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How would you compare your deal flow in 2023 in the Australia/ New Zealand markets relative to last year, and what are your expectations for 2024?
2023 was a difficult year for VC and for founders inAustralia. The industry is undergoing significant changes in its approach to early-stage investing and investment types. For instance, in 2023, I believe there were around 3.5billion dollars invested in Venture Capital across about 413 deals, a decline of over 50% compared to the previous year. From a peak in 2021, where approximately$10 billion a year was invested, it dropped to around 3.5 billion dollars in2023.
The market transitioned from rapid capital deployment to a more selective approach, focusing on businesses with sustainable and profitable value-generating models in the short term, requiring less capital for growth.
I expect that in 2024 deal flow will increase. I'm already seeing more deals coming through particularly in the early stages, the seed and pre seed stage.This space hasn't been as heavily impacted as later stages. With advancements in AI, big data, and interest in climate tech and IoT, I expect this trend to continue, offering disruptive capabilities for certain industries, which is very interesting!
What were the key factors driving the market conditions experience in the last 2years?
Well, there are a few factors at play here.High interest rates, global uncertainty, and tough macroeconomic conditions like inflation have all contributed to the squeeze.
But there's a silver lining. People are feeling more optimistic now. Inflation seems to be getting under control, and the pace of interest rate hikes is slowing down. Some are even talking about a potential reversal in the second half of 2024.
Despite the challenges, there's still a lot of capital floating around. Investors have been holding onto their funds during this uncertain period, but I reckon they'll start dipping their toes back into the market soon.
Which firms in your portfolio performed well in the previous year?
One standout in our portfolio is Sharesies inNew Zealand. They benefited during COVID as more people turned to online investing while staying at home. They've continued to expand their brand and scale into Australia, boasting over 600,000 customers and $2.6 billion in funds under management. Their successful capital raise of $50 million at a $500million valuation speaks volumes about their progress. They also have a great team with female leadership at the helm! A gender diverse team actually, that has been able to build a strong brand, listened to their customers, and adapted their product accordingly. Also, they've now been accepted onto theKiwi Saver platform in New Zealand, which is the New Zealand Superannuation scheme. So you know that that company continues to perform and is getting strong support.
Another promising company is Jigspace, operating in spatial computing. With the rapid adoption of spatial computing technology, especially with Apple introducing the Vision Pro series, Jigspace is poised for significant growth.
Avarni is making strides in the carbon footprint space, enabling corporates to understand and manage their carbon footprint. They've achieved steady growth and made inroads into the US market, securing a $2.5 million capital raise with support from existing and new investors.
I have to mention also Nexl, FileInvite in NZ and Cloudwave. All companies that I’m really excited about and that have demonstrated resilience and adaptability, expanding into new markets and driving impressive growth.
What adjustments have you made to your investment thesis and funding strategy in light of the challenging market conditions in the region (Aus/NZ)?
Yeah, absolutely. Like everyone else in the market, we're focusing on companies that can generate profits sooner rather than later. However, it's crucial to recognise that SaaS businesses, in particular, need to scale before becoming profitable. For these businesses, our goal is to invest early, assess their future journey and product-market fit.
Additionally, we've made a deliberate shift in our investment strategy to focus on supporting female founders. Closing the gender funding gap has become a priority for us, driven by our analysis showing that our own portfolio companies with gender-diverse teams outperform homogeneous teams. Like Sharesies for example, as I was saying earlier, that has managed to build an incredibly strong gender diverse team while growing and expanding.
Actually, a report I recently read by Cut Through Ventures highlights that in Australia gender diverse teams have about 26% participation, with female-founding teams representing 12% of start-ups in the ecosystem. It’s still a long-way from where we want to be but its definitely an improvement over 2022, and at Vulpes Ventures we want to play a part in the progress that we’re starting to see.
Which vertical is likely to take the most hit / thrive in the Aus/ NZ markets in next few years?
I thinkB2B will continue to thrive more than B2C at the moment. B2C businesses are feeling the pinch from macroeconomic conditions, decreasing discretionary spending and the ever-increasing costs of digital marketing. Digital marketing is becoming increasingly more complex and reaching your audience in a cost-effective manner is challenging. So, I think consumer will take the most hit.
But on the flip side, B2B sectors are looking more promising. Especially with things like compliance and regulations around climate, carbon, and supply chain reporting gaining traction. The credibility of supply chains is very important and tech can really help with this. Companies focusing on AI, supply chain management, IoT, and spatial computing and so on will be the winners, in my opinion.
How do we approach finding startups and businesses in need of funding? Are we proactive in seeking them out, or do we primarily evaluate incoming deal flow?
We strike a balance between both approaches. We receive a significant amount of deal flow from various channels such as partners, other VCs, and founders we've previously invested in, all through our extensive networks. This incoming flow is quite substantial and often provides us with enough deal flow to be honest.
We also engage in proactive outreach efforts from time to time. We target specific geographies or sectors and keep an eye on companies that have recently received seed funding within the past 12 to 24 months. We reach out to them to assess their performance and potential for future investment opportunities.
With the shift towards business sustainability, have tech startups in the region shown robust financial improvement? What metrics would best illustrate this progress?
With the shift towards business sustainability, tech startups in the region have indeed shown robust financial improvement. There's been a notable shift in focus towards analysing what is cost-effective and what is not. Many investors, including VCs, are investing considerable time in working closely with portfolio companies to ensure their sustainability and success. Given the significant influx of VC capital directed towards supporting existing portfolio companies, it's vital to assess their sustainability and growth potential.
The key metrics illustrating this progress lie in the capital efficiency of these businesses. How effectively have they managed to reduce costs and extend their runway while sustaining growth? Many startups have implemented significant cost-cutting measures, particularly in marketing, without compromising sales performance, which has been interesting to see and has prompted a reevaluation of marketing strategies. Additionally, startups have prioritised overall cost control and benefited from more accessible tech resources at better rates, as the global tech industry faced challenges and layoffs in recent years.
