VC survey finds nearly every startup founder thinks the current funding climate is having an impact on their plans

Australian startup founders remain upbeat about the future, despite challenging conditions, according to a new survey from law firm Herbert Smith Freehills (HSF), but an overwhelming 97% say the current fundraising environment is impacting their business strategy.

Despite startup failures, withdrawals from the Australian market by some global companies and down rounds in capital raises, local founder remain positive about their prospects, with many even anticipating higher valuations in 2023, the HSF survey found.

There’s an increased focus on the push to profitability, but those with enough capital are continuing to operate as usual.

The key findings in the survey of Australian startup founders at all stages of their growth cycle from pre-Seed to pre-IPO, are that:

• 81% believe that the current fundraising environment is more challenging than in 2021 and 97% say that it is impacting their business strategy;
• 76% remain optimistic about the long-term prospects for Australian start-ups;
• 76% expect to raise capital within the next 12 months;
• 85% believe that their next raise will be higher than their last post-money valuation; and
• 31% stated that they were very confident of a higher valuation.

HSF’s co-head of venture capital, Australia, Elizabeth Henderson, said the outlook for local VC remains promising.

“We are seeing the current environment impact strategy and decision-making, in particular, startups are pivoting from growth to profit, with a much stronger focus on cash burn reduction — 72% of respondents to our survey said that Australian startups will need to reach profitability earlier,” she said.

“However, for startups with a comfortable cash runway, it is largely business as usual.”

With Australia’s top three VCs, Airtree, Square Peg and Blackbird, having raised a combined $2.5 billion in fresh capital for new funds in 2022, Henderson’s co-head of VC, Clayton Jame said there is good reason for optimism.

“Australian funds are sitting on significant levels of dry powder and are continuing to deploy it, especially in early stage raises where there is some competitive tension. We expect that to pick up more in the new year,” he said.

“There may also be opportunities for private equity to be involved in later stage and pre-IPO fundraising given the current positioning of equity capital markets.”

Nonetheless, the survey found that current conditions are leading some founders to consider bridging rounds between raises, James said.

“While almost all founders in our survey are not expecting to make an early exit, half indicated that they are unsure if they will require bridging funding, and 27% expect that it will be necessary,” he said.

“This reflects what we’re seeing in the market, and we are advising clients to appropriately safeguard their businesses.”

The survey also indicates that founders want more support from government, with 92%  believing that governments can do more to support startups, with founders indicating that they want it to be easier to raise capital and issue employee equity.

“Founders acknowledge that there are good government programs at the pre-commercialisation stage, but more flexibility and practical assistance would support further commercialisation and potential international expansion post their start-up phase,” Henderson said.

HSF was worked with companies such as Atlassian, Mr Yum, Culture Amp, SafetyCulture, Linktree, and Who Gives A Crap on VC deals.

More on the survey responses is available here.