story of local investment in such a short time remains astonishing, with investment reaching $7.4 billion in 2022, which is still five times bigger than 2018’s $1.4 billion. While challenges persist, Australia’s startup ecosystem is maturing, and the funding environment will periodically expand and contract.

The full report is available for free from here.