Tech valuations fall but venture capitalists brush off the hit

Younger, unprofitable tech companies – that is, those not long out of the start-up category that venture capital concentrates on – have been hit hardest, with Goldman Sach’s basket of unprofitable Wall Street tech firms falling 39 per cent since November and 6 per cent last week alone.

But the action in Australia’s VC sector in the first weeks of 2022 looks very different.

Striking display of honesty

Last week, grocery delivery start-up Milkrun raised $75 million less than eight months after opening its doors, while five-year old customer research start-up Dovetail confirmed it raised $86 million in December at a valuation of $960 million.

In a striking display of honesty, Dovetail’s co-founder and CEO, Benjamin Humphrey, declared there was “a bubble at the moment” in Australia’s VC sector, as cashed-up firms throw big dollars at start-up founders.

The contrast between Humphrey’s comments and the pain in listed tech stocks is stark. So, is the Australian VC sector really immune from tumbling tech valuations in public markets?

Not according to two of Australia’s VC titans in Square Peg’s Paul Bassat and Telstra Ventures chief financial officer Geoff Dolphin.

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

“I think we’ll look at the data and say the third quarter [of 2021] or maybe the fourth quarter was probably a high watermark for valuations globally.”

Dolphin, whose firm does the majority of its investing in offshore markets, says there is generally a lag of three or four months before public company valuations trickle down to the VC markets. But there are already signs of what’s coming.

“It takes time before these early tech disruptions bleed into the private markets, but it does happen,” he says. “We are already seeing term sheets being walked back with lower valuations. They’re not ‘down’ rounds [when money is raised at a lower valuation than previously], but they’re not the steep ‘up’ rounds that they might have been in the past.”

While Dolphin expects Telstra Ventures will still need to fight its way into A-plus deals, the tussle between investors and founders will generally tilt slightly in the former’s direction.

“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.”

Australia’s best and brightest talent isn’t going into investment banking, consulting or professional services, but into start-ups.

Bassat is equally sanguine, pointing out that cycles in valuations do happen. For example, a fall in valuations of software-as-a-service companies in 2016-17 took heat out of the market for a few quarters, but didn’t last.

He also points out that valuations remain elevated on a two-year view.

One of Square Peg’s best recent winners was Israeli tech group Fiverr, which listed in 2019 at $21 and saw its shares moon to $US336 last February before falling back to about $US80.

Would investors be pleased they are up 300 per cent since March 2020, or upset they are down 70 per cent in 12 months. “Both are valid perspectives,” Bassat says.

And while entry prices are important, Bassat says they are far less important than picking the right companies in the first place.

“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 says.

“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.”

Local sector awash with capital

Importantly, Bassat and Dolphin hold no fears that the fall in tech valuations will lead to a drought of capital in Australia’s venture capital sector.

The first reason is that the global and local VC sectors are awash with capital after a record-breaking year that saw the amount invested by the sector double to $US612 billion ($852 million), including an estimated $US7.5 billion ($10.5 billion) in Australia.

Dolphin says many firms took advantage of this extraordinary interest in the sector to raise fresh funds, with some bringing forward planned raisings by as much as 18 months to lock in capital.

The raising spree looks set to continue into 2022, with local titan Blackbird Ventures reportedly set to raise $1 billion in the coming months, and The Australian Financial Review’s Street Talk column is reporting that Future Now Capital will tap investors for $150 million.

“There is still such a weight of capital waiting to be deployed,” Dolphin says.

Bassat says $US7.5 billion invested in the Australian VC sector last year is a huge change from 2012, when $US240 million was deployed.

But his optimism is more about people than money.

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

Today, Australia’s best and brightest talent isn’t going into investment banking, consulting or professional services, but into start-ups.

Successful start-up founders like those from Atlassian, Aconex and Seek are reinvesting in new ventures, while the alumni of these start-ups are starting companies of their own; Dovetail co-founders Benjamin Humphrey and Bradley Ayers previously worked at Atlassian.

“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,” Bassat says.