Startups are raising capital later. Often with more traction. All of which is lowering the risk to investors, thanks to AI-enabled product development.
Welcome to the shifting Australian startup ecosystem.
Investments in AI have dominated the headlines of late. Globally record sums are being poured into the space, with forecasts suggesting AI could add $600 billion to Australia’s GDP by 2030.
But it’s not just where the money is being invested that’s changing, it’s also when.
Seed and early-stage funding has dropped 50% when compared with 2024 according to a recent report. Increasingly founders are holding off until Series A to raise their first significant round, often at record median levels, with AI-first companies raising faster and at higher levels, once they’ve demonstrated product-marketing fit, rather than at pre-seed.
Compressed dev cycle
What’s been the number one reason startups have failed historically? No market need.
Even just 5 years ago startup founders were still raising $200-500K to build an MVP. They’d hire a small team to brainstorm, design, build and deploy a prototype. All just to validate the idea.
However we’re now witnessing greater AI adoption, which is shortening development cycles. Ideas can be validated before they’re fully formed and executed with far less resources than ever before.
It’s worth noting that while Agentic User Testing and AI Validation tools are making it easier and faster to ship digital products, the end user is still human. So while it’s definitely impacting the process, it’s still not a replacement for real Human User Testing in software.
Leaner teams
When startup veteran Murray Galbraith recently discovered he was one of at least 350 million people who’d fallen through the ADHD diagnostic cracks, his first instinct wasn’t to raise capital, it was to build. “VCs have rigorous processes for good reasons, but those processes come with time costs I can’t afford when AI has made iteration this fast. Plus, after 40 years of dealing with the deep inner shame from being told you’re lazy, stupid and broken, I know that any time I spend pitching investors leaves more people suffering on their own.”
Using rapid prototyping AI, Galbraith has built functional tools for
neurodivergent minds in weeks rather than months, and crucially, without external pressure to rush toward exit strategies.
Galbraith argues that, despite the downfalls, agentic AI can offer the different sounding boards an entrepreneur requires early on: “By its very nature, generative AI is incapable of proactively peeking around corners or anticipating risk like an experienced CTO or CFO. But it also never makes me feel bad for asking dumb questions. I’ve slowly developed a team of around 30-40 individual characters, each trained to improve my output, while challenging my perspective in various ways that a single human never could.”
Reducing risk
Startups that can prove some success and onboard users earlier in their journey, are directly influencing investor decision-making. Which can mitigate some early risks, as capital is able to be injected into a business idea that is much closer to finding the holy grail of product market fit.
Don McKenzie, co-founder and investor at Tribe Global Ventures agreed that the barrier for revenue creation is smaller than ever. “We recently looked at a deal where the platform was launched 2 months prior, and was already at $400k ARR with a single founder that had hacked together AI tools. They raised money with customers already in place. In times gone by, they likely would have needed some capital just to create the MVP.”
This pushes capital further downstream into areas with greater impact on the bottom-line. Instead of dropping pools of cash into traditional development cycles, funding can be put to better use (across branding, CX, marketing and strategy) driving growth, rather than confirming credentials. Reducing the risk of the startup falling into the 42% of failures due to ‘no market fit’.
However McKenzie does caution: “Whilst companies can get customers on board earlier, it remains to be seen if those customers will be sticky and not jump to something else quickly.”
The tide has shifted
Australia continues to be efficient with VC money. Globally we’re ranked top for unicorn creation per VC dollar invested. WiseTech Global and Afterpay are two of the Aussie companies in that illustrious club.
And it’s not just at the larger/enterprise level where AI is impacting execution. It’s throughout the Aussie ecosystem, with one Govt report finding 40% of SMEs are currently adopting AI. The level though will differ with penetration more relevant for some industries than others.
What next?
Not all startups are going to grow to become unicorns, but I’m not alone in expecting a further increase in the volume of viable startups in Australia.
A stronger pipeline for investors will ultimately lead to improving our national competitiveness on the global stage. Along with providing further evidence for our efficiency with investor capital.
The role of technology in helping founders to prove their idea works, is in and of itself, changing the investment landscape, where Angel Investor and VC money comes in, as well as de-risking the proposition for Aussie investors.
- Casey Midgley is the founder of MKRST.
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