Tech valuations fall but venture capitalists erase the blow

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Younger, unprofitable tech companies – that is, those that haven’t long since left the start-up category on which venture capital is focused – have been hardest hit, with the basket d Goldman Sach’s unprofitable Wall Street tech companies have fallen 39% since November and 6% alone in the past week.

But the action in Australia’s venture capital sector in the first weeks of 2022 is very different.

Striking display of honesty

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

In a striking show of honesty, Dovetail co-founder and CEO Benjamin Humphrey said there was “a bubble right now” in Australia’s venture capital industry, as cashed-out companies throw money big dollars to start-up founders.

The contrast between Humphrey’s comments and the pain of listed tech stocks is stark. So, is Australia’s venture capital industry really immune to falling tech valuations in public markets?

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

“Predicting the future is an incredibly dumb and dangerous business, but I think the most likely outcome over the next 12 months is rather that valuations rise, or rather valuations fall, that a little bit of air comes out of the tires,” says Bassat.

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

Dolphin, whose firm makes the majority of its investments in offshore markets, says there is typically a three- or four-month lag before public company valuations trickle down to venture capital markets. But there are already signs of what is to come.

“It takes time for these early technological disruptions to trickle down to private markets, but it is happening,” he says. “We are already seeing termsheets being returned with lower valuations. These are not “down” rounds [when money is raised at a lower valuation than previously], but they’re not the steep rounds they might have been in the past.

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

“I think the irrational exuberance is starting to deflate, but I think it’s good overall for the industry. The industry has probably gotten ahead of itself in that sense.

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

Bassat is equally bullish, pointing out that valuation cycles are happening. For example, a drop in valuations of software as a service companies in 2016-2017 calmed the market for a few quarters, but did not last.

He also points out that valuations remain elevated over a two-year outlook.

One of the top recent Square Peg winners is Israeli tech group Fiverr, which listed in 2019 at $21 and saw its shares climb to US$336 last February before falling back to around US$80.

Would investors be happy to have risen 300% since March 2020, or unhappy to have fallen 70% in 12 months. “Both are valid prospects,” says Bassat.

And while entry prices are important, Bassat says they’re 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 is pretty hot, we’re paying a very, very high valuation for a young company, but it ends up being incredibly successful, so it’s going to be an incredible investment,” did he declare. said.

“On the other hand, if we get into very low-priced businesses but they end up failing, then low valuations haven’t helped us at all.”

Local sector flooded with capital

Importantly, Bassat and Dolphin are not worried that falling tech valuations will lead to a capital crunch in Australia’s venture capital industry.

The first reason is that the global and local venture capital sectors are teeming with capital after a banner year in which the amount invested by the sector doubled to $612 billion ($852 million), of which approximately 7, $5 billion ($10.5 billion). ) in Australia.

Dolphin says many companies have taken advantage of this extraordinary interest in the sector to raise new funds, with some advancing planned raises by up to 18 months to lock in capital.

The fundraising spree is set to continue through 2022, with local titan Blackbird Ventures set to raise $1 billion in the coming months, and The Australian Financial ReviewThe Street Talk column reports that Future Now Capital will appeal to investors for $150 million.

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

Bassat says $7.5 billion invested in Australia’s venture capital industry last year is a huge change from 2012, when $240 million was deployed.

But his optimism is more about people than money.

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

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

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

“We’ll see valuations go up and down over the years…but what’s unambiguous is this rise of a start-up ecosystem in Australia, which is the most exciting thing that’s happened in my career” , says Bassat.

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