It’s estimated 40pc of startups have just three months to live – but Australian VCs say there’s never been a better time to invest
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In a business world being turned upside down by COVID-19, you would think it’s startups, those bootstrapped rockets to the moon, which would be among the most worried about implosion.
After all, four in 10 are expected to be in dangerous territory, holding less than three months cash. Yet-to-be established operations are always on the search for new investment, but in this new environment their runway might suddenly be looking a little short.
Despite that, Australia appears to have so far bucked that expectation. Some 235 listed companies have raised nearly $15bn on the ASX this year alone – around triple the average – as they look to shore up their financial positions for choppier seas ahead, and their smaller, private counterparts appear to be in a similar – albeit smaller – boat.
Property management tech startup :Different is one such startup, nabbing $7.1m in a series A round that included venture capital (VC) funds AirTree, PieLab and investors SpringCapital and rich-lister Tim Roberts. :Different co-founder and former Softbank director Ruwin Perera admits it’s “an unusual time to be raising funds”.
“I always believe there’s a market for good companies at fair prices regardless of the economic environment but it’s certainly not been without its challenges,” he told Business Insider Australia. “It’s an unprecedented time but this raise puts us in a strong position to get through it.”
Certainly, :Different, with its exposure to an under-pressure property market, is not immune from the current economic storm. Its raise come smack bang in the middle of one of the worst stock market falls in Australian history.
“The ASX dropped 30 per cent during the time we got off the term sheet for the raise to when we signed it,” Perera said.
But with Australians tightening the belt as a result of insecurity, it might be some startups that become the beneficiaries as expensive business models weigh down incumbents.
“We’re charging a flat fee of $100 a month, which is saving the vast majority of customers a significant amount of money at a time when they’re looking to tighten their belts.”
On the flip side of the equation, despite the nerves plaguing retail investors, venture capitalists clearly haven’t lost their appetite. Founder and managing partner Craig Blair told Business Insider that Airtree is “as active as ever”, issuing four term sheets last month.
“We’re taking 10-year market bets so we see through these cycles. The structural changes haven’t gone away, instead what may have taken three years is now taking three months,” he said.
Part of that activity might also have something to do with the need for the kind of balance sheets required to endure tough times.
“I’m definitely seeing some founders look to add more to the round to make sure they’ve got plenty of runway at the moment. In some cases, they might be extending rounds which is a responsible thing for them to do,” Blair said.
Certainly, for a sector quick to boast of its agility, startups may in some instances prove themselves more adaptable to quickly-shifting ground. :Different, for example, was able to quickly offer virtual property inspections when in-person ones were prohibited.
“The future of many industries, including property management for example, is going to very different to what it is now and the current crisis hasn’t changed that. In fact, for some sectors it’s probably only accelerated the rate at which they’re changing,” Blair said.
But while the sector may be sure of itself now, Blair acknowledges there are hard times coming, with at least one Australian VC fund choosing to shut its doors for now.
“Right now it’s pretty active but going forward I can see that there are some dark clouds ahead and many funds might struggle to raise and capital [could be] less available in six to twelve months,” Blair said.
It’s a view Michael Batko, the CEO of Australian incubator Startmate, shares.
“VCs have an interesting dynamic in that they raise funds for three to twelve months, so they actually already have this capital that they need to now deploy over the next year so there’s no slowdown yet.”
“So if you’re running out of cash in the next three months, that actually might be a good position to be in because now is actually the best time for a startup to be raising in the next year because there’s money to be allocated. Whereas let’s say VCs can’t raise those funds again in twelve months time, that’s when there will be a real impact.”
For VCs the opposite is true, according to Batko.
“Funds typically work on a two to four-year cycle so if they’re running out of money now and we’re heading into tough economic times, now might not be the time you want to be running low,” he said, although he maintains the likes of Blackbird Ventures, Airtree and Square Peg, established funds with good track records, will manage just fine.
An optimist, Batko says there’s a silver lining to all of this for VCs.
“Now is actually the best time to invest because in hard times all the pretenders go away and the most resilient founders stay around, and those are the people you really want to invest in.”
Blair agrees, noting it’ll be those who haven’t build a solid foundation that may lose their shirt.
“If you’ve got strong fundamentals – a clear proposition, an obvious competitive advantage, strong and sustainable economics – you’ll do well. If one or two of those aren’t there, then you’re going to have a trickier time raising out there.”
But given the structural changes coming as industries adjust to a health pandemic, there will also be opportunities for a new generation looking to leave their mark.
“Some things will change forever like the future of work and education, for example. There will the founders who spot these trends early, launch products and take market share early will thrive,” Blair said.
“Some of the best venture capitalists and some of the best startups are founded in times like this, just as Google, Atlassian, and Salesforce were. Somewhere in Australia right now, someone is hopefully building one of those.”
For Perera, he thinks it’ll perhaps the first serious economic challenge some founders might have faced.
“Given the age of a lot of founders, this will be the first downturn many of them have seen so I think it’ll change their perspective. This is the time when great companies are made,” he said.
Then again, it’s what they signed up for.
“Startups are failing all the time. You can’t be a founder unless you accept a high level of risk.”