Coronavirus & Australia VC: In SaaS we trust

The Australian VC community’s predilection for B2B software-as-a-service (SaaS) could be a blessing if the current coronavirus-driven funding crisis morphs into a prolonged nuclear winter. Start-ups in this space have recurring revenues – often contracted, which locks in cash flow – and they are known for being reasonably disciplined with their money.

“They tend to be capital efficient: they raise capital, increase their burn rate, then head back towards break-even before the next fundraise. They haven’t spent a lot on sales and marketing, so they are in pretty good shape to weather this period,” says Rick Baker, co-founder of Blackbird Ventures. “Generally speaking, the Australian start-up community has the ability to fare better than others [in the region] because we aren’t burning heaps of cash.”

SaaS is one half of Blackbird’s portfolio. The other half comprises frontier technology players that are low-revenue or pre-revenue. These companies rely on fundraising to stay afloat, but even there, Baker claims to be comfortable with the amount of cash held in reserve.

Australia didn’t close its borders to non-residents and impose social distancing rules until the end of the third week of March, so the COVID-19 impact on technology start-ups is relatively recent. Most VC firms are still in the process of assessing the damage to their portfolios. Less thought is being directed towards new investments and lockdown measures prevent due diligence anyway.

A mere A$14 million ($9 million) was deployed in two early-stage technology deals in March. January and February conformed to recent historical norms with around A$100 million invested across a handful of transactions. Often these monthly totals are propped up by relatively large rounds raised by the country’s leading SaaS players: Canva, for example, accounted for $85 million of the $229 million committed to the technology sector last October.

Few industry participants are worried about the prospects for members of the top tier – indeed, Canva, a cloud-based platform that allows marketers and other individual users to create a custom-designed online presence, is said to be benefiting from the switch to remote working. They are likely to retain an investor following even if offshore players that provide most of Australia’s growth capital pull back. Rather, the middle tier faces the biggest threat.

“These companies are in that scale-up phase, burn rates have increased because they’ve recruited sales and distribution teams, so the cost base is growing at the same rate as the revenue base. It would be hard for them to cut back,” says Neil Stanford, head of private equity at Hostplus, a local superannuation fund with substantial VC exposure.

Capital conservation

Some SaaS players are taking preemptive action to strengthen their balance sheets. Meanwhile, consumer-facing start-ups that have been impacted directly and immediately by COVID-19 have no time to lose. According to Tushar Roy, a partner at Square Peg Capital, some companies are already taking drastic action such as pay cuts at leadership level or across the board and furloughing staff, making them part-time or making them redundant.

“Valuation expectations are more muted than a few years ago. I haven’t seen a down round yet, but there will be down rounds and flat rounds – or extensions of previous rounds, as they will be termed,” he says. “I haven’t seen any rescue investments either, although they might be happening internally.”

The Australian government has announced A$320 billion COVID-19 relief package that includes numerous measures intended to support business. Small and medium-sized enterprises (SMEs) can apply for tax-free cashflow boosts, short-term unsecured loans guaranteed by the government, and tax deferrals and relief. But the central policy – expected to amount to A$130 billion – is “job keeper” payments, whereby the government will provide eligible companies with fortnightly salary subsidies of A$1,500 per employee for up to six months.

The potential problem for technology start-ups is the eligibility criteria. Companies with annual turnover of less than A$1 billion must provide evidence of a more than 30% decrease on the previous financial year. First, some start-ups are less than a year old. Second, fast-growing players in the SaaS space might have doubled their revenue over the past 12 months but their teams have also trebled in size. Looking at yearly revenue alone doesn’t offer a complete operational picture.

The Australian Tax Office (ATO) has indicated it will exercise discretion regarding start-ups, and some investors are confident these companies won’t be overlooked. “The scheme has gone through a lot of iterations since the initial announcement and the government has listened to the sector, so the scheme will be applicable to start-ups,” says Roy of Square Peg.

Nevertheless, companies are applying for the scheme – first payments will be made in the first week of May and backdated to the end of March – without absolute certainty as whether they will qualify. “Getting access to those subsidies is huge in being able to save jobs,” says Blackbird’s Baker. “But not knowing what discretion the ATO will use makes it harder to plan.”

For now, though, making sure companies have enough runway is by far Baker’s biggest concern. He notes that after the global financial crisis hit in 2008, it took three of four quarters before venture capital investment bottomed out globally. Should the current situation follow a similar pattern, the first half of 2021 would be the least optimal time to launch a new funding round. As such, Blackbird is asking portfolio companies to develop runway scenarios that extend to the end of next year.

“I’m not seeing start-ups desperately searching for capital, but I get worried when founders say they have 12 months of runway and they think they will be fine,” Baker says.

 

SIDEBAR: Case study - SafetyCulture

SafetyCulture, an Australia-based software provider for safety compliance inspectors, responded to COVID-19 by digitizing checklists from the World Health Organization and the Center for Disease Control & Prevention. Its website became a one-stop-shop for companies seeking best-practice protocols on crisis management, business resumption, social distancing, and working from home.

This is the free part of the company’s freemium business model. SafetyCulture attracts users with its checklists and inspection templates, as well as limited access to its iAuditor app, and attempts to convert them into paying customers. IAuditor – which helps companies create their own checklists, conduct on-site investigations, and analyze data – is now used by 27,000 organizations across 85 countries. This traction has helped SafetyCulture turn cash flow positive in the past 12 months.

Demand has increased following the coronavirus outbreak, most visibly in the growing number of unique licenses within organizations that are existing customers. In some cases, this reflects a significant change in operational policy. “Some organizations had teams of inspectors visiting hotels, stores or factories, but someone traveling all around the country would probably be the definition of a carrier. Centralized processes cannot take place, so they put iAuditor into the hands of local staff to conduct inspections,” says Alistair Venn, SafetyCulture’s COO.

While there has been a dramatic reduction in usage from companies like airlines that are cutting back operations, demand is booming in logistics, government, and healthcare, where activity remains robust and compliance has become a key priority. Even hotels, despite seeing a substantial drop in business, are still in operation and their requirements for managing risk have increased.

However, SafetyCulture is not aggressively pursuing new customers. “Now is not necessarily the time to be pushing large paid campaigns to get organizations using the product,” says Venn. “We want to help during this time and hopefully people will see the benefits. For example, we have increased the payment threshold for iAuditor Premium to 10 users, while frontline support workers can use the product free for six months with an unlimited number of users.”

It also helps that the company has plenty of runway. SafetyCulture’s A$60 million ($35 million) Series C – which values the business at A$1.3 billion – closed in March. “We definitely decided to get it done before it became really difficult for people to sign documents and transfer funds,” Venn adds. “The exchange rate was already fluctuating wildly during the process.”

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• Topics
• Australasia
• Venture
• Technology
• Early-stage
• Australia
• Blackbird Ventures
• Square Peg Capital
• HOSTPLUS
• TMT
• coronavirus
• covid-19