Clutching at the straws of imperfection: why startup founders and investors need to shake off 2021

- February 7, 2024 7 MIN READ
Talyor Swift
A female founder is presented with a SAFE note for the next pivot in her music startup. Photo: Kevin Winter/Getty Images for The Recording Academy
While I didn’t get to watch the Grammys in real time on Monday, I did get to enjoy it on social media later.

I was able to scroll through the posts retrospectively, and perhaps this is because I was scrolling through Threads and not Twitter, it truly felt joyful and positive, which is a much-needed contrast to all the truly awful things happening elsewhere in the world to remind us that it isn’t all awful, all the time.

And of course, those who have read me for long enough know that I am an enormous T Swift fan, and so it was great to see her make history winning a record making fourth Album of The Year Grammy for Midnights.

It was predictable of course, given her historic treatment by the press, to then see the news today that still had to criticise her on the basis that she didn’t quite show enough deference on stage for Celine Dion who presented the award, or that she didn’t thank her boyfriend (you know, the one she started dating a whole year after she released the album for which she was being rewarded), or that she too ‘tastelessly’ used the acceptance speech to spruik her new album (one comment I read was “it was also Swifts tone, as every word sounded calculated and strategic” and that it was another case of “humblebragaddocio and her obsessive, CEO-like work ethic”.

Society still doesn’t seem to cope very well with women who are successful and wear their desire or efforts to be successful on their sleeves. So gauche.

My observation is that when someone or something is really killing it in their field, humans seem to clutch at the straws of imperfection to return balance to their self-esteem. I get it, we all do it at various times to soothe our egos.

Now, don’t feel too sorry for her, Taylor Swift has used that criticism as fuel, and combined with brute force of hard work and talent is now a billionaire — as she has said herself in Karma “ask me what I learned from all those years, ask me what I earned from all those tears”, the point I’m trying to make is, we just seem to love taking something generally positive and throw rocks at it.

Anyway, what does any of this have to do with the State of Australian Startup Funding? Huh, you ask? Yeh, that’s actually the point of this post.

Hear me out.

The 2023 full year report has been released by Cut Through Ventures and I’ve written about previous quarterly reports they released last year.

And look, this is a massive task. I don’t know how they are funded to do this work, but I sure am glad that someone is doing it, because what gets measured gets managed etc etc. They have pulled together a comprehensive report for which one post is certainly not going to do it justice, so I may have to make this a multi-part post. We will see.

But, the key take-home I couldn’t get out of my head after I read through the report, is actually how well the ecosystem is operating.

Not perfectly, and we will get to that in later posts, but how well in general it is functioning is great to see and I think often gets lost in the small criticisms we (the media, investors, founders) like to make.

Founders do complain its hard ot raise capital, investors like to complain its hard to raise capital, and even today I saw an article in the AFR about this very report labelling its conclusions a ‘tech wreck”.

Yeh, its not actually.

Yeh, I beg to differ.

I mean, our ecosystem is not yet quite T Swift level, but genuinely I think we all Need to Calm Down. Let me explain.

Stop trying to make 2021 happen

If you look at the data, especially going back a decade, in context of a broader data set 2021 was a weird blip.

There are lots of reasons for that weird blip, but it was a blip…not a trend.

Comparing the state of the ecosystem today to 2021, is like comparing Lance Armstrong today to when he was on performance enhancing drugs (oh wait, that did happen in that last Tour de France he competed in while not on PEDs, and actually was the catalyst for unwinding his whole lie….). I’m not saying we will never approach that level of funding or valuations again, I’m just saying they reflected an artificial environment, and not organic performance of the underlying ecosystem.

The blip has enabled a pretty handy narrative for the media…calling todays environment a ‘tech wreck’ by comparison — and to be fair there is some merit in discussing a downturn in that lots of people have lost jobs — but it promulgates a sense that the industry is in deep trouble, when actually I don’t think it is.

I think it’s far more useful to compare today to where we were in 2019/2020, and if you look at general trends from that data point, then we are seeing improvements in almost every sphere.

Capital Deployment Cadence and Valuations have Fallen

Ummm, sorry what? How is that good?? Well, lets look at how the scenario would play out if they didn’t.

Valuations increased in 2021 as a reflection of…well many things, but lets call it a low interest rate environment, comparatively bigger pools of capital availability, and higher competition for deals.

However, now the environment is much higher interest rates, lower capital availability, and a depressed economic market which is making M&A, exits, and growth difficult when markets/customers have less disposable capital.

The valuation multiples have fallen as a result, and companies who need to raise another round of capital are about to see a reckoning with many, many companies likely to having to raise at lower valuations (because multiples have fallen and many companies have underperformed) , and so many, many investments are ‘under water’ — lower value than when the fund originally invested.

While venture funds get to set the prices when they first invest, they rarely get to set the price for future rounds and are as vulnerable to the market as any founder is.

If companies never saw a valuation adjustment, then it isn’t being valued on fundamentals and it isn’t a question of if but when investors will be in for a shock (did I hear someone say Tesla?).

So deal cadence slowed — luckily investors could read the room and see it was a blip, not a trend, and investors could align their pace to the market more accurately, and so became more circumspect.

If they didn’t, they would have blown millions of dollars at the height of the bubble, all their investments would currently be ‘under water’ and taken years to dig out of if they could dig out of it at all, which would have been suicide for the venture manager.

And frankly, as an ecosystem we need the VC managers with expertise and track record to stick around if we are to continue on a growth trajectory.

The fall in valuations and deal cadence is not a sign of a sick ecosystem, its a sign that its operating as an efficient market subject to supply and demand. If it wasn’t, the industry and the investors would be labelled money wasters and hype machines.

And to honest, we as an ecosystem should be wiping the sweat from our brows, not clutching at pearls as a result.

Women founders are accessing a greater proportion deals

According to the 2023 report, teams with at least one women founder are accessing 26% of the deal numbers — an increase over 2020 levels of 18% (as per the 2021 CTV report).

2023 report
2021 report

While the proportion of capital raised by teams with at least one women founder seems to have decreased from 2020 levels (22 % down to 18% today and from the five years prior to 2021 as quoted by Techboard), the report makes a salient point which is that the proportion of capital raised and the median deal size number is heavily swayed by the large series B + rounds as they proportionally swamp the smaller deals.

And so, it would have been great to see the breakdown of capital raised (as opposed to proportion of deals below) by teams with one women founder in rounds earlier than series B.

2023 vs 2021 report

Can this be improved — absolutely. Should this be improved — well, duh, I’ve written about why here here and here. Nevertheless, the increase in proportion of mixed genders in deals is somewhat encouraging as it the general upward trend in mixed teams we are seeing at each stage.


While there was not much data presented yet, quite a few pages were devoted to talking about liquidity and the various options.

We know that VC funds like Airtree and Blackbird have successfully sold down parcels of their holdings via the secondary market this has been reported many times, and together this represents a fantastic signal that the sector is maturing and effectively recycling capital for investors.

Yes, the trajectory needs to continue. Yes we need to see more of the funds that have started post 2012 do the same thing. Yes we need to see more successes across the board than Canva, Safety Culture and Culture Amp.

But right now we need to acknowledge that the building blocks of this industry and asset class are looking positive, despite the market volatility they have experienced.

The Angels are truly the angels

Angel investors are the second layer of foundation upon which this industry is built (the first is the entrepreneur), and they have been doing the heavy investing lifting. Not only have they, unlike VC investors, kept their investment fairly consistent over the intervening years of volatility ensuring that the top of funnel for deal flow stays robust, the shape and composition of angel investors that are active, is changing with 57% of the most active angel investors in the under 40 category.

Meaning that the angel investors, have really been the buffer that has enabled our industry to absorb the shocks.

Pair this with the data around who is actually driving the startup engine (i.e. the startups), and its clear that its the young ones who are keeping this industry ticking along just nicely, thank you. And we should all be a little more grateful for that.

But importantly, this is a positive leading indicator for our industry — assuming we can keep this cohort engaged, imagine how much more experienced and savvy they will all be at 50 than we are now, and the impact that could have on success and impact.

Careful optimism is warranted

The moral of the story is that the venture industry and the startup ecosystem have had some challenging times, but we need to make sure we don’t lose the forest for the trees. Things are good directionally, but we all have to take a long event horizon to support that optimism.

Together with the fact that there is a $15 billion initiative from the National Reconstruction Fund to help grow the S’s under the SME umbrella into M’s, in high growth sectors that are awfully aligned with the startup and venture industry, I see much to be optimistic about.

Stay tuned for a couple further posts about where I think we need to do better, and some interesting observations I thought the report exposed that I’d like to dig deeper on — in particular the divergence of opinion between founders and VCs and what they valued, and the divergence between how diverse founders experienced the ecosystem versus non diverse founders.