Australian Seed Stage Funding Analysis — For Founders!!!
**2024 Update: I now publish Aussie capital raising content on Substack here **
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This is an analysis of Australia’s Seed stage investment activity over the past 5 years, it is the next instalment of my last piece called Australian Early-Stage Startup Ecosystem Funding Analysis. It is intended to empower founders when making decisions related to capital raising. I hope that Australia’s largest VCs can expand on this analysis so that we can continue to empower founders and develop the ecosystem.
Personally, I’m deep in a Pre-Series A capital raise at a MedTech startup called Nutromics which has opened my eyes to the ups and downs founders face during this process. After we finalise the round, I will write an analysis and debrief of our learnings that I hope will help founders.
Finally, don’t forget to visit Startup-Funding.com.au to strategically search for investors and learn about the capital raising process.
I write these reports for founders regularly so make sure you follow my Medium to get future reports
TL;DR
- You should totally read it, I made it as short and sharp as I could!
Seed Deal Count
2020 was another bad year for Seed stage deal activity with total deal count declining 64% from a peak of 285 transactions in 2017 to only 104 in 2020 with a 20% year on year decline from 2019. This is seriously bad news for founders looking for early-stage capital.
Seed Deal Value
Surprisingly, despite the outbreak of COVID-19, 2020 wasn’t as bad a year as one might have expected with total Seed stage deal value dropping a relatively low 15% to $172 million. Interestingly, all of the decline in activity occurred in Q1 and Q4 which may indicate that whilst investors were reasonably upbeat during the height of the first and second wave in Australia, their confidence may finally be dented with the pandemic dragging out into 2021.
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Seed Median Deal Size
Given how turbulent the year was, I decided to break the median deal size out by quarters which shows more clearly what a year it was. 17 transactions were announced in Q1 2020 with median deal size diving to $800k but then recovering to $1.5m to $1.7m for the remainder of the year. Interestingly, at the height of the first wave of COVID-19 in Q2 where 18 transactions occurred, the 75th percentile blew out to $5.6m. This was 3.3x the median for that quarter which typically sits at 2x. In the final two quarters of 2020, the 75% percentile tightened to its lowest level in the last 6 years to be 1.3x indicating a tighter variation in deal sizing.
Seed Number of Investors
The reported number of investors per deal has been steadily climbing since bottoming out at 1.3 in 1H 2018. It now sits at an all-time high of 2.5 in 2H 2020.
There is a correlation between the number of investors and the median deal size as can be seen below.
Seed Company Age
The average age of a company raising Seed stage funding dipped from the 2H 2019 high of 3.6 years old down to 2.4 years old but has since returned to 3.5 years old. One might assume that companies rushed to raise capital in order to strengthen their balance sheets and extend their runway during the 1st half of 2020.
There appears to be little to no relationship between company age and deal size in the Seed stage in 2020.
Seed Founders
In 2019 and 2020, companies that had three founders raised the largest Seed rounds with the median hovering around $2m. However, this relationship didn’t hold true in 2018.
Seed Runway
How long are companies waiting to raise their Seed round from their last round?
During the first wave of COVID-19 (Q2 2020), the time between the last round to current Seed round surged to its highest level to 1.4 years and then crashed to 0.6 years in Q4. This is difficult to interpret but fascinating none the less.
If you are raising your Seed then you will no doubt be asking “How long until I should raise my Series A?” which will help inform your financial modelling, so let’s take a look.
In Q3 2020, companies raised their Series A round on average 3.4 years after their last round but that dived in Q4 to 0.9 years. Pre-COVID-19, companies typically waited 1.5 years (18 months) before raising their Series A but in uncertain times cash is king and the best laid plans don’t always work out.
On a Side Note: Investors Have Changed Strategy
In 2018, Australian investors appear to have changed their approach to Seed stage investing, deciding to favour a less is more strategy.
As can be seen in the two graphs below, a strong negative correlation (-0.8) between deal count and median deal size emerged over the last 5 years. In 2018, investors switched strategy (or a less likely scenario, less companies are looking for capital) from more investments/smaller cheque sizes to their now preferred strategy of less investments in larger deals.
If we explore this further, then we can see in the graph below that investors are deploying about the same amount of capital but in much larger deals.
And as the same amount of capital is deployed, less and less companies are successfully closing rounds.
A few things that may be driving this:
- Investors may be investing in less companies so they can:
- Nurture/support their portfolio more (capacity issues)
- Better assess opportunities prior to investing (capacity issues)
- Have more capital to allocate to subsequent investment rounds (capital supply issues)
2. Companies may be raising larger rounds as they are:
- Waiting longer to raise Seed stage funding as we have seen average company age rise to 3.2 years in 2019 from 1.7 in 2015
- Raising on longer runways that require more and more capital as we have seen median Series A to time raise extend from 0.8 years to 1.4 years to 2.2 years.
- Inflation pushing up the cost of running tech companies with skills shortages persisting in Australia
However, it is hard to pinpoint exactly who is driving this change in the market without more data and analysis but we can be certain that this is happening. It could be both investors and companies.
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I’m the Aussie Startup Capital Nerd… My name is Warwick Donaldson and I specialise in Australian DeepTech and FinTech Seed and Series A capital raisings. To date I’ve worked on over 150 Pre-seed, Seed, and Series A fundraises. Hit me up if you’d like to chat.
Analysis Notes
- All data sourced from Crunchbase
- Data period from 1-Jan-15 to 31-Dec-20
- A total of 1,020 publicly announced transactions make up this analysis
- Seed is classified as angel, seed and convertible note transactions
- Produced using Python/Jupyter Lab
