Investors can now get 5 per cent by keeping their cash in the bank or buying government debt, Movac general partner Mark Vivian says. Photo / File
Investors can now get 5 per cent by keeping their cash in the bank or buying government debt, Movac general partner Mark Vivian says. Photo / File
Everyone knows the venture capital market got tighter last year as rates rose and economies sank. Now a survey has quantified the contraction’s impact on funding for startups.
Early-stage companies pulled in $112 million of funding during the second half of 2022.
That was a 43 per cent drop from2021, according to a report released by PwC, the Angel Association, and the Crown-backed NZ Growth Capital Partners (NZGCP) based on “young company deal data” NZGCP compiled for seed or pre-Series A raises - usually involving raises of $3m or less.
Overall, there was an 18 per cent drop in deal volume and a 28 per cent drop in capital to a total transaction value of $230m.
Despite being the “it” trend of 2023, AI startups accounted for a modest 4.4 per cent of early-stage investment by sector last year (a total that also included “big data”).
Software (45 per cent) and “deep tech” or R&D-intensive firms (34 per cent) snagged easily the most funding. Within the deep tech sector, cleantech (72 per cent) dominated, with ag tech railing at 2 per cent.
The survey arrived on the eve of Budget 2023, which could include the long-awaited verdict on whether or not the Government top’s up NZGCP’s $300m Elevate fund. Elevate has played a key role in boosting the local VC scene since it was launched in 2020, by co-investing with private players. But its coffers are now close to exhausted.
In its most recent update, NZGCP was still in negotiations with Treasury, MBIE and the NZ Super Fund over $40.5m, meaning it was only ever funded to $259.5m). The Herald understands decisions have now been made - and will be revealed with the Budget next Thursday or soon after.
Angel Association head Suse Reynolds said 2021′s record levels of investment, fuelled by low rates and quantitative easing (aka Government’s printing money) “was always going to be a hard act to follow.”
PwC legal partner Joelle Grace said while the market may be experiencing a cooling compared to 2021, the long-term trend still shows clear growth, with a CAGR (2018 to 2022) of 12.4 per cent.
“While unsettling, a slowing economy can actually be a good thing for some companies, as it forces businesses to focus on what is important. This means these startups will be built on strong foundations, with a focus on creating long-term value and will thrive in the long run,” Grace said.
Source / NZGCP, PwC, Angel Association
NZGCP associate investment director Jacques Richter said market conditions will likely continue to apply pressure to the early-stage ecosystem in the short to medium term, making it harder for young companies to grow and raise funding, but highlights the opportunities that may arise for the sector in times of uncertainty.
Yesterday, Mark Vivian, general partner at NZ’s largest VC firm Movac told the Herald: “Like the GFC, I think you’ll see a reduction in the number of VCs in the market, in NZ and globally.”
But he added that for those who did raise investment funds, there were deals to be had.
“Software company valuations have dropped approximately two-thirds from their peak, and therefore venture is an asset class where there may be significant returns to be had in the coming years,” Vivian said.
Movac closed its Growth Fund 6 on May 1, with $202m raised, including a $70m contribution from the NZ Super Fund.
That was down on the $250m raised for Movac’s Growth Fund 5 in 2020.
Vivian said his firm’s total haul for the year could still surpass its 2020 total, given it was also targeting a $50m raise for a new Emerge fund, which will close in December. So far $5m has been committed to Emerge, with “strong indications of interest” for a further $15 to $25m.
And the overall headwinds notwithstanding, a string of local startups have managed major raises in 2023 from local and international sources.
Tax software startup Hnry is a case in point. It features in NZGPC’s 2022 data for a $2.5m Series A raise. In January this year, it kicked things up a gear with a $35m Series B round.
Other startups that have increased funding over the past few months included Partly, which landed $37m in an NZ record-setting Series A, Mint Innovation closed a $60m Series C and Halter raised $85m with its Series C.
Angel Association executive chair Suse Reynolds: “We need to see more engagement from KiwiSaver funds."
While those deals are higher up the food chain than the pre-Series A landscape covered for survey released today, the Angel’s Association’s Reynolds says anecdotal evidence points to 2023 being relatively buoyant for pre-seed and seed raises too.
“I’m seeing great deal flow,” she told the Herald.
Reynolds said she would like to see the Government top up the Elevate fund, and continued public-private coordination in the sector.
“They say it takes a village to raise a child. It takes a country to raise a startup,” she said.
Beyond that, “We need to see more engagement from KiwiSaver funds,” Reynolds said.
Beyond the Super Fund, Movac’s Growth Fund 6 drew $20m from Generate KiwiSaver and $40m from Fisher Funds. And, earlier, Sam Stubbs’ Simplicity pledged to invest $100m over time through Icehouse Ventures and took a 12 per cent stake in the VC firm.
“It’s a good start, but we need to see more,” Reynolds said.
