Tech valuation crunch hits start-up angel deals

In April, the amount of venture capital funding flowing to local start-ups plummeted from $837 million in March to $371 million, according to Cut Through Venture figures, driven largely by a slide in the number of deals, rather than deal value.

In the month there were 38 deals, compared to 72 the month prior, and of these, 17 deals were pre-seed and seed stage.

Globally, CB Insights projects that the amount of VC funding globally will fall by 19 per cent this quarter, and 25 per cent compared to the same time last year, while the number of new unicorns will halve.

Investors spoken to by the Financial Review said these trends were continuing throughout May.

“I think 2021 was a banner year for technology investment and start-ups around the world, especially here in Australia,” Flying Fox Ventures co-founder and partner Rachael Neumann said.

“We set out to deploy $5 million and did $12 million in that time. It was an exciting bull run, but a lot of us knew it wouldn’t last forever.”

Ms Neumann, who is out raising again for their rolling fund alongside fellow founding partner Kylie Frazer, said valuation pressure slowly creeps down, but so far, it was minimal and in deals where it was having an impact, it was a good thing for investors because the market was “getting toppy” in 2021.

“Short-term volatility is a killer right now, but because we’re investing for the long term, we can buy low and exit in an up market,” she said.

“The good deals will still get done, but maybe the bar has changed.”

“The good news for us is we’re always leaning on fundamentals, so nothing has changed for us. We know this game … and we’re established to ride out any inevitable shocks that might come through the system.”

Between late January and now, Flying Fox has deployed more than $4 million. Based on its deal pipeline, it could hit $12 million again in 2022, with its model structured so that the 300-odd investors in its rolling fund can opt in and out of certain deals that require larger cheque sizes.

Angel investor and Venture Advisory executive director Adrian Bunter said pre-seed deals that were being done at $3 million to $4 million valuations in 2021, were now being priced at $2 million to $3 million.

But, he said investor confidence was where the seed space would take the biggest hit.

“There is a large group of investors that have seen their listed portfolio come off, and potentially their property portfolio too, so they’re saying ‘maybe I’ll hold back a little bit more’,” he said.

“Some of this is also about making capital available for existing portfolio companies, as opposed to new companies.

“We saw this at the start of COVID-19 too … but I think this will stretch on for longer. We’ve seen the first interest rate rise, and it won’t be the last one … it just makes people pause a little bit.”

Companies that have completed seed rounds in May include Jack Bloomfield’s Disputify and events tech start-up Snackr.

One angel investor and CEO, who did not want to be named, said he had invested a few hundred thousand dollars into deals in 2021, but this year was planning to only invest a fraction of that amount.

“My feeling is that the collapse in public market valuations has not yet made its way back to early-stage valuations,” they said.

“For this reason, as well as concerns about the overarching economic environment, I am likely to deploy a much smaller amount of capital in the next 12-24 months.”

Scale Investors co-CEO Chelsea Newell said while the common narrative has been that later stage deals would be more impacted than earlier deals, investors in the syndicate were putting smaller cheques into deals.

“Round sizes and valuations are more of an art than a science at the early stage … but there have been deals where valuations … have been negotiated lower than what the company had come to us with,” she said.

“We’ve seen a big uptick in smaller bridging rounds, rather than companies going and raising larger Series A cheques.

“But investors are still looking for value, and coming in at this end of the spectrum, there is a lot of value to be unlocked.”

What it means for founders

For early-stage founders raising capital, Mr Allen said they had to have “an amazing story and no numbers, or an amazing story with amazing numbers”.

“If you have any numbers, people will extrapolate them out, and they’ll be sceptical,” he said.

What investors are looking for, he said, were companies growing at 200 per cent to 300 per cent each year, that have high levels of recurring revenue and are also growing revenue from existing customers, not just new customers.

“That’s when it’s hard for an investor, regardless of how little money they have, to not pay attention,” he said.

Mr Allen, whose business Tractor Ventures provides revenue-based financing to start-ups, said entrepreneurs would be crazy not to build a self-sustaining company in today’s environment.

The biggest risk, he said, was for young companies that had kicked off rounds late last year or earlier this year, and were now under pressure from investors to reduce the valuation.

This, he said, led to situations where either founders gave away too much equity, or they raised less capital than they actually need to meet their objectives.

Either outcome would put the company’s ability to raise again in later rounds at risk.

“You can’t take a 40 per cent stake in a company, because [the founders] would never be able to raise again. You’d be shooting yourself in the foot,” he said.

“A lot of my VC mates will look at broken capital tables, the founder ownership, heading into a Series A and see that the founders don’t own enough and just say ‘no.’ It’s a pain in the arse to fix a diluted capital table.

“There are a lot of interests at play that are conflicting … and it’s not as easy or straightforward as it has been.”