Funding for Australia’s startup ecosystem has kicked off its strongest year since 2022, with $1.8 billion raised in the first quarter of 2026 – up 63 per cent year-on-year – but the rebound is highly concentrated, with AI-first and AI-enabled companies accounting for more than half of all deals.
According to Cut Through Venture’s quarterly Australian startup funding report, the trajectory is now tracking well above every post-boom year and marks the second-fastest Q1 start in the past seven years, behind only the 2022 peak.
“The first quarter of 2026 got off to a flying start, with a $1.8 billion raised across 81 venture deals and 26 accelerator rounds.”
However, while the market has clearly reopened, it is far from broad-based. Capital is flowing, but investors are increasingly selective about where it lands.
A handful of large deals drove the headline result, with the top 10 transactions accounting for almost 60 per cent of total funding.
“The first quarter’s $1.8 billion result wasn’t really a sign of whole market exuberance. The topline number was mostly thanks to a few extremely large investments that made a big impact.
“Q1 was one of the most concentrated quarters we’ve seen … while capital deployment is way up on recent prior years, venture capital deal count remains flat at best,” the report stated.
While vertical SaaS continues to attract strong interest, many of the largest raises are now occurring outside traditional software categories. Capital flowed into sectors including space, defence, robotics, AI infrastructure, cybersecurity, biotech and climate, underscoring a broadening of investor focus.
“The sector mix is notable for being different from what we’re used to down in Australia.”
“This shift suggests that the next wave of mega – Australian success stories might not just be software – focused but also technology companies deeply integrated into vital systems. For those software pure plays, vertical trumped horizontal… and it wasn’t even close.”
Cut Through Venture has also revised its sector taxonomy to reflect AI’s growing ubiquity across the ecosystem.
“AI is now cutting across the market rather than sitting in one neat category.
“AI-first and AI-enabled companies accounted for more than half of Q1 deals, and investors reported significant valuation premiums going to companies where AI meaningfully impact the product, economics or customer workflow. For companies born in the last two years, an absence of AI in the product stack was rare.”
Valuations were broadly stable through the quarter, although stage-level data points to pockets of upward pressure.
“AI-first companies remain the clearest exception to an otherwise stable pricing environment,” the report said. “Investors overwhelmingly reported AI-first startups commanding higher valuations than non-AI peers, even as broader valuation expectations for the rest of the year remain measured.”
At the other end of the spectrum, consumer-facing segments remain under pressure, with consumer tech, brands and crypto continuing to lag.
The data also shows startups are raising earlier but taking longer to reach later stages, though it remains unclear whether this reflects shifting investor expectations or founder behaviour.
“Still, the significant shift upward in age at the time of a Series B suggests that to get there, companies have spent early capital in a more measured fashion and come to market with a more mature proof of concept,” the report said.
Investor sentiment has softened compared to last year, even as deployment intentions remain intact.
“They still plan to put their money into projects, but instead of being very optimistic about everything, they are being more selective about the startups and market segments where they believe defensibility exists. Volume of opportunities is not the constraint to getting deals done.”
The findings come as Australia’s R&D tax incentive faces renewed scrutiny following the release of the Ambitious Australia final report from the Strategic Examination of Research and Development.
“The independent panel discusses that Australia’s research, development and innovation system is fragmented and under-scaled, and proposes a package of reforms, including a redesign of the RDTI, now being considered by government,” Cut Through’s report said.
HSBC Australia and New Zealand’s head of innovation banking, Alan Watters, also contributed insights from the firm’s recent US trip, highlighting a growing focus on exit pathways.
“The reopening of the IPO market is high on the agenda for investors,” he said. “While there is a clear need for liquidity events, this excitement is largely concentrated at the very top end of the market. There’s optimism around the mega IPOs in the pipeline, but the market feels very top-heavy.”
Watters noted that AI is increasingly dictating valuations across sectors, though some investors are seeking alternatives to pure AI exposure in pursuit of more attractive pricing.
“The speed of technological progress is raising top-end AI valuations faster than anything we have ever seen in Australia. Where companies used to raise funds every 18 to 24 months, some AI companies are now raising capital two or three times a year – each time at a multiple of the previous round,” Watters said.
This dynamic is reshaping the venture landscape, with mega-funds raising tens of billions while smaller boutique managers pursue high-risk, high-return strategies targeting 100x outcomes. The result is a “missing middle”, where mid-sized deals – typically in the US$30–50 million range – are struggling to attract attention, a gap Watters believes could create opportunities for Australian founders.
“For Australia’s startups and scaleups, this environment could present some interesting opportunities. Many of the US VCs we met in March are wary of current valuations but don’t want to miss a generational company. They are actively looking further afield to find the next 100x opportunity.”
