Funding plummeted 54% in 2023, but early-stage startups fared the best

It’s no surprise that the 2023 State of Australian Startup Funding report has revealed an economy-induced bloodbath. We saw this across the year with the number of deals, the drop-off in numbers, the quarterly stats, and the general conversations happening across the community. There was also a distinct lack of new Aussie unicorns prancing across the headlines.

Still, having a hard figure — thanks to the collaboration between Cut Through and Folklore Ventures — put against what the ecosystem has been speaking about colloquially for a year still seems shocking. Especially after such a strong rally in Q4, with several deals even sliding in during the waning month of December. Most notable, of course, was the $47 million secured by Leonardo.ai.

But the drop was very real. The year-on-year decline of startup funding went to 54%  from 2022, with just 413 deals recorded for a total of $3.5 billion. And while there has been a global decline in VC funding, it sat at just 38%.

However, the community is still positive about the state of the Australian funding market.

“Considering the global context, the decline in funding during 2023 was expected. 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”, Chris Gillings, founder of Cut Through Venture and venture capitalist at Five V Capital, said.

Early-stage deals weren’t hit as hard in 2023

There is also some nuance within the eye-bulging figure 54% figure. As it turns out, early-stage investment wasn’t hit quite as hard.

It seems investors were more comfortable with placing bets with smaller dollar amounts during the midst of a tough economic climate. And we certainly saw this across our own deal reporting. Throughout 2023, our weekly funding roundups were often dominated by earlier-stage investments.

There was a much closer eye across alleged valuations in 2023, and those bigger, late-stage deals were the ones to see the biggest decline. According to the report, Series B and later deals saw a drop to under a third of what they were at in early 2021.

But that did lead to some room for pre-seed and seed deals, with 48% of investors reporting more competition in this space across the year. This led to less of a sharp cliff drop, as well as stability across the deals’ sizes and valuations.

The report also noted smaller average deals, with a sprinkle of larger outliers throughout the year. What this has suggested is a shift in what is considered to be a big deal in Australia in the current economic climate.

“The diminished competition was paired with improved investor behaviour, marked by a decrease in reports of pulled and re-traded term sheets by investors. Most investors now perceive the wave of revaluation as largely concluded and expect deal pricing to stabilise in 2024,” the report said.

More notable stats from the 2023 State of Australian Startup Funding report

There’s certainly more to come from this 100+ page report, but here are a few more interesting statistics and trends that jumped out

• And per usual, it was a mixed bag of numbers when it came to investment into women-led startups. Deal participation by all-female or mixed-gender teams hit a five-year peak at 12% and 26%, respectively.
  The proportion of capital given to mixed-gender founding teams also recovered from a 10% low in 2022, coming back up to 18%. However, this is still below the 22% high of 2020. The median deal size for all-women founding teams also sat at just $700,000, whereas in 2021 it was $2.5 million. It is worth noting that mixed-gender teams and all-male teams also saw a large median drop-off.
  Lastly, at least surprisingly, it was reported that once again the numbers show that on average, women-led startups raise less capital than men-only-led companies across every stage of funding.
• The AI revolution continues with 30% of investors listing AI and Big Data as the sector they are most bullish on in 2024.
• As the Aussie VC market hits the big 10, there’s been more talk around liquidities and secondaries. There’s some great investor insights on this I recommend you read. We’ve certainly seen this ourselves in the last month with both Canva and Eucalyptus poised to sell some of their founder and long-term employee shares.
  August also saw similar plans from SafetyCulture as well as $150 million Canva shares sold by Blackbird. It’s to be expected in a maturing market and it’ll be interesting to see who else boards the gravy train in 2024.
• The figures from the 2023 State of Startup Funding report also further solidifies how impressive it was that crowd-sourced funding (CSF) remained stable in 2023. According to Birchal’s report from last week, $71 million was raised via CSF in 2023 — which was only $1 million less than the 2022 figure.
• Thanks to new ways of getting into angel investing, there is some movement when it comes to younger investors from lower socioeconomic backgrounds getting involved. However, the stats show that the angel investment community is still predominantly white (58%) and male (82%), with an average income of $250,001 – $400,000 (40%). But there are moves happening in the ecosystem to try and shift the needle, such as the free Airtree Explorer program that teaches angel investment and in 2023 was targeting participants from diverse backgrounds and regional areas.