Startup investment landscape snapshot for 2019

Startup investment landscape snapshot for 2019

If you're still in the early stages of your startup or looking to finally launch your startup, 2019 might be the year to cast your net wider for investment capital to start or grow your company. 

2018 was a big year for startups around the world. According to KPMG, over US$899 million was raised in Australia alone in 2018.

At Transition Level Investments, we reviewed more than 500 companies and invested in 7 Australian startups. These companies were concentrated across cyber security, voice, machine learning, platform plays and fintech.

Towards the end of 2018, volatile equity markets across the world shook the confidence of even the most seasoned venture investors, including many we co-invest with in Australia.

Shaky equity markets are bad for private markets for a few reasons:

1. Conviction: Declining equity markets can have a negative psychological effect on investors. Plunging public markets cause early stage investors to think twice when placing big bets on startups.

2. Acquisition appetite: Volatile equity markets may limit the appetite and ability of listed companies to strategically acquire fast growing startups. This dampens the potential for investment returns for early stage investors and their ability to subsequently raise further funds to invest into other startups.

3. IPO: Declining equity markets also limit the potential for IPOs which are another important way for investors to realise returns on their investment.

4. Capital call: Lastly, rapid declines in equity markets can put pressure on Venture Capital fund managers and cause them to think twice about calling of capital commitments from their investors (Limited Partners).

For these reasons, we expect that in 2019, venture capital funding will flow into later staged investment opportunities as investors seek out de-risked venture investments with proven track records over very early seed stage opportunities. So, if you're still in the early stages you might want to explore other sources of capital this year.

Other sources of capital

Whilst venture capital funds are an important source of capital, they're not the only way to get your startup funded in 2019. Some other important sources of capital for startups include:

- Family offices: Many family offices, including our own, are increasingly making direct investments into early stage companies. Stages, cheque sizes and mandates may vary but family offices are increasingly playing an important role in the venture capital industry. 

- Angels: Startups who qualify as Early Stage Innovation Companies (ESIC) may continue to be able to raise investment capital from angel investors who might benefit from the favourable tax concessions available for investments into ESICs. Whilst angel investments may drop off as public equity markets drop off on balance, the tax concessions for ESIC investments are hard to ignore.

- Grants: Startups should take advantage of the generous State and Federal grants and funding programs available to startups across Australia. Many of our portfolio companies in Queensland have benefited from the Ignite Ideas Fund and have received co-investments from the Business Development Fund in particular. 

- Debt financing: Venture debt has a legitimate role to play in the early stage investment ecosystem and can make sense for some startups. One of our portfolio companies decided last year that venture debt made sense for them and decided to raise $3 million in debt last year to scale their business both in Australia and in the US.

- Corporate venture capital: Once derided as a poorly aligned source of capital, we've seen corporate venture capital firms add value to our portfolio companies last year by providing access to unique distribution channels and corporate customers.

Whilst 2019 might be a less exuberant year for startups raising very early stage investment rounds, there will still be ample sources of capital available for those who can point to factors such as a proven model, experienced management, strong product, defensible valuation with the potential to go global.

An Vo is an investment associate at Transition Level Investments, the family office of Steve Baxter. Transition Level Investments has invested in over 25 early stage startups in Australia and in the US since 2012.

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