Colin McKinnon is executive director of NZ Private Capital.
According to data from Crunchbase, global venture capital investment has increased 94 per cent year-on-year.
New Zealand investors are joining the trend with increasing commitment for New Zealand-based venture capital funds.
The number and size of venture funds operating in New Zealand is increasing. The "Series A" gap in New Zealand appears to be filling, fast.
What does this mean for company founders and new start-ups? Will there be enough good investment opportunities for the new venture funds?
For the last decade, New Zealand private capital funds has been largely mid-market private equity funds. Private capital includes private equity and venture capital.
The larger private equity funds have built track records over successive funds. There are around 20 private equity funds that are active in New Zealand at any time — half of these are New Zealand funds and the other half Australian. It is a market segment of private capital that has seen stability and resilience over two decades.
Several fund managers have multiple funds with loyal institution investor following.
NZ Private Capital's ambition is for a similar sustainable venture fund community including New Zealand and international fund managers.
The aftermath of the 2008 Global Financial Crisis decimated a fledgling venture capital industry in New Zealand. The industry needed to rebuild. Fund managers like Movac and Global from Day One continued to make progress. But institutional investors were generally disinterested in the early-stage market.
The government Seed Co-investment Fund initiated in 2006 helped catalyse an emerging angel investment community. The angels started to build a pipeline of founders and start-ups that were investable. Successful founders need larger and larger follow-on capital raisings. Generally, the angels aggregated pools of capital to meet a need for follow-on capital of the size and stage of investment referred to as Series-A.
Where founders could not raise capital in New Zealand, they introduced international venture firms, many from Australia, such as Blackbird Ventures and Airtree Ventures.
What has changed?
Several factors may have contributed to a re-energised appetite from investors for venture capital. Amongst those factors are an increasing pool of savings, global increase in venture investment, low interest rates, and oversubscribed fund raising by major venture funds in New Zealand and Australia (driven by FOMO — fear of missing out).
Should we be excited about the prospect of more local venture capital funds?
In 2020 the 92 investments by venture capital funds were executed by 24 different funds.
Only three investments involved international funds. A possible inference is that local venture funds are meeting the needs of more companies.
The latest NZ Private Capital Monitor reports that venture funds invested $127.2 million in calendar year 2020 over 92 transactions. The previous year there had been $112.2m invested from 46 transactions. Of the 92 transactions, 59 were in the IT and software sector with a further 21 investments in the health/bioscience sector.
The obvious question is, "Are there enough founders for all the new venture capital money.
The answer is "yes"
My conversations with early-stage fund managers suggest that there are more latent founders, inventors and innovators that will be emboldened by a greater choice of funds and encouraged by a cohort of founder colleagues.
People are selecting entrepreneurship early in their careers rather than working for a large corporation. They may sacrifice salary but have an opportunity for substantial upside working with an innovative team. Young people can emulate successful founders that return to the community.
UniServices executive director commercialisation, Will Charles says: "It is time to shake the tree". The implication being that more choice of capital providers will encourage more founders to give it a go.
Movac partner David Beard says that deal flow is good, with a lot of innovation coming from universities, incubators and increasingly spillover from employees of successful ventures.
"Increasingly venture funds are co-investing in a start-up's first funding round, looking to accelerate their growth by providing expertise and focus on funding milestones," he says.
"Having a venture fund in early is also a way of doing due diligence on the company and generally speeds up follow-on Series A and B rounds where bigger cheques ($5m-$20m+) are needed."
The ebb and flow of the marketplace finds the right level. The competition for quality will increase pressure on fund managers as much as it does on founders.
Venture funds are experienced in attracting companies that they want to invest in. Start-up and innovative ideas come from several sources: university research, garage entrepreneurs and some simply from the "woodwork".
What about the angels?
The angels have carried some heavy lifting while there were few local Series-A venture funds. With more capital flowing into venture, the angels may be relieved to be able to revert to their forte of building talent in young founders and setting up companies to attract larger capital rounds to accelerate ambitions.
It may appear that venture funds are a "new shiny thing". Many of the 24 funds that invested in 2020 have been around for years, with names including Movac, GD1, K1W1, Punakaiki Fund, UniServices, WNT Ventures and Icehouse Ventures. Recently, those funds have been able to raise larger amounts of capital. New funds such as Blackbird Ventures, Pacific Channel and Finistere Ventures add to a growing dry powder of capital that is estimated to be more than $500m.
It may have taken a decade to achieve some scale in the New Zealand venture market.
Good things take time.
- Colin McKinnon is Executive Director of NZ Private Capital.
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