Investors have confidence in startup futures

The October issue of Startup Investment New Zealand Magazine is now available here.

In this edition, we shine a spotlight on Kiwi businesses that have earned a place on the world stage. To be successful, Kiwi startups have always had to think and act global from the outset but there’s now a number of factors helping these startups succeed in offshore markets, and often much earlier in their journey. We’re seeing a developing ecosystem of support including government agencies, networks and people with experience at scaling global businesses, as well as investors who have the confidence to support these innovative companies.

The data is supporting this investor confidence. Five times the number of startup organisations successfully raised over $1 million from local investors in the first half of 2018 verse the same period last year, according to the latest Young Company Finance Index. This year almost half of deals are co invested by two or more Angel clubs and funds. Why is the formula to achieve global success so critical? It means little old New Zealand can produce valuable companies winning on the global stage, which attracts investors and ultimately builds prosperity for us as a country.

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How to scale – the Goodnest story

As Madonna so famously sung, we are living in a material world. If she were to update that song, she might tweak it slightly and mention the fact that we are also living in a gig economy. And Goodnest, a platform that matches up jobs that need doing with suppliers willing to do them, is harnessing that shift and attempting to make it even easier for both sides of the equation with a range of new features, a launch into new regions and a new capital raise to fund more growth.

Goodnest was one of the first domestic jobs marketplaces to pop up in this country, launching around four and a half years ago. And things have changed considerably since then, says co-founder James MacAvoy, who, along with his brother, also founded the DVD rental company Fatso that was bought by Sky.

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Comment: Five steps to stronger capital markets

If the New Zealand economy were a human body, then we can think of capital as the oxygen required to sustain life.

In a functioning capital market, those seeking capital are brought together with those who wish to deploy it. This lowers the cost of equity and debt, boosts the growth of funding and sparks wealth creation.

Is this economic oxygen flowing as it should? Most New Zealand companies listed on the stock exchange (NZX) have unrestricted access to capital, enjoy diverse and internationally-based registers, and are trading at fair to elevated multiples.

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NZ company growing new skin for burn victims

A Kiwi biotechnology company which has found a way to grow bigger-than-A5 sheets of replacement human skin says the product might be ready to start clinical trials on burn patients in 2020 or 2021.

Upside Biotechnologies, a company which spun out of the University of Auckland’s immunology research area, announced this week it has raised $2 million in a convertible notes issue from existing investors.

And it is preparing for a $10m to $15m capital raising later this year, which will hopefully take it into clinical trials 12-15 months after that.

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Capital Markers Report: Venturing closer to maturity

Richard Dellabarca, chief executive of the NZ Venture Investment Fund, has completed a strategic review of the industry and provided growth options to Government, reports Tim McCready.
Last year, then Economic Development Minister Steven Joyce announced a review of New Zealand Venture Investment Fund’s structure, reiterating the Government’s ambition for the fund to become self-sustaining.
Soon after the announcement, Richard Dellabarca was appointed chief executive of NZVIF in mid-2016 — a move that indicated the industry was maturing.
Dellabarca, an investment banker, had spent 14 years offshore in a variety of leadership roles in venture-backed companies, capital markets, financial services and technology-related opportunities.
He brings a private sector investment perspective, but given his experience as an entrepreneur he understands what is required to build globally scalable companies.
“Really good Venture Capital funds (VCs) are looking to build businesses. Investment is an important skill to have, but their greatest skill is in building companies,” he says.
“It helps to have gone through the journey of building a global company, or a company with global aspirations, in order to understand what is needed.”
When Dellabarca joined NZVIF, he was given a blank piece of paper and the mandate to go away and undertake an independent strategic review. He has spent the last year speaking with stakeholders — around 140 organisations and 230 individuals.
Dellabarca says he is encouraged with the significant amount of investable opportunities in New Zealand, noting that founders and teams tend to be aspirational and motivated, and companies aim to be global from day one.
The review noted a growing amount of angel investment — $69 million in the last year, and more than $400 million since figures have been tracked — in addition to the significant investment into universities and Crown Research Institutes.
There is money available in New Zealand to fund proof-of-concept in early stage companies.
But a shortage of funds was identified for opportunities requiring $5-20 million in early stage growth capital.
In addition, Dellabarca noted that in the Silicon Valley or the UK, “you generally see funds syndicating with two or three investors when raising Series A & B investment.
“Yet over here, we have only Movac and Global from Day One (GD1) investing locally in growth capital, severely limiting the opportunity to syndicate investments or fully fund early stage growth companies through to maturity — and ultimately a successful realisation of the investment.”
Although eight Venture Capital funds were originally established in New Zealand, the average fund size was only NZ$45 million compared with a global average of approximately US$300 million.
Dellabarca explains there is a good reason for global fund sizes given the amount of money a company generally requires through to an investment realisation.
“They will tend to invest in, say, 15-18 companies at $5-10 million each, and then keep money aside for further follow-on investment in companies that are succeeding.
“This allows for better funds management practice, managing downside while optimising on upside opportunities,” he says.
“These historic sub-scale New Zealand funds tended to invest in a range of companies, but then either didn’t have capacity to fund them through to success and, therefore under-capitalised them, or had later stage investors dilute them down when they couldn’t follow on with the investment.
Hopefully in 15 years we won’t need a NZVIF in any guise, and instead there will be several self-sustaining funds of scale.
Richard Dellabarca
“The consequence was that many of these funds didn’t generate appropriate returns for their investors,” Dellabarca says.
While offshore corporates and financial institutions have had an interest in allocating money into New Zealand technology innovation, they have not been able to find a platform to put the money in.
As many of these institutions manage multibillion-dollar funds, the smallest investment they are willing to make is $50-$100 million.
“With an average fund size of $45 million, their mandate will often preclude them from being more than 10-20 per cent of a fund,” says Dellabarca.
“By definition you need a $300 million to $400 million fund to take these cheques.
“We just haven’t set up a fund of scale to allow foreign investors to come in and access innovation.”
NZVIF have presented a number of options to Economic Development Minister Simon Bridges that aim to make the fund self-sustainable.
Although Dellabarca is unable to divulge the details on those options, he says the fund-of-funds model with its hefty fees on fees structure is no longer viable.
The results of the strategic review provide a clue that early stage expansion capital for growth companies is New Zealand’s choke point, and is a gap NZVIF would like to address if a model that works can be established.
“There is an unmet need. You could argue about the specific number but the current deal flow suggests an annual demand of $200-$300 million,” says Dellabarca.
“If you assume our current VCs invest over five years, holding back 30 per cent for follow-on investment (the traditional venture capital investing model), then you have approximately $20-$25 million invested per year, versus a demand of up to $300 million per year.
“But whatever the number is, it is substantially larger than available capital. The aspirational goal is to have that need met in some way or another.”
Considering the future, Dellabarca says that he would like to see more money in the angel space. NZVIF is currently the second largest angel investor in New Zealand, and he hopes that in time it won’t be needed.
He has the same goal for the venture capital space.
“Hopefully in 15 years we won’t need a NZVIF in any guise, and instead there will be several self-sustaining funds of scale,” he says.
“We don’t have government intervention in private equity.
“You would hope that ultimately the same will happen in the venture capital space.”
Power of NZVIF?
• The NZ Venture Investment Fund (NZVIF) was established by the Labour Government in 2002 to build a vibrant early stage investment market in New Zealand by investing alongside private venture capital funds into high-growth companies.
NZVIF currently has $245 million of funds under management which it invests through two vehicles:
• a $195 million venture capital fund of funds, partnering with private New Zealand venture capital funds to support the development of innovative companies from start-up through to growth (investing on a two-to-one basis).
• a $50 million Seed Co-Investment Fund (SCIF) established in 2005 to encourage angel investment and fill the investment gap for entrepreneurs needing capital to get their business underway (investing on a one-to-one basis).
Since its inception, NZVIF has formed 27 investment partners (16 angel and 11 venture capital partners) and invested in a portfolio of 236 companies.
NZVIF has helped stimulate $2.2 billion in leveraged capital, $1.2 billion in attracted overseas capital, employment of 6076 FTEs and $174 million in taxes.
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Rocket Lab’s value shoots past US$1b after capital raise

The value of Kiwi satellite launch company Rocket Lab has rocketed past US$1 billion (NZ$1.42b).

The company said on Wednesday it had secured another $105m of investment following a funding round by Silicon Valley-based venture capital firm Data Collective.

Sir Stephen Tindall’s K1W1 investment firm, as well as Promus Ventures, Bessemer Venture Partners, and Khosla Ventures all invested, bringing total investment in the company to $210m.

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NZ Angel Values and Expectations

People do business with people. This is a universal truth, but in angel and early stage investment, the people side is writ large.

Angels and founders share a hunger for success and making a difference. It is this trait that aligns us so tightly.

There are a number of other values that underpin an angel investor’s effectiveness. A year or two back it seemed a good idea to explicitly set out these values and how we expect each other to behave, so the Angel Association agreed a Code of Conduct.

It sets out the following values as being important to us:

  • To be passionately ambitious for our ventures,
  • To be collaborative and collegial, and
  • To act with integrity and honesty.

Growing a successful business is hard work. Without passion and ambition, the knock-backs and grind of growing a business would quickly overwhelm most us. Angels share other traits with founders that are critical to success; unremitting optimism and creativity. The ability to positively and constructively address problems is powerful stuff.

Growing a successful business is never done alone. Generosity of spirit is one of the most inspirational aspects of working in angel investment. Angels bring value which goes way beyond their ability to write a cheque. Our experience, networks and expertise are the real rocket fuel. And what’s more, when a founder receives money from an investor in the formal NZ angel community, that investor is bringing over 600 people who share a generosity of spirit and values of collaboration and collegiality.

Another key component of success in the angel world is honesty and integrity. We have made it clear that communicating quickly and clearly is vital. We put great store on ‘doing what you say you are going to do’. When we commit to invest or offer to make an introduction, you should expect we will do it. If we are required to sign a document, you should expect it to be done quickly. Of course this isn’t always possible. We all know “life” happens, but you should expect that if something does get in the way of our doing what we said we would, we will communicate.

We also expect professionalism. Dealing professionally with each other sets the standard we expect of ourselves and our ventures as they grow into world-beating enterprises. Time and energy can be scarce resources in this setting. Sometimes this makes it challenging to operate at the levels of professionalism we are used to in other parts of our lives, but we strive for it nevertheless. Angel investors are also by definition actively involved in the business and with the founder. This level of familiarity also requires us to be sensitive to the need for professionalism.

These principles serve as the foundation for our dealings with each other and are the standards others working with us, such as founders and professional service providers, should expect.

What does this look like in practice?

If you are seeking angel investment should know that our members are looking for a credible entrepreneur with aspirations to grow an internationally competitive business with a well-defined product, customer and market. You should expect professional, prompt, objective and constructive guidance from our members, whether or not you ultimately secure capital.

Ends

Suze Reynolds

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Datagate gets capital for North American push

AUCKLAND. New Zealand cloud software start-up Datagate Innovation Limited has raised more than $1m in capital as it gears up to hire salespeople and start selling into the North American market.

For customers including a network of Spark resellers and one of New Zealand’s largest IT services companies, Datagate’s cloud billing solution provides online billing, reporting and customer self-service for usage-based services.

Datagate has raised $1,042,794 from new and existing investors, more than double its $500,000 target. The capital raise was originally a rights issue for existing investors, but strong interest saw Datagate extend the issue to include new investors, says CEO Mark Loveys.

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Theresa Gattung Venture Capital fund

ArcAngels and Angel Association New Zealand today welcomed the launch of Theresa Gattung’s new Venture Capital fund which aims to raise capital from women, for women entrepreneurs.

“Boosting the pool of capital for entrepreneurs is vital for New Zealand’s ecosystem of start ups to grow,” said Cecilia Tarrant, Chair of ArcAngels, a New Zealand based angel organisation focused on funding women entrepreneurs.

“As an organisation, focused on women-founders, we are delighted to hear Theresa Gattung, one of New Zealand’s preeminent business leaders has launched an initiative to fund women entrepreneurs, supported by women. Having a Venture Capital fund will help expand the capital and mentorship female entrepreneurs need to develop their businesses,” Tarrant said.

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Movac Fund 4 reaches first close at $105 million

MEDIA RELEASE

Movac Fund 4 reaches first close at $105 million

Movac Fund 4 has raised $105 million to invest in the next generation of iconic Kiwi technology companies.

The Fund is underpinned by $75m in investment commitments from institutional investors including Ngāi Tahu Holdings, with the balance coming from the New Zealand Venture Investment Fund, leading New Zealand family offices, community trusts, and private investors.

Movac Fund 4 will be investing in established New Zealand technology companies that are seeking capital to accelerate their growth.  These are companies with an established track-record of sales, a team in place to grow the business, and the ambition and potential to scale their business internationally.  This is a later stage fund than Movac’s previous funds.

Phil McCaw, Movac Managing Partner, commented: “We are really encouraged by the commitments from all of our investors, and in particular our new cornerstone investors who have recognised the significant investment opportunity that exists in the New Zealand technology sector right now.”

“Importantly, we have a strong pipeline of potential investments for Movac Fund 4.  We have already been meeting with and conducting due diligence on various opportunities, and are very impressed by the quality of the companies that we’re seeing.  We anticipate that we will make Fund 4’s first investments prior to Christmas.”

Ngāi Tahu Holdings Chief Executive, Mike Sang, commented: “Ngāi Tahu Holdings is excited about the addition of Movac Fund 4 to our portfolio.  We are looking forward to our new partnership with the Movac team and the added diversity the investment brings us from its focus on investing growth capital in the technology sector.”

Mr McCaw added: “As a team, we have 55 years of collective investment experience and we believe that we are uniquely placed to invest in and help accelerate New Zealand technology companies.  Our Fund 4 investors include a number of highly successful founders and business builders, experienced investors, as well as family offices and investment funds.  We also have a number of investor migrants investing in Fund 4.  We would like to thank them for their commitments, and look forward to working with them to grow the next wave of iconic Kiwi companies and delivering an outstanding investment return.”

Movac Fund 4 remains open for eligible investors until its final close in April 2017.

ENDS
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Lead Partners

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