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Cautious optimism for venture capital in 2023

Two co-heads of venture capital at Herbert Smith Freehills have weighed in on the venture capital landscape of 2023. 

user iconJess Feyder 17 January 2023 Big Law
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2021 saw record deal volumes and valuations, with the Australian start-up and venture capital (VC) ecosystem booming until the end of 2021, and record levels of investment from domestic and international investors drove up confidence.

2022 saw buoyant optimism turn into apprehension as to what the downturn in tech valuations would mean for companies relying on VC investment.

In 2022, VC investment deployment dropped, albeit from a record high in 2021. Yet, the Australian market proved resilient with some strong success stories. 


Herbert Smith Freehills’ (HSF) co-heads of venture capital Australia, Claire Thompson and Elizabeth Henderson, along with solicitor Adam Ong, discussed what might lie ahead for 2023.

Plans to raise capital

Since tech valuations were down, most companies that didn’t have to raise capital in 2022 chose to wait. A recent HSF survey of Australian founders showed that 76 per cent plan to raise capital throughout 2023. 

“We expect to see most founders turning their minds to their next priced round from as early as January 2023,” said Ms Thompson, Ms Henderson and Mr Ong. 

Building investor confidence

2022 saw a wave of bridging rounds for reasons such as lengthening cash runways and deferring landings on valuations. In some cases, investors wanted to provide certainty to funders so that they could focus on the business. 

“We expect this trend to continue through 2023, particularly if tech valuations are slow to recover,” said the trio.

“Companies and investors should be mindful of the complexities of SAFE (a Simple Agreement for Future Equity) and convertible note economics, especially when multiple instruments are ‘stacked’ on each other.”

Due diligence 

In 2021, it was evident that speed to term sheet was a critical competitive advantage.

“Going forward, we expect an enhanced focus on due diligence and a challenging of the assumptions behind forecasting, ensuring a clear path to neutral or positive cash flow,” posited Ms Thompson, Ms Henderson and Mr Ong.

How can founders set themselves up for success in this environment? 

“Prior planning, organisation and responsiveness are key,” they noted. “Getting your ducks in a row and keeping your information for prospective investors up to date before you need to.”

Market for secondaries

Secondaries have performed an important function in incentivising founders and employees by providing a partial equity liquidity event, they said. 

“However, we did not see as many secondaries in 2022 as [in] previous years, probably due to the uptick in use of SAFEs and convertible notes and the uncertainty on valuations (a secondary really requires agreement on price).

“We believe the rationale and motivation for these secondaries will continue, notwithstanding it may not have taken the same pride of place in 2022 as in 2021,” Ms Thompson, Ms Henderson and Mr Ong explained. 

“With some companies contemplating a longer pathway to IPO or other exit, secondaries may increasingly be looked at by investors as a mechanism for liquidity,” they added. 


With a changing cost of capital, we expect to see some founders and boards review exit and liquidity strategies and any opportunities for sales and consolidations that may emerge,” Ms Thompson, Ms Henderson and Mr Ong noted. 

When such discussions take place, they should recognise that different stakeholders may have different drivers to exit while a company is still in its growth phase.


Downsizing by Big Tech in 2022 has talent on the move and may even see some expats returning home, they speculated.

“This will present an opportunity for well-funded home-grown businesses who’ve found it harder in the competition for talent,” they said. “It also has the potential to spawn a raft of new start-ups as people consider starting a business of their own.”

Employee incentives

With a focus on cash burn, start-ups will increasingly look to employee equity to reward and motivate staff,” the group predicted. 

Regulatory changes in 2022 have sharpened the focus of founders, start-ups and their boards on the disclosure rules for offering employee equity.

Private equity funds

“Private equity funds have been looking earlier into the business life cycle for opportunities and return. 

“We expect to see this interest translate into more announced deals, with the first already coming out of the blocks,” stated Ms Thompson, Ms Henderson and Mr Ong.

Successful start-ups give support

“Founders and family offices of Australian success stories like Atlassian, Canva, Culture Amp, Safety Culture, Linktree, and Mr Yum are strongly supportive of the Australian ecosystem, and we believe many founders will continue to back local start-ups,” they noted. 

Reason for optimism

Amid the negative press, there is reason for founders to be optimistic in 2023, they said. 

“The last three quarters of 2022 saw some stand-out raises, including Sonder, Vexev, Greener, Gamurs, Reejig, 6Clicks, Great Wrap and Rentbetter, and announced equity capital raised for April to October 2022 is not substantially below the same period in 2020. 

“And there is no shortage of dry powder — this year, we’ve seen record fundraises by leading Australian VC funds, including Square Peg, OIF Ventures and Blackbird, and we expect to see more from these players in 2023,” they added. 

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