Venture capital will shirk away from early stage startups this year, forcing entrepreneurs to look elsewhere for funding, according to an investment expert.
The volatile equity markets in the last quarter of 2018 have investors nervous, and this anxiety flows through to the startup world, according to Transition Level investment associate An Vo.
“Declining equity markets can have a negative psychological effect on investors,” he wrote in a column for Business News Australia.
“Plunging public markets cause early stage investors to think twice when placing big bets on startups.”
The uncertainty in share markets also deter listed companies from making acquisitions of fast-growing startups — and this puts off investors from early stage businesses because it takes a potentially lucrative exit off the table.
“Declining equity markets also limit the potential for IPOs which are another important way for investors to realise returns on their investment,” Vo said.
Venture capital fund managers also are under pressure form their own investors in times of stress in financial markets and this makes them double-think about signing off new capital commitments.
“For these reasons, we expect that in 2019, venture capital funding will flow into later staged investment opportunities as investors seek out de-risked venture investments with proven track records over very early seed stage opportunities.”
With venture capital out of reach, Vo urged early stage entrepreneurs to seek alternative sources of investment:
- Family offices: Vo’s employer Transition Level Investments is an example of this, as it is the personal investment vehicle of Shark Tank judge Steve Baxter. Another is Grok Ventures, the equivalent fund for Atlassian co-founder Mike Cannon-Brookes.
- Angel investors could potentially benefit from tax concessions available for investments into startups that qualify as Early Stage Innovation Companies, according to Vo.
- Grants: There are many government grants and subsidies available at the state and federal levels, wrote Vo: “Many of our portfolio companies in Queensland have benefited from the Ignite Ideas Fund and have received co-investments from the Business Development Fund.”
- Debt financing: One of the companies in the Transition Level portfolio raised $3 million in debt last year to scale both in Australia and in the US, Vo wrote. Many nascent businesses outside technology borrow money to expand, so this shouldn’t be a radical concept for startups.
- Corporate venture capital: Vo said funds from big corporates were “once derided as a poorly aligned source of capital” but are now seen as value in allowing access to “unique distribution channels and corporate customers”. Big brands like Qantas and Telstra both have startup investment arms.
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