The Covid-19 Story for Aussie Startups
We’ve all seen the graphs and images purporting the dramatic trend to digital over the first 8 mths of 2020. The rise of e-commerce, the outperformance of technology public equities and booming second-order effects of our new-normal. But what’s been happening in the early stage startup community? At EVP we see 100’s of companies per mth allowing me to collate a database of AU/NZ early stage startup performance during the period. Here are the facts.
Background to the data-set:
Mix of 15 to 400 person companies.
Size split by Revenue for the 12 mths to Jun-20:
Typically Series A or Series B funded.
76% of companies loss-making.
Business models typically either B2B SaaS or marketplaces.
Heavy skew towards B2B.
Majority AU based, 18% in NZ.
Throughout the article “Series A” companies are defined as less than 30 staff, raising less than $5m. “Series B” companies are between 30 and 400 staff and raising typically $10m to $30m. Across all charts revenues have been normalised to a $1k per mth starting point.
Subscription vs. Transaction Revenue Streams:
As one might expect, software that monetises by way of a subscription revenue stream faced a less extreme shift to growth rates and revenue. As per the below chart, the B2B SaaS companies were largely unaffected by Covid, while marketplace models, for whom revenue typically is pegged to activity or volumes through a platform were significantly impacted in the first 6 mths of 2020.
I note that the marketplace dataset was slightly skewed to an earlier stage as compared to the B2B SaaS data set. This might account for variance in growth rate. Or maybe marketplaces just perform better…
YoY growth rates show the same trend with B2B SaaS companies slowing marginally, as compared to marketplace models which were severely impacted during the AU lockdowns before rebounding strongly through Jun-20.
Series A vs. Series B Stage Companies:
Comparing the impact of Covid on companies segmented by stage of business provides an interesting, maybe predictable, insight. Clearly the impact of Covid is greater on earlier stage, Series A companies as compared to later stage Series B startups. The earlier stage companies typically had:
less robust revenue streams,
less validation of products or services to position themselves as totally mission critical to their end customer need or workflow,
generally faster growth and acquisition engines which skews towards shorter duration of existing customer lifetimes = newer relationships and a higher propensity to churn,
relatively less developed products
Pleasingly, many of these companies have been nimble enough to spin up entire new product lines and/or revenue streams, or have generally been able to shift towards emerging new opportunities. Pleasingly the average Series A company has already seen revenues rebound strongly in lockstep with the re-opening of the AU economy (sans VIC - sorry).
As expected, Series A companies are growing materially faster on average and equally had a more dramatic slowdown due to the lockdown. Interestingly Series B companies have generally maintained growth although the slowdown has nevertheless impacted this segment with a slight lag. More established growth functions internally have likely setup these businesses to be more resilient as market conditions change. Equally, for B2B or enterprise businesses at the Series B stage, sales cycles commenced in Q1 2020 would still be closing over subsequent quarters, but ultimately seem to still be progressing. Series A enterprise companies are more likely to see sales conversations paused by anxious buyers. They typically lack the product and/or brand validation to diminish concerns within potential buyers.
Average Mthly Burn Rates
As expected, burn rates have reduced as a result of the pandemic. Generally founders have looked to extend runway and tighten expenditure as uncertainty around future growth increases. Across the basket of companies, burn rates materially reduced both in absolute and % terms.
Splitting the dataset between Series A and Series B also provides interesting insights with respect to burn rates. Series A companies were a little quicker to act, but reduced burn by c. 30-40% on average. Comparatively, Series B companies slashed burn by over 50%. This is somewhat of a "narrative violation" in that the conventional wisdom states that startups lack the levers to alter runways or burn as effectively as they have done through 2020.
And finally. With breathless excitement. If you had invested $1 in this random assortment of early stage startups in July 2018, two years later, you would have $2.51 (if you believe revenue growth to be an approximation of growth in value). A cool 52% IRR. Which other asset class would provide such uncorrelated, stable and attractive returns?