Having worked in Australia for four years, I got to appreciate how well the venture capital sector has thrived there. Many start-ups don’t have to look far for capital — they just tap into one of the accelerator or incubator programs throughout the country and are instantly in touch with some of the country’s most connected investors and partners.
When I moved to New Zealand, I assumed it would be the same. However, I came across founder after founder telling me how difficult it was to raise capital from professional investors in their early stage space. Why is this?
NZ is a world-class country in so many aspects of business. Not only is it consistently ranked as the most transparent country in the world, it also tops the lists for both ease of doing business as well as ease of starting a business. With a flourishing angel investor ecosystem and a range of private equity funds continually outperforming, you would naturally assume there is a healthy venture capital market to service the gap between the angels and late-stage VC/private equity players. That — sadly — would be a mistaken assumption. However, a combination of lack of institutional investor appetite, past market structures and challenge of scale all have contributed to the present venture capital funding chasm in New Zealand.
The funding chasm can be explained by the following:
Due to a lack of market maturity, New Zealand-based funds have yet to see the mass successful exits typically seen in the US or Israel, and therefore institutional investors are less inclined to put money behind earlier-stage ventures. New Zealand is a small market — which is great for testing, but many institutional investors are left without confidence that the world’s larger markets will react the same way.
New Zealand is well versed in foreign capital being invested into the country, however a majority of it has been directed at the property market up until recently. This task of changing the direction of the flow of foreign capital into alternative assets is a long — and difficult — task.
Many of the former early-stage VCs in New Zealand have found success, raised larger funds, and therefore have had to deploy larger cheque sizes, typically looking for companies turning over a few million in revenue — leaving a huge gap in the early stage (seed) market. This forces companies to become capital constrained and unable to scale without that external injection of capital and strategic guidance. With more smart capital backing early stage companies, the more likely large offshore exits are going to eventuate.
Punching above weight with global success
For being a country of less than five million, New Zealand punches far above its weight in terms of creativity and talent. U.S. funds are paying more attention to New Zealand with our recent mutual successes, with the momentous funding rounds and exit realisations of Phitek, Power by Proxi, Xero, and RocketLab to name just a few. We have seen a 239% increase in foreign direct investment in the last year, which is quickly providing a great worldwide reputation for New Zealand.
Why do we need to fill this gap?
I have lived in 4 countries in my lifetime (so far) and never have I been more impressed with the passion, dedication and immense talent I see in the New Zealand start-up ecosystem. The founders I am so lucky to work with are some of the most resilient people I know — which is just one of the many reasons I am so proud to call myself an (honourary) Kiwi.
Being so geographically isolated, having that strategic support and smart capital to break into other markets is crucial in the increasingly competitive and challenging international venture landscape. The more capital New Zealand can offer its rapidly growing early-stage market to achieve growth, the quicker we will become part of the global cluster of innovation that fuels the venture economy around the world.