The market is in flux, venture capital (VC) valuations are under pressure and capital raising is challenging for early-stage companies. But investing for innovation and impact hasn’t gone out of style.
Breakthrough Victoria continues to see smart, cutting-edge companies looking to solve society’s problems and build their presence in Victoria, and our mandate is clear that we aim to ensure that the “valleys of death” don’t lead to the loss of these companies to other places in search of capital.
State of the market
The US VC market, as a bellwether of VC capital flows, has grown from approximately US$30 billion invested in 2006 to US$350 billion in 2021. Similarly, the Australian VC market deployed approximately $1.5 billion in 2018, rising to over $10 billion in 2021.
However, recent broader macroeconomic factors have led to significant downward pressure on capital markets and the VC market has not been immune to this. Even prior to the collapse of Silicon Valley Bank in early 2023, there were downward pressures on valuations in the VC space, most notably reflected in the mid-2022 significant write down by investors in Canva.
These broader adverse market conditions have continued over the past six months. Significant inflationary pressures and the impacts of interest rate decisions by central bankers have led to significantly tightened capital access, as investors aim for higher risk adjusted returns. Market expectation for the Australian VC sector reflect anticipation of further reduction in deal size coupled with reduced valuations for new capital raises from peak pricing, in the order of 30-50 per cent falls, according to the latest Cut Through Quarterly Australian Venture Capital Funding Report .
However, the counterpoint to this negative sentiment is that good companies that are innovating, solving societal problems and have a clear pathway to growth will continue to garner support from both existing investors and new capital.
Unchanging mandate of a patient investor
So, where does this leave Breakthrough Victoria?
Our mandate remains the same, but a heightened sensitivity to these market conditions means we are adopting a more prudent and risk-adjusted approach to investing through our triple lenses of innovation, impact and commercial return.
Breakthrough Victoria has invested more than $96 million in 11 companies and a further $59 million in other investments, such as our fund and platform programs.
Good companies will need longer cash runways to ensure that they can ride out the market volatility that comes with economic uncertainty. This same uncertainty means that founders will need to understand that even though we are funded by the government, we are not an investor of last resort.
In addition to direct investments in companies, which is our primary focus, Breakthrough Victoria will also look to also invest in funds and platforms. Fund investments allow us to co-invest with like-minded investors, deploying more capital into the market and supporting the commercialisation of breakthrough innovations. Our platform investments provide technology facilities, research platforms and research infrastructure to underpin new discoveries, as well as the prototyping, translation and commercialisation activity required to bring discoveries towards commercialisation.
We will continue to work with our peers in the VC ecosystem to support the best companies, but not all companies will pass our investment screens. This same economic uncertainty also means that the expected impact of our investments needs to be rock solid.
Providing support beyond initial capital
Finally, after our investment is made, the equally important part of managing our portfolio companies kicks in.
This support ensures our portfolio companies are well served and supported, connected with our peers in government to support their growth both here in Victoria and globally, and we continue to focus on investing at the next stage of their growth.
So, the markets are volatile, capital is more expensive, valuations are lower, and growth is slower. However, our investment mandate for investing patient capital in innovative companies that have and will continue to have real impact in our societies remains unchanged. We as a team remain proudly focused on building something truly multi-generational in its benefits and outcomes for Victoria.
About the author
Brett Mitsch is the Executive Director, Growth Capital at Breakthrough Victoria. Brett is responsible for sourcing and investing in later stage investment opportunities. Having worked in multiple top tier organisations across the USA and Australia, Brett brings over 30 years’ experience in funds management, mergers and acquisitions, sustainability and civil engineering.