Aussie founders resilient and facing into the challenges of the fundraising environment

A survey from global law firm Herbert Smith Freehills (HSF) has found continued challenges in the fundraising environment have not extinguished optimism among Australian start-ups, and that founders expect to raise and achieve higher valuations, whilst recognising the new paradigm in the Australian VC ecosystem.

HSF’s second-annual survey of Australian start-up founders found that:

• 73% believe that the current fundraising environment is more challenging than in 2022 and 84% say it is impacting their business strategy;
• 91% agreed that Australian start-ups will need to reach profitability earlier because of current market conditions;
• 74% expect to raise capital within the next 12 months;
• 60% believe that their next raise will be higher than their last post-money valuation;
• 79% said that their company did not intend to pursue a liquidity event in the next 12 months;
• 62% remain optimistic about the long-term prospects for Australian start-ups; and
• 94% believe that governments can do more to support Australian start-ups.

One of the strongest responses in the survey was to founders’ approach to profitability — over 90 per cent of respondents agreed that Australian start-ups will need to reach profitability earlier because of current market conditions. As one respondent said, “Pipeline to profitability is probably the most common phrase with investors at the moment”.

HSF partner and Co-Head of Venture Capital in Australia Elizabeth Henderson explains, “A couple of years into the new capital fundraising climate for start-ups, founders are more accepting of the economic challenges that they are facing, and more are pursuing a path to profitability over growth, funded by new capital.

“For many, this pursuit of profit over growth started in early 2022, and we are now seeing a number of companies that have successfully navigated the transition and no longer need to raise as much or as frequently to pursue their scale ambitions”.

HSF’s survey also reflects that for many founders, the path to profitability is a higher priority than seeking an exit.

“The majority of respondents, 79 per cent, said that their company did not intend to pursue a liquidity event in the next 12 months, which likely reflects the greater focus on profitability, as well as respondents’ positive expectations in relation to future capital raising. It may also indicate that there is not yet a meeting of minds on trade sale valuations, and reflects the pause in the IPO market both in Australia and the US”, added Henderson.

In a sign of positivity for the sector, 74 per cent of founders surveyed expect to raise capital within the next 12 months, and not just to bridge — only 38 per cent stated that their company will look at a bridging round before its next series or priced round.

Claire Thompson, Co-Head of Venture Capital in Australia, explains, “Over the last 2 years we have seen a significant number of bridging rounds, but the data suggests that founders no longer expect their next raise to be a bridge. The majority of founders surveyed are looking to raise, and they are expecting to undertake priced rounds.

“This may reflect an acceptance that investors will be looking for some certainty on the cap table as these companies mature and move past the valuation uncertainty over the past two years”.

While most respondents expect their next raise to be above their last post-money valuation, there was still a degree of uncertainty among the respondents when it came to valuations — more than a third of respondents stated that they were unsure about valuation or expecting a down round.

Thompson added, “Founders’ expectations on valuation were more measured than expectations on raising, with 61 per cent agreeing that they were confident that their company’s next raise will be above its last post-money valuation. This reflects an acceptance of “new normal” fundraising environment”.

Founders are still finding that fundraising environment challenging — 73 per cent believe that it is more challenging than in 2022.

“Our latest data, as well as our experience with clients, indicates that founders have shifted to expect this challenging environment, and are prepared and planning accordingly”, Thompson explains.

HSF partner Clayton James predicts that for founders with profitable start-ups, 2024 will be a year for secondaries.

“For the companies that have successfully navigated the pivot to profitability, there have been fewer opportunities for liquidity. This has resulted in a number of companies in the Australian ecosystem with early investors and employees sitting on significant positions they may wish to crystallise, and investors looking for opportunities to get in”, said James.

“Accordingly, we expect to see some significant secondary transactions in the next 12 months, and recent deals involving Canva and Employment Hero have shown a clear appetite for these transactions”.

James further predicts that 2024 will see a growing pipeline of deals.

“The majority of founders we surveyed still intend to raise in the next 12 months. Anecdotally, we are seeing a busy start to the year, particularly at the seed and series A stage and in key sub-sectors including enterprise SaaS, climatetech and AI.

“Most importantly, founders remain hopeful — 62 per cent of founders in our survey feel optimistic about the long-term prospects for Australian start-ups. Overall, we continue to see a level of confidence, one that is tempered by a recognition of the new paradigm in the Australian VC ecosystem”.

HSF is the pre-eminent venture capital law firm in Australia, and one of the leading VC firms in Asia Pacific, advising on more VC transactions for more clients than any other Australian law firm, including some of Australia’s most high-profile tech companies.

The firm’s national Australian VC team works closely with the firm’s other private capital experts globally to advise start-ups from their earliest raises through the full company lifecycle to realisation, including pre-company formation.

For more information including the survey responses, click here.