Growing unicorns – NZ’s changing start-up and VC landscape

By Phil Taylor – Partner, Tompkins Wake

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Entrepreneurs may be the commercial heart of New Zealand, with the start-up sector poised for hockey stick growth, but by international comparison, we still have a long way to go.

Thanks to our ability to bootstrap ideas and disrupt stagnant industries, New Zealand has witnessed some remarkable success stories in the last five years.

Some starts-up have gained unicorn status by surpassing the market capitalisation mark of $1 billion dollars with a few possibly reaching dragon status – surpassing $1B in a single raise. These include Predict HQ, Timely, ArchiPro, AllBirds, Harmoney, Red Shield, Petlife, Soul Machines, Hnry, Crimson Education, Vend, Vital, Xero, Unleashed and Rocket Lab.

But compared to other countries, such as the US, Germany, the UK, Australia, Israel, and India, NZ is still in an emergent phase when it comes to how we support, fund, and develop new commercial ventures.

New Zealand hasn’t seen the enormous wealth from successful start-ups that many of those countries have enjoyed over the last 20 years.

So how can New Zealand foster new commercial ventures better and create more unicorns?

What’s holding us back?

  • The Downturn – The current economic downturn is driving venture capitalists to cautiousness and conservatism. We have seen an end to the ‘easy money’ and the seemingly limitless supply of readily available capital of the last few years.

The New Zealand start-up sector is well-positioned for significant growth, but there are now likely to be more checks and balances before an investment is made.

The onus is on start-ups to get their house in order and demonstrate why they stand out from the crowd. People and emotions will play key roles in investors’ decision making, so getting the right advice is crucial. Fortunately, there is a wealth of accessible and affordable help now available.

  • Experience and awareness – Many early-stage companies don’t have a firm grasp on how the VC process works or how to attract the right investors, particularly during seed, series A, series B, and series C funding rounds.

We have an opportunity to grow founders’ awareness of venture capital and private equity by making it easy and affordable for them to access information, support, and advice.

  • Misconception – We also need to challenge some of the preconceptions and stereotypes people hold about venture capitalists and demonstrate the valuable role investors play in helping entrepreneurs and our economy.

Gone are the days when investors were out to beat founders down, and exercise control as quickly as possible. To be successful in venture capital today, investors understand the need to be a founder-friendly partner who can invest, incubate, and incentivise their entrepreneurial partner.

However, more recently, we have seen the balance swing back slightly towards investors. Venture capitalists recognise that terms need to be favourable for all parties. They understand the need to preserve incentives for founders, typically through a healthy shareholding.

  • Attitude – A lack of ambitious aspiration also hamstrings many Kiwi entrepreneurs. Many are quite happy to sell out for $20-30 million, buy their bach, boat and Ford Ranger ute and retire early. You must be pretty extraordinary to be the leader of a billion-dollar unicorn.

But the reality is many institutional VC investors aren’t looking for a start-up that will just do well. They want unicorns.

Market growth & maturity

Despite all the challenges, now is the perfect time to establish a start-up. The venture capital landscape has changed over the last four to five years, influenced by growth in the number of venture capital funds and increasing maturity in the market. And it’s been good news for start-ups.

In 2002, the New Zealand Government issued funds through New Zealand Growth Capital Partners NZGCP, making $300 million available to the start-up market. This was a real tonic for the sector and made it easier for start-ups to find investor money in New Zealand, rather than looking offshore. Today, we have more than 65 active funds, which has seen investment in the start-up market grow by more than five times over the last 20 years.

NZGCP’s funds gave the market time to grow and mature to the point where it is now self-supporting.  The influx of international funds that have come into New Zealand combined with investment by homegrown funds demonstrates the durability of our start-up ecosystem. Our talent and innovation will continue to be drawcards for foreign VCs, as will our high education standards and ‘no corruption’ status.

We have seen several large venture capital funds mature from a typical initial size of say $10 million fund size to up to $250 million. They now have cash to reinvest and appreciate the benefits of their previous experiences, particularly during tough times.

The need for ‘Smart Money’

While venture capitalists are looking for the right start-up, entrepreneurs also need to make sure they’re partnering with the right VC. We call it ‘smart money’, and it is largely about being satisfied with the following three things:

  • Knowledge & connections: VCs with a deep knowledge of their particular sector. Think of someone who can facilitate connections with suppliers, help recruit the talent the business needs, and offer structured training and support.
  • Deep pockets: VCs with deep pockets and the ability to help with follow-on funding. This could be through their own fund or other funds they can tap into. As we head further into an economic downturn, start-ups will need larger cheques at later stages, and funds to tide them over to the next round.
  • People first approach: VCs who know how to put people first and can help avoid founder burnout. Successful VCs understand the importance of putting people first. Forget the accounting and finance metrics. It’s all about the people – looking after them is not just the right thing to do, it’s good business.
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