No 8 Ventures

The Series A Crunch in New Zealand – by Jenny Morel

Posted by: | 2017 | Investment | Jenny Morel | New Zealand | Venture Capital | 27.03.2017

I believe New Zealand has more angel investors and more incubators per head of population than any other country on the planet. I can’t substantiate that but there is an amazing rich ecosystem of 1,000’s of start-up companies, eager small investors, and a handful of very experienced investor-director-mentors. And from this rich ecosystem stars have been born.

But once they’re ready to grow up where do they go for the significant funding needed to build a world class world-dominating business? The commonest route is very early IPOs to raise what is in effect a Series A, or if you’re lucky, a Series B. Rod Drury led the way with the brilliant early IPO of Xero, which is 10 years old this year, has a market cap around $1.5bn and is one of the most successful SaaS businesses in the world. It’s worked for Xero because they executed so well — primed the media for 6 months in advance, knowing they would have to sell past the ever-critical financial press and the sharebroker analysts — who in New Zealand are more accustomed to valuing forests and farms and can’t get their heads around investing in global expansion before you’re profitable.

At No 8 Ventures we really suffered from our funds being too small to top up the companies with the funding they needed, and the lack of co-funders to join us. We partnered every deal we could, but there weren’t many potential partners prepared to come in from offshore a few years ago (better now) and there was very little money for the series A growth stage in New Zealand. So we slogged it out, suffering starvation pangs along with our portfoio companies during the GFC (hey, slim is good, starving is bad). Pleased to say we all survived. It took us a while to realise the GFC was over and people would fund non-profitable big-thinking companies again. Then we rushed into our early listings: Rex Bionics on AIM, Martin Aircraft Co on the ASX, and ikeGPS on the NZX. We came out of it with a great return for our investors considering we’d had to weather the GFC but it took a long time and a lot of energy.

So where is New Zealand now for the Series A? Here are some of my favourite companies:

· 90 Seconds has moved to Singapore and is funded by Sequoia, Airtree Ventures from Australia and others

· Vend is funded by Valar Ventures (Peter Thiel), Square Peg Ventures from Australia and others

· 8i is funded by US venture funds and One Ventures from Australia

· Rocket Lab — wow, Rocket Lab! — is funded by Bessemer Ventures, Khosla Ventures and other US funds and institutional investors. Rumour has it that their latest funding round was over US$200M and they are a unicorn.

· Soul Machines is funded by Horizon Ventures (HongKong) and Iconiq (Mark Zuckerberg’s venture fund)

And where will the next great companies get funded? Wouldn’t it be good if some New Zealand investors could share in these past the seed stage — if they’re lucky enough to even be invited into the seed rounds? There are only a tiny handlful of venture funds in New Zealand. If we ignore the very small funds, under $30M, as really being seed funds and unable to do much in the way of Series A rounds (and certainly not Series B), then it’s really just our friends at Movac. Delighted that they have just raised a decent sized fund — around $120M. New Zealand could do with at least half a dozen such funds because we’ll all be a bit different from each other and there is plenty of dealflow. But here comes the bad news on the new Movac Fund — they’re not investing in any pre-revenue companies. What kind of crazy restriction is this? I’m all for a balanced portfolio with companies at all stages of the growth journey, and don’t want to do another fund with a whole stable of early stage companies. We really didn’t know how tough this was going to be: our fund needed to be 5x as big to support them, especially without partners. We did it 10 years ago because that was what we could raise and it’s what the dealflow was then. But it’s not the dealflow in New Zealand now: which covers a big range through to pre-IPO and arguably undervalued opportunities post-IPO (such as Peter Thiel’s NZVIF-subsidised early investment in the listed Xero).

Which brings us to NZVIF and its role in this. The New Zealand Venture Investment Fund was set up to sponsor the development of the venture capital industry in New Zealand. But it’s about as badly named as the NZVCA — which is really a private equity associaition (try going to the annual conference and see if you can spot a VC). So what has NZVIF been doing? The answer seems to be angel investing. Now I’m not anti angel investing at all. The best angel investors, who bring skills and money to the table, can be invaluable, and in general all people who get companies started are valuable to the ecosystem. So fine for the Government to support this area, but NZVIF seem to love being direct investors, regarding the start ups as their customers rather than being in the busines of fostering VC funds.

So what might NZVIF have done? (I put this in the past tense because I understand it’s now run out of money.) I would have measured its success on: how many venture funds that it invested in went on to raise another fund — 2 so far in 15 years I thnk; how many institutional investors invested in NZ venture funds — ACC, and eventually the NZ Super Fund but read on …. Any offshore institutional investors? Any funds of funds? Not that I know of.

So let’s stop for a moment on the two big institutional investors in the New Zealand market: ACC and NZ Super Fund (both over $30bn). ACC invested in all the original venture funds on the basis that it was a portfolio approach and they expected the option to buy out the government shareholding at a fixed low rate of return to be valuable. Unfortunately the Government option was to buy out at 5 years into the life of the fund and as anyone familiar with the venture industry knows, the J curve usually moves positive about year 7 after the losses have been culled and before the successes are exited. So I think the only one to exercise the option was Peter Thiel’s Valar Ventures — and it’s an interesting argument that he needed a NZ Government subsidy to buy listed shares!

Now we come to the NZ Super Fund. 15 years ago their CEO wanted to invest in all the original VIF funds too on the basis that it would have been a small investment for them, sponsored the begninning of a local industry, and we could all learn together. Unfortunately his board closed down this argument and decided to focus on proper process: get all the necessary traditional building blocks in place first. This seemed to take at least 8 years. Then they set up a board committee to review their investment in private equity (including venture capital). From this they developed a tick box template for what might qualify you for some investment from the NZ Super Fund and they have invested quite a bit in private equity, but not venture. They remain relentlessly anti venture capital — hence it seems that there is a restriction that any fund they invest in in New Zealand cannot invest in pre-revenue companies. No Rocket Lab, 8i or Soul Machines for the New Zealand Super Fund portfolio. (Although I think they invested directly in Lanzatech.)

Now, every investor is enttiled to their own investment strategy. The problem with the NZ Super Fund taking this view is that it is the gorilla in the market: the one that everyone else follows. So Ngai Tahu have followed the NZ Super Fund into the Movac fund with the restriction on not investing in pre-revenue companies. And when you talk to offshore investors, they ask if the NZ Super Fund is an investor. So the NZ Super Fund leads both the New Zealand market and many offshore investors, and since the NZ Super Fund doesn’t want anyone in New Zealand to do across the board venture, this puts off a lot of other investors too. Hey, Saas companies are great. but what about IP rich opportunities in all kinds of new technology areas like AI, blockchain, robotics, machine vision, jetpacks and rockets?

Back to the wonderful companies themselves. New Zealanders are resourceful people. We have to be. As Ernest Lord Rutherford (the New Zealander who split the atom) said, “We haven’t got the money, so we have to think.” And because New Zealand is a small market, almost every company set up in the tech sector is going after a global market from day one. The kiwis just get out there and make it happen — whether its funding from China, Singapore, Australia or Silicon Valley.

So, while some of the stars are making it work with offshore funds, wouldn’t it be great to help more good New Zealand companies with funding? Have a handful of good local funds who specialiase in Series A and build funding partnerships for their companies to go all the way with them? Yes, that’s what we should do. Just seems like we need the big investors in New Zealand to get on board with what real venture is!

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