What are investment deals looking like in today’s climate? Startup advisers and investment managers weigh in

It’s true: equity investment in Australian startups has slowed this year. But that’s far from the full story. 

Deals are still being done — to the tune of $471 million in October, not to mention this group of nine Aussie startups that raised $104 million last week alone. 

But what are investment deals looking like in today’s climate of macroeconomic uncertainty and investor caution? I asked some investment managers and startup advisers to share their thoughts to help founders avoid closing a deal they might regret down the track. 

A quick look at the market

Before diving into insider insights on investment today, let’s set the scene by taking a quick look at the market. 

Five V Capital investor Chris Gillings is also the founder of Cut Through Venture — a monthly startup funding newsletter and annual State of Australian Startup Funding report. He says while equity investment has slowed, that’s in large part because 2021 was a bumper year with record deals and dollars.

“The first few months of 2022 were actually up on the previous months in 2021,” said Gillings. 

“Since April, that has dropped off but 2021 was such a massive year. Anything looks like a slowdown compared with that. If you look at the whole picture for 2022, depending on what happens in November and December, we could end the year with a funding figure within 25% of the record hit in 2021.”

Investors act with more caution

Venture capital and angel investors aren’t exactly known for rushing into deals but in today’s uncertain climate, they’re especially rigorous. 

This means it’s essential to have your financials, metrics and due diligence in order if you’re trying to close a deal.

Founders should also be prepared for the decision to take longer. This means you need to keep a close eye on cashflow while you’re waiting and, as we always say, have a backup funding plan.

Scale Investors investment manager Roo Harris says investor syndicates are wanting to see more from founders. 

“We have some investors in our syndicate who are reluctant to invest without knowing the founder has patents, for example,” Harris said.

“In general, investors are wanting to know more and value specialist endorsement of your product or service, especially if they don’t have in-depth understanding of your industry.”

Founders risk selling themselves short

Now is not the time to aim for a record-breaking deal but that doesn’t mean you should sell yourself short on your valuation either.

“Don’t stare yourself blind on the valuation if you’re going to run out of money in 12 months,” said Harris.

“You need at least an 18-month runway, post raise, to avoid facing the distraction of equity raising again in 12 months.”

Extension or ‘bridge’ funding rounds are more frequent in tighter conditions. For example, at Standard Ledger, we have a client doing a $1 million extension round, mostly with existing shareholders. We also have another client doing a $500,000 convertible note round, thereby avoiding an immediate valuation in the current market.

AirTree investment manager Sid Kasbekar says seed-stage startups are less affected by valuation pressure because earlier-stage startups are more removed from what’s happening in the public markets. 

“AirTree has a greater focus on early stage investments where valuations are more of an art than a science,” explained Kasbekar.

“It’s more about how much you need to raise and what’s an acceptable level of dilution rather than data and metrics available in later stages.”

Beware the devil in the deal detail 

Naturally, coverage of economic uncertainty influences how investors and founders act. It can lead to less desirable deal structures, which you might be better off walking away from in some cases. 

Red flags for founders include high daily interest rates on convertible notes, deals involving preference shares that favour liquidation and supersede ordinary shareholders, and private equity investment significantly diluting employee shares. 

Founders should check the terms on any compound interest calculation, including time frames. As a general rule, the longer the time frame, the better.

Also look for alternative sources of funding across the whole spectrum, from grants to R&D, crowdfunding and revenue-based financing. No matter what the funding source though, it takes at least six to nine months to secure, so look ahead and always have plans B and C for funding.

Remco Marcelis is the founder of startup accounting and CFO firm Standard Ledger.