Aussie startup funding fell in half to $3.5 billion in 2023

Australian startup funding fell by a whopping 52.7 per cent last year to $3.5 billion as valuations dropped and prospective backers treated businesses with more scrutiny, but the majority of investors are looking to deploy more capital in 2024 and founders themselves are highly confident they'll be able to attract new funds.

This is the verdict of State of Australian Startup Funding Report 2023 prepared by Cut Through Venture and Folklore Ventures, based on surveys of 1,000 startup founders, professional startup investors and angel investors, and with support from KPMG, HSBC and Corrs Chambers Westgarth.

There were notably no new unicorns in 2023 - which refers to a startup that's valued at $1 billion or more - and the total raised 'mirrors' the figure for 2020, featuring 413 reported deals.

As flagged in a quarterly report in mid-2023, deals at the pre-seed and seed stages were less impacted by the prevailing negative investment conditions than those at Series A and Series B, although early-stage investments still saw an average decline in valuation of 33 per cent.

This compares to a 41 per cent average valuation decrease for later-stage deals, while for Series C+ valuations the average decline was even greater at 47 per cent.

The number of investors recorded in funding deal data also fell drastically, from 833 in 2022 to 373 last year.

Australia's 2023 startup capital raises above $50 million

The number of deals worth $50 million or more declined from 29 in 2022 to 15 this year. The number of deals worth $100 million or more fell in half to just six.

1. Employment Hero ($263m)
2. Saluda Medical ($150m)
3. Skycraft ($120m)
4. Arkon Energy ($105m)
5. Songtradr ($109m)
6. Loam ($105m) - Highest raise for a startup with a female founder
7. Roller ($78.6m)
8. Pet Circle ($75m)
9. Secure Code Warrior ($73m) - includes female founder
10. Till ($70m)
11. OneModel ($64m)
12. Eucalyptus ($60m)
13. EACON ($55m)
14. Fleet Space Technologies ($50m) - includes female founder
15. Silicon Quantum Computing ($50m) - includes female founder

Participation in deals by all-female or mixed-gender teams reached a five-year peak at 12 per cent and 26 per cent respectively, but overall outcomes for female founders remained below levels considered appropriate by most as the cohort 'fared better in deals over dollars'.

The report authors claim survey responses were collected from a diverse cohort of founders with in-depth analyses on the State of Gender Equity and the State of Indigenous Entrepreneurship.

AI/big data was a sector that 30 per cent of investors said they were most excited about for 2024, followed by enterprise/business software at 22 per cent, and climate tech/cleantech at 19 per cent.

Climate tech was the highest rank sector of interest at the end of 2022 amongst investors, dropping to 11th place mid-year before rising again to 3rd place by the end of 2023.

Interest in health-tech witnessed a similar rebound. Investors also showed significantly more interest in legaltech companies, with the category jumping from 21st place to 9th. 

The report authors note enterprise software and climate tech were the two winners of 2023, with funding and deal flow totalling $505 million and 41 deals, respectively.

In 2023, a third of investors admitted at least 40 per cent of their investments were allocated to current portfolio companies, while more than a third indicated their primary focus for the year would be ensuring their current portfolio is well capitalised. More than half the investors surveyed participated in a down round.

The survey showed 66 per cent of investors anticipate deploying more capital this year, while over the next two years 92 per cent of surveyed founders plan to raise capital, and 86 per cent of them believe they'll be successful.

"Considering the global context, the decline in funding during 2023 was expected. However, unlike many startup ecosystems worldwide, Australia continues to go from strength to strength," says Chris Gillings, founder of Cut Through Venture and venture capitalist at Five V Capital.

"We have more young people entering the tech sector, more talented executives leaving their day jobs to start companies, and more investors competing to invest in the next great Australian businesses.

"Despite the headline fall in funding, Australia is now a mature, globally admired ecosystem.” 

Folklore Ventures’ founder and managing partner Alister Coleman says the resurgence of offshore investors dipping their toes back into early rounds is a 'material positive signal'.

"Despite the tighter market in 2023, we’re excited to see Australian founders continue to punch above their weight globally. There’s always an appetite for big ideas and talented founding teams, and from what we’ve seen, Folklore is already expecting a stronger market for early stage investment and a more positive year ahead," says Coleman.

"We look ahead with optimism to a third generation of Australian founders, who have now founded or worked in some of the most important Australian and global startups. 

"Their familiarity with growing venture-backed companies, overcoming adversity, and harnessing their global networks should give us all great optimism for the future."

The report's authors have also called out the current crowdfunding model and questioned how well it protects retail investors. Click here for more.