Note: This is part one of the three-part series on the 2023 State of Australian Startup Funding report, a collaboration between Cut Through and Folklore Ventures.
Australian venture capital investment mirrored global trends, experiencing a significant decline from 2022. While deal volumes showed occasional signs of activity throughout 2023, overall funding volumes remained subdued due to the lack of consistent mega-deals, which the market had grown accustomed to in 2021 and early 2022.
By the end of the year, Australian startup funding reached $3.5 billion, marking a 54% decline from the previous year. A fourth-quarter upswing in reported deals barely surpassed 2022 by $400M and 19 reported deals. Globally, venture capital investments also saw a 38% decline.
Only a small fraction of local investors met their expected investment targets for 2023. However, the majority of venture capitalists expressed optimism for increased deal volume and international investment interest in the Australian market in 2024.
The Australian startup funding landscape mirrored the global decline in deal volume observed in 2023. Despite significant changes since the pre-COVID era, the number of deals and the amount of capital invested resembled local figures from 2020.
While investors exhibited caution, entrepreneurs enjoyed access to a wider range of funding options. An increasing number of mature local investors were ready to deploy substantial capital, and interest from international investors remained robust.
Although it may take time to return to the activity levels of 2021, both investors and entrepreneurs are optimistic that the worst is behind them.
“The final quarter of 2023 saw further pressure in public markets with an additional 25bp rate hike, while inflation remained high. These ripple effects into the private markets, particularly Venture Capital, led to further tightening of valuations alongside conservative investment decisions.
A significant portion of investments went into bridging rounds for existing portfolio companies to support and extend runways through these challenging times. While the best startups continue to secure funding, capital raises are taking longer, and due diligence is extensive,” remarked Georgia Barkell, Managing Partner of Sprint Ventures.
Taryn Pieterse, Principal at Rampersand, commented, “The landscape for VC funding has been dynamic this year. Startups demonstrating focus and disciplined progress are securing strong rounds, but fundraising timelines remain drawn-out. Navigating the fundraising environment and finding the right investor are critical. At Rampersand, we are as focused on supporting founders through these challenging macro conditions as we are on identifying new startups for investment.”
Most sectors fall
Most sectors fell, with a return to the fundamentals of venture capital evident. Traditionally well-supported sectors dominated the funding pool, echoing global trends where software, hardware, and hard sciences secured larger funding rounds.
While few sectors were immune to the decline in total funding, the decreases in the total number of deals were particularly noticeable in Enterprise and Business Software, Fintech, Web3, and Food and Beverage.
Capital-efficient Enterprise & Business Software took pole position in total funding for the first time, with Fintech maintaining the top spot for deal count.
Other sectors saw positive shifts in total investment, including Space/Aviation/Defense, Marketplaces, and DevTech, which all climbed the rankings from relatively low bases. Smaller deals in Climate Tech, Healthtech, and EdTech/Training contributed to their increased share of total transactions.
Although pure-play Artificial Intelligence startups constituted a small portion of total funding and deal count, there was a significant uptick in startups mentioning the technology in their business descriptions, particularly across software-focused sectors, Fintech, Healthtech, and Cybersecurity.
Almost all active investors in 2022 significantly reduced their pace in 2023, with some reporting no new deals at all.
16 investors made more than 5 investments in 2022, compared to 35 in the previous year.
Among the top 50 most active investors in 2022, 10 announced no new investments in 2023.
A staggering 95% of the 50 most active investors announced fewer investments in 2023 than in 2022.
Anecdotal investor commentary suggests that professional startup investors devoted a larger portion of their time to supporting their current portfolio companies, either operationally or through small, often unannounced, bridging rounds. This observation aligns with the data collected through our survey, making the widespread slowdown in deal participation at the individual fund level unsurprising.
In the first half of 2023, 31% of the most active investors did not announce any new deals. This percentage decreased as the year progressed, concurrent with an uptick in overall deal volume.
The third annual The State of Australian Startup Funding Report is by Cut Through Venture and Folklore Ventures.