Startup funding tanked more than 50% in 2023 – so what should we expect this year?

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Back to the future? Start-up funding in 2023 was similar to COVID levels, topping just $3.5 billion compared to $7.4 billion in 2022, the latest State of Australian Startup Funding Report found.
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Start-up funding tanked in 2023, with just 413 deals reported by Folklore and Cut Through Venture for the calendar year – and no new unicorns. The report found funding slipped to $3.5 billion, declining nearly 54% year-on-year from $7.4 billion in 2022, in a climate reminiscent of 2020, paired with layoffs.

While it’s largely in line with the global downtrend in funding, Australia’s fallout was larger than the reduction in funding witnessed globally, which was reported to be 38%. But 2023 was still Australia’s third-highest funding year on record, trailling 2022 and 2021, but beating out 2020 marginally.

Later-stage deals experienced the most significant decline, with median Series B or later deals shrinking to under a third of their early 2021 sizes by the second-half of 2023, and the number of overall deals decreasing significantly. Series C+ valuations experienced an average decline of 47%.

Early-stage (pre-seed and seed) deal sizes and valuations remained relatively stable, with investors reportedly observing strong competition for deals.

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In terms of sectors, hype around artificial intelligence continues to grip investors. It remains the most anticipated sector for the upcoming year (30% of investors listed AI as the sector they’re most excited about), followed by enterprise/business software (22%) and climate/clean-tech (19%), both of which took out the top spot for funding deals in 2023, with flow totalling $505 million and 41 deals respectively. Conversely, blockchain/web 3 and bio-tech interest has fallen off a cliff.

Of the 1,000 investors and founders surveyed, 41% of investors witnessed a portfolio company shut down, and 90% observed layoffs within their portfolio companies.

But Cut Though Venture founder and venture capitalist at Five V Capital, Chris Gillings, says the data reflects a maturing ecosystem.

“Considering the global context, the decline in funding during 2023 was expected,” Gillings, says “However, unlike many startup ecosystems worldwide, Australia continues to go from strength to strength. 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.”

Little improvement in funding for women

Funding for women founders in 2023 remained low, but some metrics showed encouraging signs, according to the report. For example, participation in deals by all-female or mixed-gender teams reached a five-year peak at 12% and 26%, respectively, while the share of total capital raised recovered from the low levels achieved in 2022.

Deal participation and the share of funding for founding teams with at least one female founder improved across all stages of investment.

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Outlook for 2024

Founders and investors remain positive for 2024, with 92% of surveyed founders planning to raise capital in 2024 or 2025 – and 86% confident they’ll be successful. About two-thirds of investors expect startup funding deal flow to increase in 2024.

“A material positive signal is the resurgence of offshore investors dipping their toes back into early rounds, mirroring Folklore’s recent deals, and data shared in this year’s report,” Folklore Ventures’ founder and managing partner, Alister Coleman, says.

“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.”

Looking ahead, Head of KPMG High Growth Ventures, Amanda Price, says founders will need to continue to prioritise profitability over growth.

“Australia, like the rest of the world, has seen venture capital activity fall from the boom years of 2022 and 2023,” Price says. “However, good ideas and promising founders continue to attract investment with sectors like climate tech, artificial intelligence and med-tech defying the downturn.” 

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