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DailyBubble News

VC sector risks running cold

Recent months have seen a lot of eyes on the venture capital space, for reasons good and bad. While celebrities like tennis star Serena Williams are showing enthusiasm, rising interest rates have caused some to question the sector’s outlook.

Last year, super funds, family offices, private equity, and strategy investors swarmed the VC market, creating robust levels of dry powder. This year, according to Cut Through Venture, investors pumped a record $3.6 billion into Australian start-ups in the March quarter alone. Within the space, tech and enterprise software continued to be the most dominant segments, generating $1 billion and $941 million worth of deals respectively.

However, as the year has gone on, darlings like Canva have seen their valuations shaved as a result of ongoing uncertainty, while others also feel the pinch; solar power BNPL player Brighte was forced to make significant cuts to staff to “accelerate the pathway to profitability.”

Former professional Australian cricketer, now tech entrepreneur Matt Berriman has been involved in several high growth digital ventures since leaving the sport in 2006. Most recently, he launched RealVC, a seed and early-stage venture technology fund aiming to support, invest and build the next class of globally successful businesses. Since its inception in July, RealVC’s Australian Early-Stage Venture Capital Limited Partnership has secured a $20 million first close, with the firm now targeting $50 million with another fund.

While it’s hard to generalise, Berriman believes venture capital valuations across all stages have pulled back since the markets peaked in November last year.

“Later stage valuations, which were bid up most with the influx of capital from listed and crossover players, are the ones that have been hit hardest,” he says.

“As public markets, which provide the best proxy for late-stage VC exit values, have sold off, this has led to many funds being forced to mark down their investments substantially. Earlier-stage VCs have been much less impacted.”

Berriman adds that there is still substantial dry powder of committed VC funding available to place, so while the deal cadence has slowed in recent quarters, once a new equilibrium is formed, this will start to flow again.

“Some Australian VC funds have also recently provisioned for lower valuations ahead of any external pricing event in anticipation of some down-round valuations within their portfolio,” he said.

Meanwhile, HLB Mann Judd partner, corporate advisory Nicholas Guest says Australia’s VC sector has performed well over the past year, adding that there’s been a real maturing of the industry, thanks to the support of several large fundraisings. However, as of late, and unlike Berriman, Guest says it has become increasingly challenging for a number of individual early-stage businesses.

“VC-backed businesses which need to go back to the market to raise capital in the near term are probably going to have pressure on maintaining their valuations,” he says.

“That’s not necessarily a bad thing, it’s just a movement in the markets, but we are noticing that a lot of the VC companies are trimming their costs and trying to extend their funds on hand for longer periods of time. Because of that valuation pressure, they’re trying to delay coming back to market to raise more capital if it’s not essential for their business growth.”

Meanwhile, PieLAB co-founder and managing director Chris Rolls warns that VC investments should be made with caution for the remainder of the year.

“Up until six months ago, venture capital funds were high-performing, reliable investment classes, but now, not so much,” Rolls says.

“While it’s fun and sexy, what most people don’t realise is that for every Google, there’s about 100,000 companies that don’t deliver positive returns. Therefore, it can be a risky asset class for people that don’t know what they’re going to invest in.”

Still, despite the ambiguous nature of the market, capital raisings remain possible and there are reasons for optimism, as public market performance has begun to stabilise and dealmaking carries on.

“Now is still a great time to be investing in VC in Australia and we remain very optimistic. Many great companies get started in the depths of a down cycle, and this will be no different,” Berriman says.

“There are several significant economic and societal shifts underway, and this will create a number of tailwinds for newly started companies. There are a lot of great founders around, and we are looking forward to working with them.”

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VC sector risks running cold

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