Thoughts on the Australian VC Ecosystem (January 2025)
As we kick off 2025 (in earnest), I wanted to share thoughts on the Australian startup ecosystem. These are the key issues I’m watching, reflecting on, and, in some cases, working to address:
1. The Liquidity Challenge
Liquidity—or distributions-to-paid-in (DPI) capital—has been generally low. As wave of new capital entered the ecosystem between 2015–2018, many investors are now seeking cash returns rather than paper gains before allocating fresh capital.
The primary effect? Fund managers are finding it harder to raise new funds, and we’re likely to see the rise of “zombie managers” (those who fail to raise follow-on funds).
The second order effects are already visible:
Slower Capital Deployment: Managers are deploying recent fund capital more cautiously.
Focus on Profitability: Startups are being forced to operate more sustainably, which is healthy for the ecosystem but could limit outsized growth outcomes.
2. Valuation Resets
Companies that raised capital during the high-valuation years (2020–2021) are now facing hard truths. We’re seeing four common paths:
Non-Priced Bridge Rounds: Some founders are returning to existing investors for SAFEs or convertible notes to bridge to the next priced round, profitability, or an exit. However, most companies only get one chance for such a bridge round.
Shift to Profitability: Startups are cutting costs to achieve sustainable growth.
Exits: We’re starting to see companies test true market valuations through acquisition processes.
Shutdowns: In some cases, companies are winding down—this has been more visible in the US recently with high profile companies shutting down (e.g., Bench Accounting’s closure in December 2024).
2025 could bring more clarity on valuations as companies are forced to choose one of these paths.
3. Fewer New Businesses?
I wonder whether rising living costs and subdued venture sentiment are discouraging founders from starting new businesses. These pressures may compound over time, especially with liquidity constraints (point #1). If true, we might see a noticeable decline in startup formation and funding this year.
4. AI: Australia’s Global Competitiveness
No discussion of the current ecosystem is complete without mentioning AI. Are Australian startups competitive on the global stage?
The release of Deepseek’s model—built at a remarkably low cost—suggests that competing with US giants might not require infinite capital. While Australian startups are known for doing more with less, AI ventures often demand significant funding to cover compute and scaling costs.
This raises an important question: will more Australian AI founders move overseas to access significant capital earlier in their journeys?
5. Rise of University VC
There’s been a noticeable shift in the ecosystem: less activity from corporate venture funds and more from university-backed VC.
This makes sense. Universities are hubs for some of Australia’s best R&D, and they’re well-placed to identify commercially viable ventures. However, corporate VC still has a lot to offer—especially in identifying and nurturing solutions to industry-specific challenges.
Corporate VC seemed to be a focal point 4–5 years ago, but today it feels less prominent (with a few exceptions). For example, Telstra—historically a significant corporate VC player—is now reportedly selling its investments in its former VC funds.
6. Federal Election and Policy Opportunities
With a federal election on the horizon, it’s worth asking: will either side of politics propose initiatives to stimulate the early-stage and venture ecosystems?
We haven’t seen much at the federal level in recent years, but there’s a real opportunity for policy to encourage founders, startups, and investors. Incentives to stimulate the early-stage tech ecosystem could deliver long-term economic and social benefits.
The Australian venture capital ecosystem is undoubtedly at a crossroads, and 2025 could be a pivotal year. I’d love to hear your thoughts—what do you think will shape the startup and VC landscape this year?