Startup funding rounds hit six-year low

Australian startup funding deals fell to a six-year low in the first three months of the year, with the drop off in early-stage venture capital more pronounced as investors turn their attention to “top opportunities”.

New data from Cut Through Venture shows $703 million in capital funding was announced by startups during the March quarter, a “significant” reduction on the $1 billion-plus funding raised in the final quarter of last year.

The report, published on Tuesday, said this was spread across 66 funding deals (58 when excluding accelerator rounds) – the lowest number since Cut Through Ventures began collecting the data six years ago.

Bug bounty company BugCrowd closed the largest funding round of the year so far at $156 million, pushing the cybersecurity sector to the top of the charts for more than two years.

It was followed by biotech firm Aravax ($66 million) — which sourced $12 million from the Victorian government’s embattled venture capital fund, Breakthrough Victoria — and Gilmour Space Technologies ($55 million).

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The remaining deals were valued at $50 million or less, including fintech Constantinople and workforce management software maker Deputy – which became Australia’s latest unicorn last month.

“The largest funding rounds for the month were relatively disbursed amongst the sectors, and so no sectors had a significant breakout quarter from a funding standpoint,” the report said of the “sluggish start to 2024”.

But with most deals that land in the first quarter beginning the year before, it is still too early to know whether the tough investment environment experienced last year will continue for the remainder of this year.

“Data from the second quarter will provide greater insight into whether the new calendar year has fostered a greater willingness and capacity among startups and investors to engage in transactions at a rate faster than what was seen over the last 18 month,” the report said.

On Monday, fintech startup Honey Insurance said it had successfully completed the largest-ever Series A funding round in Australia at $108 million.

Despite the total value of the Cut Through Ventures tracked deals “marginally outpace[ing]” the same quarter a year earlier, one unnamed investor cited in the report notes the “significant slowdown in the emergence of lead investors for rounds”.

“We are currently committed to three deals, all of which are at a standstill while awaiting the confirmation of a lead investor or for the deals minimum funding threshold required for the raise to be hit,” the investor said.

This is most evident in the number of sub-$5 million rounds, which dropped to the lowest level in five years, with investors more inclined “to pay a premium for access to higher quality opportunities”, the report said.

“The count of deals under $5M, $20M, and $50M hit five-year lows. Despite fewer transactions occurring, both average and median deal sizes from the Seed stage onwards saw significant rises compared to a year ago,” the report said.

“This trend suggests a shift towards higher quality thresholds, with investors preferring to allocate larger cheques to top opportunities, potentially to the detriment of funding for less favoured options.”

At least some of the drop off is also down to angel investors, which are weathering cost of living pressures more than other types of investors. Angel investors traditionally feature more prominently in smaller rounds.

Angel investors are facing the prospect of changes to the “sophisticated” investor thresholds after the number of people eligible for the scheme jumped eightfold since 2001, largely due to house prices.

A parliamentary committee last month launched an inquiry into the wholesale investor and wholesale client tests, with the proposed changes to sophisticated investors among the issues that will be reviewed.

A prominent angel investor has also warned changes to superannuation will also deter early support for high growth assets like startups and deep technology companies.

Do you know more? Contact James Riley via Email.

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