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Cliff Obrecht, the co-founder of Australia’s most valuable and celebrated start-up, used an interview with this masthead last week to reassure staff about the future and financial position of his company after investors slashed their holdings in Canva by more than $20 billion. Journalists obsessed with his firm’s plunging valuation “need some more interesting things to write about”, he said.
Obrecht is not the only member of the tech sector to be feeling this way, as punishing market conditions hit home, bringing a decade-long boom in start-ups to an abrupt end. “In 2021 the media stories for start-ups were gushing and in 2022 it’s doom and gloom,” Paul Bassat, one of the country’s largest start-up investors, recently said on Twitter. “It wasn’t that good last year and it’s definitely not that bad this year.”
Endless glowing magazine covers, laudatory pieces about minor capital raisings and photoshoots of two founders standing against an exposed brick wall attest to the former complaint from Bassat. But while some privately grumbled about that, many in the start-up scene grew accustomed to uncritical coverage in the media as a normal standard. Now though, the market has turned sour, and the tech industry is having trouble adjusting.
Some compelling investor letters aside, venture capital firms have every incentive to act like the downturn is a problem for other people. Until recently, capital was a commodity. To persuade start-ups to take their cash, investors had to show that they weren’t just money bags, they were true believers. Consider perhaps Australia’s most prominent venture firm, Blackbird Ventures, for example. Instead of a typical website, a visitor to its online property must “enter the world of Blackbird” by zooming in through the eye of a flame coloured bird and flying past a series of kaleidoscopic shapes to learn that the fund backs ambition so great it is “generational”.
In America, this kind of self-mythologising has spawned a legion of critical pundits. For almost every entrepreneur hawking indecipherable self-help proverbs on Twitter, there is a sceptic. Most famously, New York University Professor Scott Galloway gained prominence after lambasting the coworking firm WeWork’s claim it would “elevate the world’s consciousness”.
In some cases, the technology-media relationship in the United States has grown intensely bitter. After a series of stories on allegations of harassment, corporate mismanagement and his sex life, the billionaire Elon Musk tweeted that “The media is a click-seeking machine dressed up as a truth-seeking machine.” Another start-up founder, Ryan Breslow, issued a series of tweets obliquely implying some form of collusion between the New York Times and a venture capital firm when his company was the subject of a critical story. Big name venture capitalists routinely attack the media. Of course, there is a history of corporate tension between the media and the technology industry: sites like Facebook, Google and eBay took billions that once went to print advertising. But the American experience points to a deeper belief present: that technology and start-ups are fundamentally good, so any reporting on unfavourable truths is therefore fundamentally bad.
That worldview is still rare in Australia, where laudatory stories about tiny start-ups raising cash — or even hoping to — still predominate. The exhortation from Bassat and Obrecht is instead to “ignore the noise” of the broader economy, which is in one sense, good advice. Start-ups aren’t day traders, trying to buy low and sell high. If a company has the potential to upend an enormous industry and generate billions in revenue over the long term, it shouldn’t really matter if it has to endure a downswing on the way. In other words, Obrecht can’t do anything to change inflation or interest rates, so on Bassat’s logic, Canva should not focus on them. But that is not the point: how companies respond to a new sitatuation is what counts. Does marketing expenditure go up or down? Do they have too many staff? And while Canva, a profitable company with $1 billion in the bank and 70 per cent annual revenue growth, can afford to regard a recent multibillion-dollar hit to its valuation as “noise”, it is the exception that proves the rule.
If clients aren’t spending and VCs aren’t investing, there’s a good chance that even a decent firm won’t survive. “It’s been quite sad to see the companies that maybe don’t have strong revenue streams and don’t have the ability to support themselves in the short-term struggle to get that funding” or not get it at all, Obrecht said. Some other firms that listened to their investors pushing for growth have been left “high and dry” now that the market has changed, he said.“Then they get forced to sort of do a down round [where the company takes money at a lower valuation] or shut the business and that’s really tragic.” And then there are all the start-ups that were never a great bet in the first place but got funding because cash needed somewhere to go. With the tide going out, the people swimming naked will be exposed.
Still, Obrecht thinks that the best Australian venture capitalists largely do the right thing by founders. “At the start, it was like the Wild West a little bit. But the top Australian VCs, I fully believe are world-class.” But Obrecht has been around long enough to understand that venture capital funds have their own investors to satisfy, the largest of which are the nation’s superannuation funds.”Ultimately, if they’re not demonstrating fiscal responsibility through these tough times, their [investors] will lose confidence and they won’t be able to raise the next fund and then they won’t be able to continue in their business and that will then negatively impact their existing cohort of startups even more.” It’s a tough reality, but there’s nothing to be gained from shying away from it.
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