New Zealand a startup ‘Utopia’, but VC’s call for more funding
Ahhhh New Zealand- known the world over for its unstoppable national rugby team, stunning mountain ranges, beautiful lakes and vistas AND its incredibly vibrant startup ecosystem.
You heard right.
New Zealand’s startup community has, for the better part of two decades, consistently punched well above its weight for a country of its size. Birthing 8 unicorns in the same number of years, NZ is fast becoming one of the most active and robust startup collectives in Oceania.
On the world stage
There have been many successful startups to come out of NZ in recent years, perhaps most notably is RocketLabs- a rocket payload delivery system founded by Peter Beck, who stated recently in an interview with the New Zealand Herald, that ‘for a small (amount of) investment, NZ has created a big industry and whole lot of jobs’.
Other companies like Diligent, PushPay and TradeMe have attracted large sums of overseas investment, further boosting NZ’s status as a competitive tech and innovation hub, but also boosting the opportunities for other young startups in the country.
One of silicon valley’s most successful VC’s (and vocal Trump supporter), Peter Thiel also has strong roots in New Zealand’s startup ecosystem, describing the current community as a ‘utopia’ for VCs and investors around the world.
Mr Thiel- Co-founder of PayPal and an early investor in Facebook (with which he made millions), was granted Citizenship in New Zealand in a rather controversial process, that saw the NZ government forgo the usual citizenship criteria in order to capitalise on the acumen and investment opportunities that he brought to the country’s startup industry.
Thiel’s investment in Cloud-accounting software platform, Xero, enabled the company to become NZ’s biggest success story to date, having been recently valued at $2.1 billion.
Trouble in paradise
Despite NZ’s strong presence and performance in recent decades, the startup community has come up against a rather pressing roadblock:
Funding.
Though consistently out-performing many other startup communities considering its size, startups in New Zealand are running into issues when it comes to securing series A or B funding, causing problems for ventures incorporated in NZ who are looking to take their companies global.
The NZ Venture Capital industry is dealing with a variety of issues in raising new investment capital to meet the funding requirements of high growth early-stage businesses.
In a study released by the University of Auckland, it was suggested that ‘The primary hindrance to raising new funds to date is the lack of fund managers with track records of generating acceptable risk-adjusted returns for investors. There was also the sentiment other types of investments are expected to outperform returns of VC funds in the future e.g., “if there are better returns elsewhere for less risk, it simply doesn’t stack up”.
However, NZ does have several organisations working hard to ensure the growth of its already well-established startup ecosystem. One such institution is the NZVIF.
The NZVIF (New Zealand Venture Investment Fund) was established in 2002 by the Federal Government of NZ, tasked with building and supporting a vibrant early-stage investment community in the country.
For this weeks VC introduction, I had a chat with Richard Dellarbarca- CEO of the NZVIF and all round lovely guy, to discuss a range of topics from the state of the startup community in New Zealand to advice for young entrepreneurs in finalising their pitches to investors.
How would you characterise the startup community in New Zealand?
Extremely vibrant. We announced last week that in terms of the Angel eco-system, investment increased from about $69 million to 86 million — quite a significant yearly increase and one which has been consistent over the last several years. We are seeing the incorporation of several hundred new startups each year in NZ coming out of the community. The really interesting thing that we are seeing now is that entrepreneurs are trying to address global opportunities. There are very few lifestyle and domestic-only businesses, and those with a global focus are strongly entrepreneurial.
Though we work with 18 angel groups from all over New Zealand, the majority of opportunities are coming out of Auckland and Wellington with the wealth of openings largely to do with population size. There are some interesting AgriTech opportunities coming out of rural New Zealand increasing amount of syndication with companies around the country.
Briefly explain the types of startups that your firm looks to invest in. Are there any commonalities that you look for when thinking of investing?
From the perspective of NZVIF and representing the angel space, we look to invest in every good opportunity. We look for chances to contribute to creating $100million plus companies and billion dollar companies in NZ.
New Zealand is not a big market, so it is very hard to be a specialist VC firm. The market in this country is interesting, in that the last 8 years have produced 8 unicorn companies. Rocketlab, Xero, Diligent, PushPay, A2 milk etc all originated in NZ. We have seen roughly $17billion created in NZ almost all created by startups. Institutional investment is uncontested in NZ, and consistently outperforms many other startup ecosystems around the world.
What are some of the most common mistakes made by young startup founders when pitching to you their ideas?
Almost by definition, most first timers are a little too optimistic. There’s a clear difference between first-time entrepreneurs and second or third-time pitchers, with those already possessing experience in pitching ideas are very obviously going to be more pragmatic and more realistic interns of the amount of funding they need, the amount of time it takes to build a product, the sales cycle etc. Those who have been through the cycle more have a better understanding of the game.First timers always tend to underestimate the amount of cash they need as well, as it usually costs twice as much and takes twice as long.
Currently, we have someone at the angel conference in the US, and we are seeing the exact same kinds of opportunities in NZ as there are in the US and other parts of the world, with no difference in quality.
What are some tips you have for young entrepreneurs beginning their startup journey and pitching to VC firms?
It’s always useful to take advice from people who have taken money from investors and from people who have been through the cycle and know what to expect. Ask someone who has been through it, for advice on how to pre-market and fundraise your business. Important to ask these questions before you get in front of your target investors.
A lot of people don’t understand the process and commitment as well as what institutional investors require from entrepreneurs.
It is very helpful to get good in-house legal counsel on side early in the game, as someone who has been through the cycle many times, this is very important.
Preparation and understanding the process and timetable of how the whole process works is very important, and as well, ask for advice on what you should be presenting and the best ways to go about it.
In your opinion, is there enough government support, funding and infrastructure in New Zealand to support a vibrant startup community?
Yes. There’s a number of govt. interventions in NZ such as Callaghan investments, NZ perspective, NZ trading enterprise- all in charge of bringing capital into NZ to invest.
NZ govt does a lot to foster a healthy ecosystem and is responsible for some of the results that we are witnessing now, with the community seeing better results and in comparatively quicker time periods than you see in many other jurisdictions.
NZ biggest issue is not govt support but domestic institutional capital and the broader VC space. NZ has a vibrant ecosystem, but when companies need a 5 or 10 million dollar injection for series A or B funding, there’s a total absence of that kind of funding.
Australia over the last 10–15 years has seen somewhere in excess of 750 million of institutional funding for venture capital; NZ has had almost zero in the same period. A big challenge for the country is trying to get domestic institutional capital. There are 8–9 super funds in Australia that contributed roughly 750 million to Venture Capital. This presents a major eco-system challenge. All our best startups get funding offshore and they stay there. Australian companies like Canvas and Atlassian have majority domestic ownership, which means money flows back into the country and into the industry again, making it stronger.
