Local VCs not scared by tech stock sell-off

As share markets continue to slide in a sell-off that has seen tech stocks take a beating, Australian venture capitalists remain optimistic that funding for local startups won’t dry up amid the panic.

Last year set a record for venture capital (VC) funding in Australian and New Zealand startup companies which pulled in a total $10 billion from investors – most of which was during the second half of 2021.

But there are concerns that current market uncertainty, which extends to highly speculative cryptocurrencies that have seen value completely slashed over the past month, will cause a risk-off mentality from VCs who splashed serious cash last year.

Paul Bassat, Co-Founder and Partner of VC firm Square Peg, told the Australian Financial Review  this week that he expects the end of 2021 will be seen as “a high watermark for valuations” around the world.

“Predicting the future is an incredibly foolish and dangerous business,” Bassat said.

“But I think the most likely outcome over the next 12 months is rather than valuations going higher, or rather than valuations crashing, that some air comes out of the tyres.”

The important thing, from his point of view, is that investors consider not just the initial cost of investment, but the potential for disruption and future value they carry.

“If we invest in a future Canva or Airwallex, and because the market’s pretty hot, we pay a very, very high valuation for a young company but it ends up being an incredible success, then that will be an amazing investment,” he said.

“On the other hand, if we get into companies really cheaply but they end up being unsuccessful, then the low valuations haven’t helped us at all.”

Likewise, Geoff Dolphin, CFO of Telstra Ventures, thinks the start of 2022 will see some of the large amounts of capital flowing gently away from startups – but he doesn’t see this necessarily as a bad thing.

“We are already seeing term sheets being walked back with lower valuations,” he told the AFR.

“They’re not ‘down’ rounds, but they’re not the steep ‘up’ rounds that they might have been in the past.

“I think that irrational exuberance is starting to deflate, but I think that’s good overall for the industry. The industry probably got ahead of itself in that sense.”

Overall, the attitude of two of Australia’s VC heavyweights is positive. Even if a downturn extends into this year, it shouldn’t mean people lose excitement and pride in the local startup ecosystem that had a landmark year in 2021.

“If I go back 24 years when we started Seek, I knew three people who worked in start-ups,” Bassat said.

“We will see valuations go up and down over the years.

“But what is unambiguous is this rise of a start-up ecosystem in Australia, which is the single most exciting thing that’s happened in my career.”