Late-stage venture attracting private equity interest

Private equity firms are showing increased interest in investing in Australian later-stage venture-backed start-ups, according to the latest Cut Through Venture report.

The Quarter One 2025 report attributes this trend to increasing numbers of technology start-up companies reaching a scale that makes them suitable for private equity investment.

Most conventional private equity deals, such as majority buyouts, fall outside the Cut Through reporting criteria so are not included in its survey, even if the targets are venture-backed companies. But, in some cases, private equity firms are now taking minority positions in companies included in the survey. Many of these deals involve a mix of primary and secondary investment making it difficult to interpret precisely how significant they may be.

Cut Through takes the view that private equity investments in venture-backed companies represent a favourable trend as they increase funding diversity.

Other trends noted in the Cut Through report include:

• Venture debt picking up
• Secondaries sales moving again
• Increasing use of SAFE in small-scale investment rounds

According to Cut Through, venture debt is no longer regarded as last-resort funding but is increasingly being recognised as a strategic part of the capital mix. New lenders have entered the market driving competition, improving terms and offering more flexibility.

The increase in secondary sales is returning liquidity to the market after a tight 18-months through to mid-2024. Demand for access to top-performing scale-ups has driven the uptick in secondary sales, giving founders, early employees and early investors chances to realise some gains.

 Cut Through says use of SAFEs, (simple agreement for future equity), often for amounts under $500,000, is increasing and is currently concentrated in start-ups building AI technologies. These start-ups often comprise just one or two founders building in stealth and involve no ASIC filing and little or no publicity. Consequently, many are going unnoticed.

Overall, according to Cut Through, Q1 2025 was the strongest opening quarter for Australian venture capital since 2022 with $993 million invested across 100 deals. The pace of investment was driven by momentum carried over from a busy end to 2024. Activity was spread across all stages, from pre-seed to Series B rounds and beyond, suggesting a healthy funding pipeline. Despite global uncertainty, the local technology start-up ecosystem hit the ground running from the start of the year.

Start-ups outside the previously most common software-only categories dominated both deal volume and funding. Sectors such as biotech, climate tech and hardware together outpaced enterprise software. Cut Through says this diversification signals a broader investor appetite and a maturing ecosystem.

AI-focused businesses topped the charts by number of deals for the first time but Cut Through cautions that this might not be as strong a trend as it appears. Many founders may have, it suggests, jumped on the AI bandwagon by claiming AI to be more significant in their technologies than it really is.

The median size for deals was at record highs across every stage with Series A rounds seeing the strongest increase. Investors surveyed confirmed widespread expectations that valuations will continue to climb through the rest of the year.

Overall investor sentiment improved notably in the first quarter of 2025, compared to late 2024, with most investors reporting good portfolio health and increased deal flow. There were fewer reports of business shutdowns and staff layoffs while more venture firms were prioritising new investments.

Concerns remained, however, around global macroeconomic and sovereign risk factors, including geopolitical instability and reliance on international funding.  

Cut Through Ventures concluded that optimism was real but fragile.