Job losses across Australia's tech start-up sector have not hit the dizzying heights feared at the start of COVID-19 lockdown, with some of the biggest investors praising government support for preventing a bloodbath, but worries remain about a second wave of turmoil when JobKeeper payments end later this year.
Prior to the lockdown venture capital investors feared that early stage start-ups would be badly hurt by the lockdown, but a poll of the Australia's most influential funds conducted by The Australian Financial Review the last week has found job losses in line with the broader economy, and new funding rounds continuing to close.
The Financial Review put questions to 15 top VC funds about redundancies across their portfolios, and growth projections. Telstra Ventures, AirTree Ventures, Main Sequence Ventures, Reinventure, Bailador, Alium, Right Click Capital, Rampersand, Carthona Capital and Tempus Partners provided guidance ranging from negligible losses to 15 per cent, with 4 per cent to 7 per cent most common.
Square Peg Capital, Blackbird Ventures, Artesian, Brandon Capital and OneVentures declined to discuss statistics.
Australian Bureau of Statistics analysis of May payroll data showed the total number of jobs fell roughly 7.5 per cent between March and April, with accommodation and food services the worst hit at 27 per cent, real estate at 11 per cent, and administration roles at 10 per cent.
In the details shared by the VC funds, Bailador said roughly 15 per cent of 2000 staff had lost their jobs, with revenue expectations down roughly 4 per cent to June 30. AirTree estimated about 10 per cent of retrenchments, Alium 5 per cent from 2000 staff and Carthona Capital said 7.3 per cent for the domestic companies in its portfolio (overseas companies were 9.6 per cent.
Right Click Capital said 7 per cent of its companies had reduced headcount, with a total reduction of 6 per cent of staff across its investments. JobKeeper payments were being claimed by 70 per cent of its companies, with 25 per cent having hiring freezes and 32 per cent reducing staff salaries.
CSIRO-backed Main Sequence Ventures said only three of its 25 portfolio companies had laid off staff, with a 20 per cent headcount cut on average, Tempus Partners estimated headcount drop at less than 5 per cent and Westpac-backed Reinventure said a third of companies in its portfolio had cut workers.
Matthew Koertge, managing director of the largest venture fund Telstra Ventures, said his fund had made three new investments in the last month and had conducted a detailed review of the impact of COVID-19 on its portfolio.
He said 74 per cent of its companies had enough cashflow "runway" to last at least 12 months without further external investment, and that while 25 per cent had cut headcount and 25 per cent had kept headcount flat, 50 per cent of its companies were still hiring, albeit at a slower rate than planned prior to COVID-19.
Across the VC funds polled there were numerous start-ups that had received a COVID-era boost, through their association with enabling remote work, digital healthcare or deliveries, while others with exposure to tourism and hospitality had been hardest hit.
"In April we did quite a detailed review of the replanning for the calendar year 2020, and at the portfolio level, about two thirds of our companies reduced their 2020 plan [to predict slower growth]," Mr Koertge said.
"Interestingly, now that a few months have passed, a bunch of our companies have actually exceeded their plans. For instance in our cyber-security portfolio, e-gaming and workplace messaging like Whispir have done really, really well."
Mr Koertge said he was still predicting a lot of pain to come, despite the relatively positive COVID experience so far. He said government spending, particularly JobKeeper payments, had made an "incredible" difference to the ability of early stage companies to keep going.
"Eventually that is going to stop, and in my view there is definitely going to be some companies that find that very challenging," he said.
"The greatest companies are always able to raise money, but I think the terms and valuations are probably going to be a little bit more modest than what they were."
AirTree general partner Daniel Petre said the job losses of COVID-19 had been unevenly spread across start-ups, depending on the sectors they were operating in. Some companies were hiring, while others were shedding, and he predicted that without JobKeeper payments 20 per cent, rather than roughly 10 per cent of workers would have been cut.
"If you are in travel or anything to do with events or hospitality, you are pretty f---ed ... and the issues is whether they can hibernate until demand comes back," he said.
"If JobKeeper truly stops dead in September things may get a bit dire. We are seeing the signs of returning demand, but I doubt things will be normalised by September, in which case there will be a potential gap which either gets filled with some form of JobKeeper, or there will be a lot more jobs cut."
Mr Petre said he believed it would be hard for VC funds to raise more capital for the next year at least as high net worth individuals could get decent returns from equities, and super funds had been spooked by scrutiny of the liquidity of their assets.
He predicted that start-ups at the very early, or seed funding stage, would find it most difficult to raise money in the next 12 months, due to a typical reliance on high net worth individuals.
Aside from the snapshot provided by The Financial Review's anecdotal polling of VCs, a more formal research initiative called Startup Navigate, has been surveying the impact of the pandemic on company founders and investors.
The project is being run by start-up group Innovation Bay, KPMG High Growth Ventures and Amazon Web Services. Its most recent numbers showed that across 30 VC funds only 6.67 per cent of companies have escaped having to lay off any staff.
Since March 1, VCs reported 49 follow on deals and 30 new deals. Only 36.7 per cent are forecasting a reduction in the amount of capital investment for the second quarter of 2020 when compared with the year-earlier period, with 30 per cent forecasting no change at all.
Right Click Capital partner Benjamin Chong said the government had responded very well to help protect the nascent start-up sector so far, and had shown commendable flexibility with the qualification criteria for JobKeeper payments.
Whereas the initial rules stated that companies needed to see their earnings fall by 30 per cent to qualify, fast growth companies have been able to show the change in their growth rate as a justification to claim.
"That has been a real Godsend, and the big question now becomes what happens in September, when these payments are due to end ... [JobKeeper] has definitely averted a sudden disaster, but whether it averts an apocalypse is yet to be seen," Mr Chong said.
"It is not only the payments to the start-ups that they will worry about then, but also what is happening in the general economy and whether the purchasing managers that they have been dealing with in larger client companies decide to sign on to turn trials into full payments."
Partner at “cross-over” investment fund Alium Capital, Rajeev Gupta, said he believed the full economic impact of the COVID-19 downturn would not hit for a year, but that his portfolio was in a much better position than he had initially feared going into the lockdown period.
The fund tends to back private companies on the path to becoming ASX-listed companies, and has been an investor in businesses like Nitro, Titomic, Tyro, Credible and Damstra.
Mr Gupta said JobKeeper payments were a major factor in keeping redundancy numbers down, and that none of its portfolio had become a "zombie", (as commonly used term for a company that can't service its debts or fund its operations out of it earnings.)
He said 11 of its start-ups actually booked record revenues in March and April, while there were currently 50 open positions across its portfolio.
"We were very concerned going into COVID-19 in early March. Now, almost 12 weeks later, we feel the founders and CEOs were very good at adjusting to the environment. The velocity at which they shifted staff to more active online roles and remote business development was terrific," Mr Gupta said.
He said the company collapses that had occurred in the hospitality sector had not hit tech companies hard, and mass redundancies had been avoided, but he also remained concerned about a belated reaction towards the end of the year.
“Everyone always hopes a reset comes quickly… but we haven’t had the washout yet ... the government can’t keep funding JobKeeper forever," he said.
“The Friday night before ScoMo announced JobKeeper payments, we had a board call for one company with 84 staff, where the decision was made that we’d make 25 per cent of staff redundant. Another 25 per cent would be stood down and the balance would take a significant salary cut.
“Then on the Monday morning, we retained everyone, because JobKeeper was transformational.”
Mr Gupta said it looked inevitable that the government would need to wind back the program before the economy had fully recovered and that this would raise questions about jobs going then.
“The economy won’t come to a standstill, but it won’t move at the same velocity and companies will have to adjust and more people will take salary cuts or get redeployed elsewhere,” he said.
All the funds spoken to by The Financial Review cited numerous examples of companies doing well through the lockdown. Tempus Partners managing partner Alister Coleman said it had calculated that it had a potential impairment risk of only 2.84 per cent to its total carried value of investments across its portfolio.
A number of its investments are in areas that have been in demand for various reasons during lockdown, such as clinical trials matching service HealthMatch, and autonomous drone medical delivery service provider Swoop Aero.
"There are pockets of growth, and even in places where you wouldn't have expected, such as in businesses that have provided ordering services to cafes," Mr Coleman said.
"Even though you would say you would not want to have a company selling software to cafes, the ones that have let them keep taking orders with social distancing are doing well to some extent."
Managing partner of ASX-listed Bailador Technology Investments Paul Wilson said he was pleased with the resilience shown by portfolio companies so far. Its investments include video content platform Viostream, fintech platform Lendi and open source data platform Instaclustr.
Two of its portfolio are focused on the travel sector, including tour operator platform Rezdy and billion dollar-valued "unicorn" hotels booking engine SiteMinder.
Mr Wilson said 87 per cent of the revenue of the portfolio is recurring revenue, through software subscriptions, so were less vulnerable to temporary movements in transaction volume.
He said SiteMinder's transaction-based revenue was down during COVID-19 due to travel bans, but that the vast majority of its revenue came from ongoing subscriptions from hotels.
"The cost of the SiteMinder platform to a hotel is minimal, and certainly not the difference between a hotel surviving or not. So it does not make sense for a hotel to stop their subscription," Mr Wilson said.
"A number of hotels are likely to face insolvency, but the nature of hotels is that another operator is likely to take over the physical asset and also require SiteMinder."
Main Sequence Ventures Partner Mike Zimmerman said JobKeeper payments had bought start-ups crucial time to avoid having to make rushed and rash decisions about their staff or other investments.
This had allowed start-ups to deliver new products and look to raise additional funding in order to keep working, despite the chaos going on outside their four walls.
Main Sequence Ventures has 25 companies in its portfolio, with a number of them, including telehealth platform Coviu, fraud detection company Kasada and plant-based meat company v2Food, all experiencing a lockdown surge in demand.
"Since COVID-19 hit, the main issues our companies have been thinking about are how it changes their end markets and particularly customer buying patterns and revenue trajectory ... and as a result, how their cash and runway changes," Mr Zimmerman said.
"They have to survive to thrive post this crisis, and we have worked with each of them to assess these impacts and re-cut their plans for these scenarios. We’ve recommended everyone target a minimum of 18 months runway, ideally 24 months."