Ⓒ Acceleration Venture Catalysts Pty Ltd 2020

https://techboard.com.au [email protected]

Report author: Rafael Kimberley-Bowen

Key findings and insights

 Total startup and tech company funding in FY20 was almost $7bn, in line with FY19 but almost double FY18.

 895 transactions were recorded in FY20, a 7% increase on FY19.

 Private investment almost doubled in value (98% increase) from FY19’s $2.26b to $4.48b with the number of private investments captured rising 23% to 377 deals.

 On a per capita basis, Victoria had a strong FY19 ($352) but experienced minimal growth into FY20 ($356) while NSW grew strongly (up 115%) from FY19 ($229) to while NSW fared better in FY20 ($492), but in both cases fintech megadeals drove the high funding levels.

 In Australia, funding of local startups sits around $271 per capita per annum. This takes an all-sources view of funding, and includes VC, angel, acquisitions, public markets and grants.

 Narrowing the view to only include private funding of startups, the figure is closer to $121 per capita (as compared to $604 in Israel and $412 in the US).

 Angel group activity increased significantly by around 60%in FY20, with $14m invested by the major angel groups.

 Australian startup and tech funding has generally proved resilient to the COVID- 19 storm. The third quarter of FY20 saw a drop-off in number of transactions, but this was concentrated in public markets rather than private deals. The fourth quarter saw the highest level of funding recorded by Techboard (excluding the PEXA Acquisition) with 2.4billion in funding.

 However the number of private deals at the lower end of the scale (sub $5m) contracted during Q3 with a recovery in deals $1-$5m in Q4 and sub $1m deals continuing to decline in Q4.

About Techboard

Techboard is the number one source for up-to-date data on the Australian startup and young technology company ecosystem. Techboard maintains three interlinked datasets:

Company Profiles Techboard operates Australia’s largest publicly searchable directory of Australian startups and young technology companies (with now over 3,800 company profiles).

Funding Events Techboard monitors mentions of funding events for companies in the Techboard Directory and in the market generally both in the press and on social media channels. Techboard also accepts reports of funding events directly. Techboard tracks a wide variety of funding events such as private investment (including venture capital, angel groups, corporate venture and high-net-worths), investment via public markets, grants and awards, crowdfunding (both equity and reward), accelerator programs and acquisitions.

Funders/Investors With all the funding events that Techboard captures we also capture the identity of all investors that are disclosed either in news or social media reports or as reported to Techboard.

Techboard publishes free reports containing high level insights and provides subscription access to its data on Australian startups and young technology companies.

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A sample of our customers, sponsors and partners

General funding trends

Total startup funding from all sources during the 2020 financial year was $6.9 billion. This total is in line with the previous year’s $6.8 billion, but almost a doubling from FY18’s $3.5 billion. Private investment levels however moved markedly from 2019 levels almost doubling (98% increase) from FY19’s $2.26b to $4.48b with the number of private investments captured rising 23% to 377 deals.

This is a strong performance for a year significantly impacted in its second half by a global pandemic and unfolding economic contraction. As we will examine in more detail, the Australian venture capital markets appear to have weathered the COVID-19 storm well – at least initially, though other funding sources (such as public markets) perhaps less well.

The funding data collected by Techboard over the past three years suggests a maturing of the startup and tech sector in Australia, with funding events generally getting larger as companies are maturing.

Total funding - amount invested by size of transaction ($b)

17/18

18/19

19/20

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

up to $1m $1m-<$5m $5m-<$10m $10m-<$20m $20m-<$50m $50m-<$100m $100m +

In particular, between FY18 and FY19 there was a marked uptick in funding events greater than $100m, up 167% in quantity and 235% in value. Admittedly FY19 figures were skewed by the $1.6b acquisition of PEXA1, but even if we remove this data point the trend would remain notably upwards.

Funding events of all sizes increased year-on-year between FY18 and FY19, with the exception of deals in the $5m-$10m range. From FY19 to FY20, funding events again increased year-on-year in all categories, including $100m+ once removing the PEXA acquisition.

An increasing volume of $100m+ deals also suggests an increasing number of unicorns2 emerging on our shores. We look forward to this trend continuing in Australia, as high-profile success stories will attract more investors to the venture capital and angel investment asset classes.

1 Property Exchange Australia 2 Young, private companies with a valuation in excess of US$1 billion

Impact of COVID-19

During the early days of the economic contraction triggered by COVID-19, global reporting indicated significant slowdowns in venture funding, with falls in VC funding across China, Europe and the US in the third quarter or FY203.

On a positive note, our data has not shown the same contraction in Australia. While the number of recorded funding events dropped during the third quarter of the financial year, total funding appeared to plateau and then increase in the last quarter to its highest level ever recorded4, with $2.4b funded in the three months to June 2020.

Total invested ($bn) and volume of deals $3.0 300

$2.5 250

$2.0 200

$1.5 150

$1.0 100

$0.5 50

$- - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY18 FY19 FY20

Debt Other ICO Public Private Acquisition Count

3 https://startupgenome.com/reports/global-funding-impact-COVID-19-startup-ecosystems 4 If we exclude the $1.6 billion PEXA acquisition recorded in FY19

Private v Public While private funding seemed resilient to the impact of COVID-19, we note that public markets were more clearly impacted, with a drop in Q3 in both number and value of IPOs and share placements/offers, as share prices dropped globally in response to the global pandemic. Notwithstanding the pandemic, the levels of public funding in FY20grew from FY19 levels, increasing 42% in number to 153 and 20% in total amount raised to $1.617b

Public funding ($bn) $0.7 50 45 $0.6 40 $0.5 35 30 $0.4 25 $0.3 20

$0.2 15 10 $0.1 5 $- - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY18 FY19 FY20

Total funded Count

Q4 saw a sharp increase in the number of public market funding events as listed companies took advantage of recovering share prices in April and May to raise funds. However while the number of transactions were at record levels during the quarter, total amounts raised were lower than the previous year’s comparative quarter as companies struggled to entice nervous investors during the early recovery.

Impact by category Throughout the entire period Fintech was by far the leading company category, with fintech companies being responsible for 63% of all funding from 23% of all funding events. The pandemic had little impact on fintech although as might have been anticipated, funding preferences shifted throughout the period, with Health & Biotech and Edtech raising in significance into Q3 and Q4.

Impact by funding range One of the most notable impacts during Q3 was on funding rounds in the $1m - $5m range, which is predominantly the territory of Series A or B rounds and small ASX offers. Averaging 60 per quarter over the previous two quarters, transactions is this category dropped by half to 31 in the March quarter, before

recovering to 42 in the last quarter. While this contraction was more pronounced with public deals, VC and angel deal numbers also suffered.

Indeed while overall, private sources of funding appear to have remained resilient to COVID-19 in terms of total funding, there were signs of weakness at the lower scale of deal sizes.

Another range to show a decline during the third quarter was the sub $1m range, with only 17 private rounds recorded during the quarter, down from 44 in the December quarter. These dropped further to 9 in Q4.

The above trends appear to fit with anecdotal feedback from investors and startups actively raising funds.

Annual trends by funding type

Venture capital Venture capital funds have been consistently growing in size. According to startup advocacy group StartupAUS, VC firms raised over $4 billion from 2015 to 2018, with the annual value of new funds closed roughly doubling each year5. VC firms are now attracting more institutional level capital as larger fund sizes become more practical for industry super funds that historically have been too large to invest in early stage ventures.

In particular, super fund HostPlus has established itself as a significant player in the tech investment space, having backed a range of VC firms including Square Peg Capital, Brandon Capital’s Medial Research Commercialisation Fund and CSIRO’s Main Sequences Ventures fund. Other super funds are following in HostPlus’ footsteps, including First State Super, Sunsuper, AustralianSuper and Hesta.

During the year Square Peg Capital announced the biggest capital raise in Australian VC history, raising $350 million and becoming the largest Australia-based VC firm, with over $1 billion in assets under management6.

Since the end of FY20 this has already been surpassed, with Blackbird’s $500 million raise in August taking it to $1.24 billion funds under management7. Blackbird was the Australian VC invested in the highest overall value of deals8 during 2020, being involved in 14 investments totalling $490 million.

This was surpassed by US-based Sequoia Capital, which while not based in Australia was the VC investor that invested in the highest value of deals in Australia with six deals9 totalling $643 million, including Canva, Airwallex, CultureAmp and Q-Ctrl.

5 https://crossroads.startupaus.org/ 6 https://www.smartcompany.com.au/startupsmart/news/square-peg-1-billion-paul-bassat-COVID-19/ 7 https://www.afr.com/technology/blackbird-s-500m-fund-hopes-for-another-hundred-bagger-20200804- p55icp 8 Techboard currently collects data on the total value of investments rather than the amounts each investor contributes to an investment round 9 Including out of its Asian subsidiary Sequoia Capital China

The most active Australian VC in terms of number of deals was Artesian who backed 44 eligible companies with a combined disclosed deal value of $36 million10.

Australian VC funds do not just back Aussie companies - Square Peg backed Uber and Stripe, and Blackbird backed Zoox11 – however their impact as facilitators of Australian unicorns is significant. Melbourne-based Airwallex was one such startup to benefit when Square Peg invested $8 million in the two-year-old fintech in 2017. Two years later the company was valued at over $1 billion.

Other Aussie unicorns include now NASDAQ-listed Atlassian (arguably Australia’s first ever unicorn), Canva, ZipMoney, Afterpay, Nearmap, Culture Amp, SafetyCulture, Judo Bank and Site Minder, suggesting an accelerating trend of just over one unicorn per year.

Corporate venture capital Airwallex raised one of the year’s largest rounds, and one of the biggest on record, with a $254 million Series D round in April 2020, valuing the fintech at US$1.8 billion, almost twice its last valuation 13 months prior. Square Peg participated again alongside Tencent, Sequoia Capital China and new investors Salesforce Ventures and ANZ’s venture fund ANZi Ventures. The round was beaten in size only by Xinja’s $433 million raise from Dubai-based World Investments.

With the fintech industry dominating the headlines through its ability to generate unicorns and raise significant amounts, we are also seeing an increasing corporate venturing appetite from the big banks.

As well as Airwallex, ANZi Ventures backed Lendi, Brickfloor, Valiant, Slyp and Divipay this. In turn NAB Ventures was busy with more reported Australian investments than any other corporate VC, including Athena, ActivePipe, Hometime, Edstart and Slyp. CBA is considered the market leader in digital banking technology in Australia, and has arguably compounded its advantage through both direct investments in startups and partnerships with VC firms (like Zetta Venture Partners and Square Peg Capital). Westpac’s Reinventure made six investments during the year, including Valiant, Kasada and Indebted.

Corporate Venture Capital has not been the sole preserve of the banks though. Another example is Seek’s development of its own HR tech ecosystem, with investments in Employment Hero, GO1 and Sidekicker. Salesforce Ventures is Salesforce’s global investment arm and has invested in more than 300 companies across 20 countries over the past decade. Last year it launched an Australian focused fund worth US$50 million, with stakes in local enterprise software startups including Athena, GO1, Valiant and Airwallex.

10 The majority of Artesian’s investments were for undisclosed amounts 11 Zoox is US-based though it has an Australian co-founder

Angel investment Late last year StartupAUS’s Crossroads Report12 reported a worrying trend in angel and seed funding, with a continued decline in number of deals recorded from FY17 to FY1913. This was based on data recorded by US-based data provider Pitchbook. Our data (including exclusive data sourced directly from Australian angel groups) paints a less worrying picture.

Private deals in the sub $1 million range have remained relatively stable over the past three years at just under 100 per year, and would likely have shown more of an increase in the last year were it not for the impact of COVID-19.

Number of private deals (sub $1m) 120

100

80

60

40

20

- 17/18 18/19 19/20

Private Equity Crowdfunding

In addition, crowd sourced funding has emerged over the past couple of years as an alternative source of private seed capital for Australian startups.

Data on angel investment is notoriously difficult to track because most of seed stage deals remain confidential, either deliberately or because they are considered too small to be newsworthy. While many high-net-worths invest independently, many angels join local angel groups in order to benefit from increased deal flow and peer support. As such angel groups can provide some insight into the overall actively level of the asset class.

Data collected from the major angel groups shows total funds deployed remained steady at circa $10 million in FY18 and FY19, but increased to $14 million in FY20, despite a drop off in activity in the last quarter following COVID-19.

12 https://crossroads.startupaus.org 13 https://crossroads.startupaus.org/analysis/capital/seed-capital

Angel group total amounts invested $16,000,000 Sydney Angels Sidecar $14,000,000 Sydney Angels $12,000,000 Southern Angels $10,000,000 Scale Investors $8,000,000 Perth Angels $6,000,000 Melbourne Angels $4,000,000 Gold Coast Angels $2,000,000 Byron Angels $- Brisbane Angels FY2018 FY2019 FY2020

The most active angel groups are Brisbane Angels, Melbourne Angels, Sydney Angels and Scale Investors, with Sydney Angels’ impact amplified through its co-investment fund. Every year is seeing new angel groups being formed, in particular in the regions, with Southwest Angels, Southern Angels, Far North Queensland Angels and Byron Angels all recently launched.

Returning entrepreneurs Something largely absent from the Australian landscape, but more prevalent in more developed ecosystems like the US, is the trend of successfully exited local tech entrepreneurs reinvesting significant amounts of their wealth into the next generation of startups.

On a positive note there have been increasing examples of this occurring in Australia in recent years, most notably Square Peg Capital (co-founded by Paul Bassat of SEEK fame) which in 2019 raised $340 million, recently followed in FY20 by what was at the time Australia’s largest ever fund at $350 million.

As well as VC firms, others invest through family offices and other investment vehicles, such as the Atlassian founders investing through their respective funds Skip Capital (Scott Farquhar) and Grok Ventures (Mike Cannon-Brookes), Aconex founder Leigh Jasper and Steve Baxter investing through Transition Level Investments.

Public markets In addition to private capital, the public markets represent a significant source of funding for startups and tech companies.

In FY20, $188 million was raised by tech companies listing on the ASX (this excludes amounts raised by foreign companies relocating to Australia in order to list on the ASX, as Techboard’s focus is on Aussie- founded companies).

Dwarfing this amount was the $1.4 billion raised by tech companies across over 100 placements and share offers. Fintech Afterpay alone raised over $600 million across four offers during the last two years.

Crowdfunding Equity-based crowdfunding has existed in Australia for many years, but has been restricted to wholesale investors. ASIC’s regulation covering the asset class was extended to retail investors in 2017, creating what is today referred to as crowd-sourced funding (CSF). In this respect Australia followed in the footsteps of the UK (2011) and New Zealand (2014).

In 2019, a reported $50 million has been raised across Australia and New Zealand through CSF campaigns (as compared to roughly $500 million in the UK).14 While not all of these campaigns involve true startups (as per Techboard’s qualifying definition), we recorded a little over $16 million raised by startups in FY20. CSF platform Birchal estimates over 44,000 Australian investors have taken part in CSF campaigns to date.15

The main platforms operating in this space are:

 Equitise, which helped neobank Xinja raise several million dollars over multiple rounds.  VentureCrowd, which has focused on wholesale investors for now, even though it is licensed for retail investors too.  Birchal, a spin-off from the non equity-based platform Pozible.  OnMarket, which also offers retail investors access to IPOs and placements.

The industry sectors that are best leveraging the channel appear to be consumer-facing verticals, as per this overview from Birchal:

14 https://www.scale.partners/post/crowdfunding-in-australia-everything-you-need-to-know 15 https://storage.googleapis.com/birchal- public/Funded!%20CSF%20Industry%20Report%20FY%202019_20.pdf

This is consistent with CSF’s value proposition of allowing the fundraiser’s existing customers to be mobilised as investor-brand advocates.

Reward-based crowdfunding has been around a lot longer than CSF, but only provides a fraction of the funding to startups. According to our data fewer than a dozen Aussie startups closed successful campaigns over the past three years, with the only notable campaign being Flow Hive. The easy-to-use beehive returned to US platform Indiegogo and raised $15 million in 2018 - having previously raised the largest ever campaign ($12 million) in the US platform’s history back in 2015.

Grants and awards According to our data, Aussie startups received a quarter of a billion dollars in grants over the past three years.

These figures do not capture what is likely the biggest funder of earlier stage ventures, the R&D tax incentive, as tax data is difficult to track. Federal funding for startups is also available through the well- known Accelerating Commercialisation program, and the Export Marketing Development Grant. Over notable sources of grant funding include the Australian Renewal Energy Agency (Evie Networks, Greensync, HAZER Group), the Cooperative Research Centre (FluroSat, Solar Analytics), the Medical Research Commercialisation Fund’s Biomedical Translation Fund, AustCyber Project Fund and the Advanced Manufacturing Growth Centre.

In addition to the above programs, the federal government also lends significant amounts to SMEs through both the $2 billion Australian Business Securitisation Fund launched last year and the $15 billion Structured Finance Support Fund launched post COVID-19. While neither of these programs are targeted at startups, they are focused on providing funding to SMEs generally and strengthening competition to the big four banks, and Australian neobanks can benefit with Judo Bank’s $500 million injection a prime example16.

Other grants and awards from non-public providers including Google, Salesforce, River City Labs, Mars, Optus and Microsoft were also recorded by Techboard.

16 https://www.smh.com.au/business/small-business/government-ploughs-500m-into-neobank-judo-in-bid-to- spur-sme-loans-20200402-p54gjs.html

Funding by state

Plotting funding events by state17 over the past two financial years yields the following:

ACT $126

ACT $60

We have adjusted Techboard’s data to exclude the $1.6 billion PEXA acquisition in FY2018, in order not to skew the result. Notwithstanding this, Victoria outperformed in FY19, attracting over half of the total funding (or two thirds of the total if including the PEXA transaction). Milestone funding events during the

17 States are recorded based on the home of the funded startup, not the location of the investor

year included a slew of mega-raises by Victorian fintechs, with challenger bank Judo Bank raising over $900 million from Credit Suisse, Myer Family Company, Ironbridge Capital, Goldman Sachs and others cross a number of transactions, and lenders Afterpay and Moula raising over $700 million between the two of them.

FY20 saw Victorian funding levels remain constant, while New South Wales more than doubled its funding, from $229 to almost $500 per capita. Again fintechs led the big rounds, with Xinja, ZipCo and Brighte bringing in close to a billion dollars between them.

After a strong FY19, Western Australian almost halved its levels year-on-year, though this was mostly driven by Spookfish’s $127 million acquisition in FY19 but no similar sized transactions in FY20.

South Australia saw a 50% increase in funding year-on-year, largely driven by Uniti Group’s $85 million capital raise in early 2020. The broadband specialist deployed the funds on its acquisition of 1300 Australia, the country’s largest inventory holder of phone words.

Averaging data from the two years provides a snapshot of funding health across the states:

In Australia, funding of local startups sits around $271 per capita per annum. This takes an all-sources view of funding, and includes VC, angel, acquisitions, public markets and grants.

Narrowing the view to only include private funding of startups, the figure would be closer to $3 billion per year, or $121 per capita.

Worldwide, Israel and the US have mature venture capital industries. In 2019 VC investment was $604 (US414) per capita in Israel and $412 (US$282) in the US18 – in other words, four to five times greater than in Australia.

18 https://www.statista.com/statistics/1071105/value-of-investments-by-venture-capital-worldwide-by-key- market/