New Zealand VC: Apprehensive eruption

Back-to-back fundraisings last month suggest a stirring of interest in New Zealand's generally quiet venture capital environment. However, even though this activity coincides with growing influence within the angel community, a splash of international attention, and encouraging investment data, the industry outlook remains murky.

The better-than-expected first close of NZ$38 million ($26.3 million) from the Global from Day One (GD1) Fund II in late May came immediately after fellow VC firm Movac received $20 million in commitments towards a target of NZ$80-100 million for its growth-stage vehicle. Both funds are expected to help fill New Zealand's stubbornly persistent Series A and B gap.

"GD1 occupies a niche in between the angel market and other VC funds, which target slightly larger investments," says Aaron Tregaskis, investment director for the New Zealand Venture Investment Fund (NZVIF), a government-sponsored fund-of-funds, which supports GD1 and Movac. "Venture capital investment is at healthy levels but we always need new funds coming into the market to build on the momentum that has been achieved."

Sustainable or not?

From a NZVIF perspective, it is hoped the momentum created will become increasingly self-sustaining. Government contributions to the fund will fall from 2018 and reach zero four years after that, by which point it is expected to make investments from existing reserves. Reactions from the industry have been mixed, setting the stage for an uncertain chapter in the development of New Zealand VC that appears equally prospective and precarious.

Founded in 2002, NZVIF claims some NZ$300 million in capital under management and a track record including 10 venture fund commitments and 14 seed co-investments. It offers up to NZ$25 million per fund, providing there is at least matching private sector support.

"There was simply no formal VC market in New Zealand before that came on," says Carl Jones, a former NZVIF investment manager and current CEO of WNT Ventures, a recently formed venture firm focused on seed and pre-seed investments. "Switching off that tap will definitely impact the market and the ability to raise capital, but there's a lot of value in those portfolios which will hopefully flow through into returns that will be reinvested into more funds and companies."

WNT has recently factored into the latest groundswell of venture activity in the country with Angel HQ coming in as the final investor in the firm's debut fund. This was the second show of angel support for WNT and has thus helped punctuate one of the strongest trends in New Zealand VC.

According to government data, angel investment reached a record level of NZ$61.2 million across 94 deals in 2015, a 9% year-on-year increase. This acceleration was almost entirely responsible for a 12% increase in overall VC investment during 2015, which the New Zealand Private Equity & Venture Capital Association (NZVCA) tracked to a total of NZ$62.5 million. Business growth hub Icehouse and its associated start-up network Ice Angels recently hinted that this spate was likely to continue after raising a NZ$10 million angel fund expected to support 25 companies over the next three years.

A boost to New Zealand's international profile, meanwhile, has been anchored by a $7.5 million Series A round from Sequoia Capital for 90 Seconds, a homegrown cloud video production platform provider that recently relocated its headquarters to Singapore in order to pursue international expansion ambitions. "When a firm like Sequoia invests in New Zealand, we do get more interest from the offshore VC community," says Colin McKinnon, executive director at NZVCA. "That reflects back on the whole New Zealand ecosystem."

The local lag

The concern remains, however, that even as interest picks up, the concrete foreign commitments needed to fill New Zealand's follow-on investment vacuum may continue to elude entrepreneurs. The absence of some of the biggest domestic investors from the asset class doesn't help. New Zealand Superannuation Fund, for example, tends to avoid venture-stage assets - the notable exception being a NZ$60 million cash injection into gas fermentation company LanzaTech in 2014.

The decision to pinch NZVIF funding has likewise caused concern around international perceptions of domestic confidence in start-ups at a time when the industry's reputation is still being forged. "If you look at all the funds that are being raised at the moment in the venture space, they've got the NZVIF program as a cornerstone, and without that cornerstone, those funds would have struggled even in good times," adds McKinnon. "We're having a good period at the moment, but I don't think there's enough evidence to suggest the government program has finished doing its job."

Others suggest that New Zealand's modest progress in the venture space so far owes more to jurisdictional inputs such as a lack of corruption, established legal systems, a spirited do-it-yourself culture and favorable foreign relations. From this perspective, NZVIF's 14-year run of trying to establish an internationally competitive start-up market has done little to expand on these existing advantages.

"If NZVIF was set up to sponsor the development of a venture industry, then there should be more managers raising second funds by now," says Jenny Morel, managing director at No. 8 Ventures. "It has sponsored the angel industry and made it easier for people to get a first fund away, but I don't think it has really worked in its present incarnation because it hasn't actually fostered a vibrant venture capital ecosystem in New Zealand."

Morel, however, describes New Zealand as a thriving technology start-up scene, where high net worth individuals - rather than government-backed vehicles - are helping new companies follow the lead of international breakouts such as software company Xero and IT provider Orion Health. "The companies are here, and there are a lot of deals getting closed, but they're mostly happening in other ways - not through venture funds."

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• Topics
• Australasia
• Venture
• Fundraising
• New Zealand
• New Zealand Venture Investment Fund