Venture capital: How far will Big Chill hit New Zealand?

Investors financing startups are turning heads in the US and Australia, devaluing existing holdings amid rising interest rates, recession fears and a plunge in tech stocks
in public markets.

Industry players say New Zealand may not be hit hard, though, given that investors here have been more conservative and bought at cheaper levels. In addition, domestic venture capital typically participates in relatively modest Series A rounds rather than later Series B and C rounds where investments can be much larger. So, even though this country has seen record levels of venture capital investment over the past couple of years, we’ve never quite reached the buttery highs seen in some markets.

“[While] Venture capital funds are subject to the vagaries of international markets, particularly for those projects that have received the bulk of their investment funding from Kiwi funds, to be more conservative and conservative about valuations,” New Zealand CEO Suss Reynolds told Announces.

New Zealand deals have traditionally been ‘cheaper’ than their international counterparts due to the additional challenges of expanding from less mature and shallow capital markets.

A venture capital insider said the grief of much of the venture capital industry involves Class B or C capital increases.

“These are mega rounds whose investment can reach $100 million or more. This is the place [Australian software company] Canva has been sitting there, and that’s where the reviews are getting pretty insane.

“Kiwi VCs typically invest in both the seed and phase one. And since New Zealand venture investors tend to invest early, our valuations have never experienced the same degree of intense ups and downs. Valuations that would have fallen higher.”

Another big difference: Here, a major player in the VC market is Crown-backed NZ Growth Capital Partners (NZGCP) and the $300 million Elevate Fund, which launched in March 2020. The injections are part of a government-funded effort to boost the VC market Domestic investment capital.

And gee up her. Record venture capital activity in the past two years has been in large part due to Elevate’s investment in local funds – spending that has drawn big names from across Tasman to co-invest for the first time, or dramatically increase New Zealand activity.

Two-thirds of Elevate’s money was spent in a quick clip.

Elevate has now posted $194 million, James Boehner, chief investment officer at NZGCP, told Announces this week.

That leaves $106 million in the fund in terms of money for the NZGCP, but Benner says there’s plenty of money available given its co-investment model.

For example, on May 30, the NZGCP said it had committed $30 million to its second New Zealand fund for Blackbird Ventures, which expects to raise $70 million from other investors, so it would have a total of $100 million to invest in Kiwi startups.

Pinner says that for every $1 purchased by NZGCP, private venture capital funds invested about $3.50 of their own money.

Of the total $800 million or so raised by NZGCP-backed venture capital funds since March 2020, only 34 percent have been published so far.

“There is a lot of powder that has been kept dry,” says Benner.

NZGCP also manages the Aspire Fund, which invested about $15 million in seed capital last year. As it stands now, says Boehner, roughly the same amount will be invested this year – but that could be increased if market conditions become more challenging.

Outside, hard times have arrived well and truly.

On July 7, a The New York Times You mentioned that venture capital funding is declining for the first time in three years.

Investments in US startups have fallen 23 percent over the past three months, according to market tracker PitchBook.

Across Tasman, venture capital investment in Australian tech companies in June was down 53 percent (to A$408 million) compared to June last year, according to Cut Through Venture, which surveys the Aussie VC scene.

And Australia’s largest venture capital, Blackbird Ventures, caught the eye last week when it lowered the valuation of its top investment, Canva, by $14.4 billion (or 36 percent) to $25.6 billion.

Blackbeard said it reduced the value of some of its funds “by as much as 30 percent”.

The main reason was the change in evaluation methodology.

Like many of its overseas counterparts, the Australian fund based its valuation of the private equity of a company in its portfolio on the valuation agreed by private equity investors in the latest increase.

Now, with its more mature investments like Canva, Blackbird says it has moved from a “last round” methodology to a “market valuation,” where external value uses comparable listed companies as a benchmark.

A partner in one of New Zealand’s largest venture capital groups was unimpressed by the Blackbird publication outlining the change.

“They made it look like they had invented a new and better way of doing things in exchange for moving to the same process that all New Zealand venture capital firms are already using,” said the partner.

“Bloody Typical Australians”.

Some crossed the Tasman River in a more melancholy mood.

Paul Passat, co-founder of Melbourne-based Square Peg – one of Blackbird’s main competitors – posted on June 30: “It’s worth thinking about the mistakes we’ve made over the past year. We either knew, or should have known, that we were in the late stages. From an incredibly booming market. In hindsight, our pace of investment should have been slower than it was.”

And Passat cautioned that Square Peg is making provisions for potential write-offs in the coming months.

Although no monthly results have been released, there is anecdotal evidence that the New Zealand venture capital market is still relatively buoyant, at least for the time being.

Two new chests appeared.

Entrepreneur Derek Handley recently launched a $44 million fund with a focus on green startups.

And Mark Pavlyukovsky – a Ukrainian businessman who recently moved to Queenstown – is in the advanced stages of raising $20 million for the new NZVC fund.

Icehouse Ventures said this week that its Seed III fund, which opened in March, not only raised $35 million — about $5 million above target — but raised the money in just four months, an Icehouse record.

“Kiwi entrepreneurs have proven time and time again that their success is largely detached from these economic conditions, with startups like Lanzatec and Rocket Lab emerging around the 2008 crash,” said Robbie Paul, CEO of Icehouse.

Blackbird is now targeting $100 million instead of the original $80 million for its NZ Fund II.

And there’s still plenty of startup investment out there, but they’re finding they now have to jump through more loops.

In late June, Portainer — an Auckland-based cloud software maker — raised $10 million in an extension of its Series A round that raised a total of $19 million. Founder and CEO Neil Cresswell said to Announces It was pretty much a game of two halves.

His company passed the first stage of the increase last year. With the second slide, “there was significantly more due diligence, and more focus on how the money was spent. It was more mechanical.”

There is still money to go down — Portainer’s $10 million increase in June was led by Wellington’s Movac — but the days of ‘here’s some money,’ Cresswell said.

The other qualifier is that he got a third of his NZ Fund II money from NZGCP’s Elevate, which was a boost to the local scene.

What will happen when the last third is depleted?

Will the government enter another 300 million dollars? Benner says discussions about Elevate’s “next model” are still in their early stages. The amount will depend, in part, on the performance of the fund’s first wave of investments. And on that front, Benner says, as valuations, like Canva, sway the headlines, only one valuation matters: the point at which NZGCP sells its stake — and for a typical investment, that would be five years away.