“It’s tough,” Dibner said. “But it hasn’t seemed difficult to me for a long time.”
This wave of concern has now reached Australia, where venture capital funds have been on a historic spending spree. They injected a record $3.6 billion into Australian start-ups in the March 2022 quarter, according to Cut Through Venture. Total investment of $10.1 billion last year was more than three times higher than pre-COVID investment levels.
But the threat of soaring interest rates means those heady times are over. Senior sources in Australia’s venture capital community say they have started telling their start-ups to prepare for a very different environment, where fresh capital is suddenly much harder to come by and where growth for the growth will not be allowed.
Tough conversations about start-up valuations are also taking place with pension funds, family offices and wealthy investors who have poured increasingly large amounts of capital into Australia’s venture capital industry in recent years.
The pain of tech investors in public equity markets is easy to see. The fall and fall of Cathie Wood’s ARK Investments ETF – down 63% since November, compared to a 22% drop on the Nasdaq Composite Index – has been obsessively watched.
Another closely watched tech investor is Chase Coleman, who runs Tiger Global Management. According to reports, its main hedge fund fell 15% in April and 44% this year. The company’s long-only fund fell 25% last month and is down 52% year-to-date.
But where ARK’s investment performance is mostly just fodder for memes and snark, Tiger’s horror year holds much more significance for the global venture capital industry.
The changing stripes of the tiger
Tiger is part of a relatively new class of investors called cross-funds, so called because they support both public and private companies.
Indeed, Tiger’s venture capital venture, led by Chase Coleman’s business partner Scott Shleifer, overshadows the public side of the business; where Tiger’s public market funds have $19 billion ($26.8 billion) in assets (up from $35 billion at the end of 2021), its venture capital funds had $65 billion. dollars under management at the beginning of the calendar year.
Although the entire global venture capital industry saw a surge in activity in calendar year 2021, Tiger stood out as something special.
According to CB Insights, he was the world’s most active venture capitalist last year, raising $18 billion for his two most recent funds and investing in a staggering 333 companies throughout the year.
At the end of 2021, Tiger has warmed up. He invested in 111 companies during the December quarter at more than one per day. And according to Crunchbase, Tiger’s pace actually accelerated in the March quarter of 2022 to 133 transactions, up 140% from the same quarter in 2021.
Australia has always been a happy hunting ground for Tiger – he was an early investor in both Atlassian and Afterpay – and featured in the company’s recent wave of investments. He took a stake in buy now, pay later group Scalapay late last year and in January led a $75 million fundraising round for grocery delivery startup Milkrun. Other investments include Mr Yumm, Go1 and Shippit.
Tiger’s frenzy raises questions about how an investor can make so many decisions in such a short time and maintain high standards of due diligence. But right now, the biggest question is what might have happened to the valuation of Tiger’s portfolio of private start-ups.
Data released last week by CB Insights shows that valuations held steady in the March quarter as investors committed $144 billion to startups worldwide; valuations for early-stage and mid-stage companies increased by 21% and 15% respectively, while valuations for early-stage companies fell only 4%.
But things have since deteriorated.
As Bezos, Gurley and other venture capital veterans warned last week of dark clouds ahead, financial markets data firm Refinitiv released its Venture Capital Index, which tracks a mix of individual venture capital and listed equity portfolios to provide a proxy for the venture capital industry. It fell 24.2% in April, bringing losses since the start of the year to 45.8%.
Whether anything close to that fall is reflected in the portfolios of venture capital firms – including those in Australia – is a major point of contention.
It is the policy of most major Australian VCs to only reassess a portfolio company when there is a credible third party funding round. Valuations aren’t inflated when public tech stocks deplete — as they were in the middle of the 2021 calendar — and they aren’t lifted when public markets crash.
The consensus is that the tech wreckage in stock markets — where nearly half of Nasdaq companies have fallen 50% or more from their 52-week highs — could take 12 to 18 months to trickle down to stocks. start-up valuations.
But the role played by cross-funds means venture capital valuations don’t need to fall for falling tech stocks to have an impact.
Most believe that crossover companies such as Tiger simply won’t be able to pump money into private start-ups like they have for the past two years. The reduction in cross-company funding will likely be more acute for later start-ups which have also seen IPO markets around the world become much less friendly since the start of 2022.
With that in mind, local venture capitalists are telling startups that thought they could raise capital in the next 12 to 18 months that they probably need to stretch the money out for up to two years.
A senior Australian venture capitalist said that while the tone of recipient company board meetings is obviously radically different from the second half of 2021, when start-up valuations were frothy, there is also had a distinct change in tone from the March Quarter to the June Quarter.
The core message now is that startups need to pull their horns – be a little less aggressive on growth and a little more focused on conserving cash and proving the sustainability of the unit economy ( read: profitability).
And while the valuations of private start-ups aren’t down yet, it’s recognized that a venture capital firm that ignores what’s going on around it is unlikely to engender much confidence from from investors, called limited partners or LPs.
Thus, conversations take place. For example, one of the country’s biggest venture capital firms wrote to its investors last week seeking comment on an approach that will see it try to be as transparent as possible about the performance of portfolio companies. individual. Expect these discussions to continue in the coming months.
To be clear, there is no panic among local venture capitalists – Australia’s venture capital system is mature, robust and continues to deliver large numbers over longer periods, largely thanks to the success of Canva.
Whether the collapse of local on-demand grocery players Send and Quicko last week is a sign of what’s to come remains to be seen. But there is a feeling that the tide is going out and some in the area will remain exposed. For the first time in at least a decade, venture capital will be reminded that it is difficult to invest.