The State of Australian Startup Funding 2024
This Tuesday saw the release of the annual State of Australian Startup Funding report from Cut Through Venture and Folklore. Before diving into my analysis a special thank you to Chris Gillings for the opportunity to contribute to the actual report and to everyone who I was able to work with who are all mentioned on page 131 of the report.
In particular there were three incredible summer associates - Chris has summarised their contributions and capabilities perfectly here in this post. If you're looking to hire some of the best and brightest I'd start here.
In the analysis below you'll see me reference data starting from 2019, all data has been taken from the 2022, 2023 and 2024 reports.
2024 the year of 'Cautious Optimism'
All in all, I'd say it was a good year. Whilst we only had one more deal completed compared to 2023 (413 deals), the total funding increased 11% from $3.5b. We even had one new unicorn minted.
It's been said a few times now, but if you do remove the bubble period from 1H 2021 to 1H 2022, the trends are consistent, and where we are today is pretty much where we should be.
We saw movement again in the top funded sectors since the report has come out in 2022.
It's been a battle between Fintech and Enterprise / Business Software for top spot in the last two years, but we've seen that gap increase dramatically this year. Fintech took out almost a quarter of the total funding for the year, with Enterprise / Business Software dwindling down to 5.88%.
Australia's always performed well in Vertical B2B SaaS, perhaps this is a sign of the times changing and Australia's increasing popularity for Climate, Space and Cyber startups in more recent years.
The post ZIRP era hit B2B SaaS particularly hard. Without looking deep into the data, my gut and past analysis tells me this less to do with a decline in startups and more that we've seen an increasing amount of bridging rounds in this sector. Declining and flat valuations have meant that most B2B SaaS founders are opting to not raise equity capital unless it absolutely makes sense. Those that are doing well are more increasingly looking at products like Venture Debt to reduce dilution or are raising smaller rounds. For others they’re still focused on achieving profitability before raising again.
Employment Hero raised a huge $263m Series F in October 2023, and CEO Ben Thompson just shared this week they have not only hit the $250M ARR mark but also profitability. I hope we see even more announcements like this in 2025.
Often the data does tell the story. Early stage funding has seen a real uptick this year - we've seen larger rounds in earlier stages, in large part because of the increasing amount of active Angel Investors and Syndicates.
In Series A and B+ rounds we’re seeing a decline. There's two tales to be told here, the first is of course again the post ZIRP era causing a more realistic baseline for company valuations meaning in there a cause and effect here leading to smaller rounds - this is impacting startups who are still navigating the 'new normal'. The second is that I'm hearing and observing that the best startups are now actually not wanting to over raise, often investors will want to invest more but they are choosing to do smaller rounds as they simply don't need that much capital.
Some interesting trends here - not a real surprise that NSW's share continues to grow. It's the biggest state for startups, a large reason why I choose to move here from Adelaide after university. Making some educated guesses, the largest accelerators are still NSW based and given the historical lead it has over other states larger and later stage rounds are more likely to be from startups in NSW.
What's interesting is the overall decline in funding to Victoria, especially given how much investment is being done from a State Government level into the ecosystem. I wouldn't be surprised if the larger rounds are skewing this data. It'd be interesting to compare the number of deals by state.
Being from Adelaide, what makes me the most happy is seeing South Australia grow - in large part thanks to the booming Defence and Space sectors.
AI - The Most Discussed Not The Most Funded
AI has of course been the talk not just of the town, but the whole world. Despite that AI / Big Data startups only raised $90m, accounting for only 5.6% of total funding in 2024.
AI did keep top spot as the sector investors are most excited about, swapping places with Enterprise / B2B Software mid year, and this makes a lot of sense.
Australia's always done well in Vertical B2B SaaS, and that's where the biggest opportunity with AI is. With the arrival of DeepSeek it has challenged where the most value in the supply chain is and indeed which layer is a commodity. We've gone from the application layer being a commodity in the immediate post-ChatGPT world with the rise of wrappers, to now challenging that perception where perhaps the models are the actual commodity. It's too early to say definitively, but I do believe strongly that there is much more value to be captured at the application layer than most would have initially thought.
Australia is unlikely to push the needle too much in true pure play AI startups innovating at the silicon layer - that is going to be happening mostly in the US, Europe and now in China with the chip ban. The application layer is where we can really shine and build a global centre of excellence. This translates to less investment in 'AI' and more investment in Vertical B2B SaaS over the next few years, fundamentally it doesn't change much for these startups there is still a user problem they are trying to solve and AI is a new way to solve these challenges.
Annie Liao, Founder of Build Club, provides a great insight into the above based on what she is seeing at the grass roots level on page 27 of the report.
Progress in Early Stages for Female Founders but Worsening in Later Stages
The Gender Equity Gap still exists, and is very real. There's a great summary from Jess Baird Walsh (p. 85), and opinion pieces from Bree Kirkham (p. 87) and Noga Edelstein (p. 91) on some the systemic changes that are needed to remove the gap altogether - essential reading.
It's not all doom and gloom, although the positive signs should not be a signal for complacency but evidence that initiatives put in place are now yielding early results - providing more evidence that we will see improvement the more investment is made not only directly in female founders but into these important initiatives.
Whilst total capital invested in all female and mixed gender teams was down, the total deals for mixed gender teams was up - in particular participation at Pre-Seed and Seed stages reached record highs along with participation in Accelerator programs. Early stage initiatives are bearing fruit and should, in theory, account for increased participation at Series A+ in the years to come.
Some may argue that the pipeline problem has been largely addressed, not to say it's at the levels we need but at least there is now a playbook that exists and it's working. Now there's pipeline, we'll see how well our ecosystem does at helping these female founders to grow their early stage startups into Series A and beyond.
Reports like this are crucial - I went through and re-read from 2022 to 2024 to understand beyond the data also the sentiment.
2022 - Investors acknowledged gender disparities but there was no major action or initiatives in place
2023 - We saw record early stage participation for female founders but Series A+ funding was almost non-existent
2024 - Early stage participation continued to improve with record levels for Pre-Seed and Seed stages, but again Series A+ funding struggled
Just as this report highlighted in the 2022 data, we saw that turn into action over the next 2 years. The focus now needs to not shift, but grow to create new playbooks for these later stages as we did in the years past for early stage participation.
First Nations Entrepreneurship - From Emerging to Scaling
As our ecosystem matures it's positive to see that First Nations entrepreneurship is no longer simply on the fringes. This years report highlights both the increased activity in Indigenous led investment and the structural challenges that First Nations founders continue to face in order to access capital.
Again going through each report from 2022 to 2024 here's summary of what we're seeing;
2022 - Launch of initiatives like the Dream Venture Masterclass program offering support for Indigenous founders. Investor awareness was still very limited with most funding coming from grants or government procurement programs.
2023 - Starting to see some shifts with 12,000 First Nations businesses contributing $8.8b annually to the economy. Saw the introduction of Indigenous led investment funds such as Blak Angels the growth of the Dream Venture Masterclass program now with over 240+ alumni
2024 - The economic contribution has nearly doubled to $16b supported by initiatives like First Australians Capital with $15m funds under management.
2022 and 2023 established a lot of the groundwork and increased visibility, in 2024 we are seeing that has laid the foundation for what I hope is now a scaling phase. It's encouraging to see an increase in Indigenous led funding models, but in order to continue this moment it's important that there is continued access to capital beyond the early stage and that investor networks understand the unique challenges that face First Nations founders.
This years report includes 8 opinion pieces (p. 96-103) directly from the community, and I would encourage everyone to read them all.
Other Highlights and Commentary
There's a lot more I could write about in the report, it's 132 pages - an impressive 22% average YoY increase since 2022!
Here's my quick takes on some of the other notable takeaways;
93% of investors saw a portfolio company layoff staff
I think we through the worst of it, the startups who found it toughest to adjust in a post ZIRP era have shut down, consolidated or managed to pivot. We'll still see more layoffs but I would not expect it to be anywhere near as high as 93%. From what I'm seeing in the market, most companies are now starting to invest in growth roles again and there's a renewed confidence with an increasing amount of international unicorns establishing their APAC presence in Australia such as Vanta, Notion and Rippling.
To address the lack of traditional exit opportunities, many investors and founders turned to secondary sales, particularly at later stages. 59% of surveyed Series B or later founders said they’d sold shares to secondary buyers, and 23% of investors said they sold secondaries in 2024.
Liquidity remained tight in 2024, a second year with no IPOs if you exclude Guzman y Gomez as not a technology company despite being VC backed. In my opinion secondaries are a sign of maturity for the ecosystem. It provides much needed liquidity for not just early investors but early employees who are crucial to growing the overall pie. We've seen more and more Angel Investors and Syndicates enter the market, in large part these are experienced startup founders and employees.
57% of deals in 2024 had a foreign investor
That's a huge number, and not something I would have predicted. The report notes that this was particularly evident in Series B+ rounds - consistent with more startups at this stage looking at international expansion, 63% of whom cited this was an important strategy for international growth.
Predictions and Wishlist for 2025
In no particular order;
~$5b in total funding - There's a lot of dry powder with many top tier VC funds raising significant amounts of capital, the only caveat to that is there is increased number of International startups that Australian VCs are also investing in. This years reports also highlights that 74% of investors foresee higher deal volumes in 2025.
More international capital - This will be driven by even more Australian startups expanding internationally, but also downstream from a boom period for startups innovating with AI at the application where an area Australia has historically excelled in.
More secondaries and M&A - We have more late stage startups that are likely to wait for some of our most senior startups (ie Canva, Airwallex) IPO first before pulling the trigger. I think there will also be more M&A as both founders and investors continue to look for liquidity outside public markets.
Optimism that's not cautious but responsible - We'll have well and truly recovered from the post ZIRP era and out of the initial AI hype cycle, we won't see a return to free cash but should see capital flow more freely that is responsible rather than with caution.