Thirsty for Capital: The state of VC in New Zealand

By December 19, 2018News

Even though New Zealand consistently tops the global rankings in terms of “ease of doing business” (NZ is ranked 1st out of 190 economies), NZ has a problem- specifically for startup companies in need of capital. While property developers might complain about the difficulty of obtaining bank funding as lending criteria are tightened, the challenge for technology startups is on a whole different level- the venture capital industry in this country is virtually non-existent, and seed funding often has to be obtained from offshore investors.

Now is the time for us to take a serious look at the state of venture capital in this country and explore ways in which the taps can be turned on for aspiring startups. Actions need to be taken to enable a robust, competitive, and resilient domestic technology industry. New Zealand has potential, this is undeniable- but in order to compete against global players from London, San Francisco and New York, we’re going to need a radical rethink about the nation’s investment and funding priorities. A greater emphasis also needs to be placed on industry training to create high value jobs that contribute to, rather than being replaced by, technology.

New Zealand has its share of successful, globally recognized technology companies- take Xero, Rocket Lab, PowerByProxi, and of course, IMAGR as examples. So, what is the problem? Xero has migrated to the ASX, Rocket Lab is now headquartered in the United States, PowerByProxi has been eaten by Apple, and IMAGR is looking to expand overseas.

For a country as small as New Zealand, we are significantly over-invested in residential real estate, which has resulted in massive capital gains in the property sector. However, this has come at a cost to both our share market, as well as the venture funding industry. (Share market investment in NZ is lower compared to countries like the United States and Australia). There are many potential solutions to this problem, and an obvious one would be to make it easier for regular people to invest in the technology sector. The NZ Super Fund has about $40 billion (NZD) in assets under management, and the logical response would be to set up a dedicated technology investment arm which focuses on the funding of domestic startups with great potential. The money isn’t the real issue here- there’s plenty of capital floating around in NZ, but the issue relates to capital allocation.

The NZ Super Fund already has a positive track record of investment into successful technology companies such as Datacom, which is now 39% owned by the fund, and by extension, the New Zealand Public. Even if only 3% of the Fund’s assets were deployed in the form of VC, New Zealand startups would instantly have access to over $1 billion (NZD) in funding. While not all startups will ultimately succeed, an investment of $1 billion is virtually guaranteed to result in a few multi-billion-dollar (valuation) businesses.

As a nation, we can choose to stay the course and continue our focus on traditional investments like real estate, financials, energy, and construction companies. The thing is, one doesn’t need to look far to see the limited potential these industries hold. We need to ask some serious questions when struggling and poorly managed companies like Fletcher Building had no trouble raising $750 million (NZD) in capital, yet at the same time we have true innovators like Peter Beck going on the record saying ”You tell me where you can go and raise $200 million in New Zealand for a space company – you just can’t,”. (Rocket Lab is now headquartered and incorporated in the United States).

Oftentimes, the funding of technology startups is not as highly capital intensive as people might imagine- take Soul Machines for example. This is a NZ startup company with origins at the University of Auckland, who raised $7.5 million (NZD) from Horizon Ventures, a company owned by Hong Kong’s Ka Shing Family. For most traditional businesses, $7.5 million might be considered relatively travail, so why is it considered a huge investment when the money is invested in game changing technology?

Yes, there are absolutely risks involved, and greater risks for the purpose of full transparency. But New Zealand as a country needs to collectively decide- do we want to continue ceding our economic sovereignty to faceless overseas giants, or do we want to be the ones creating those giants? We believe the answer is an obvious one. Purely from a return on investment basis, a single successful startup can easily multiply the initial money invested by several times.

New Zealand is very well positioned to capitalize on high tech. We already have world renowned universities and individuals with ambition (and ability) to change the world. In fact, we are already on the right track with governmental institutions such as Callahan Innovation providing millions in funding for aspiring companies that demonstrate real potential. Now is the time to take things to the next level- a lot of companies seemingly outgrow New Zealand, and this can be due to a variety of reasons. Access to big capital, staffing, growth and scaling opportunities, etc.

None of these challenges are insurmountable- both state and private sector actors have an important role to play in the continued success and expansion of technology and R&D investment in New Zealand. We need to be open to embracing different business models, such as domestic hedge funds, private VC funds, private equity investment, and of course government backing.

Recent developments would suggest changes to New Zealand’s tax regime are on the way, with the potential introduction of a capital gains tax. We see this as a rear opportunity to modify our taxation system to further incentivize investment into sectors of the economy which demonstrate significant potential for growth, such as our technology industry. Perhaps exemptions to the capital gains tax could be applied to investments into the startup and high-tech sector. This would serve to shift the focus away from speculation in the property industry, and greatly increase investment into productive businesses who develop bleeding edge technology.

In terms of talent, NZ is a small country, and it isn’t easy to produce the quantity of top talent required to support our thriving tech industry. A lot of skill is now sourced from overseas, due to a lack of appropriately qualified individuals domestically. New Zealand needs to allocate further funding to, and place a greater emphasis on, the training which supports the skills required in our tech industry. It’s always encouraging to see the likes of Auckland University enabling the initial R&D for companies like Soul Machines and PowerByProxi, but at the same time it is disappointing to see how many of these companies end up leaving our shores as they grow.

It isn’t right to place any blame on businesses who do decide to leave- it’s a commercial decision after all, and that’s respectable. It is our job as a country to make ourselves better suited to supporting these companies as they expand, and to increase the incentives involved in staying NZ owned.

We operate in a world which is changing rapidly. Technology is disrupting industry, and we are at a crossroads. In this day and age, embracing the latest trends and technological innovations doesn’t simply support economic growth, it is necessary for survival. It is estimated that by the year 2030, up to 800 million jobs globally would have been rendered obsolete by automation alone. Being a small nation, we are agile and adaptable; right now, is our opportunity to upskill. Let’s embrace the benefits of technology and focus on the numerous high-quality jobs it creates, as opposed to the low skilled jobs it replaces.

The future looks bright. Investment into early stage technology companies is increasing at a healthy pace, and players like the NZVIF are actively making investments into our next unicorns. Offshore investment remains an important aspect of our startup scene, providing valuable funding and expertise to small New Zealand companies. With that being said, we need to reduce our dependency on offshore money, and look into domestic funding options in order for our startups to go global, while remaining invested in New Zealand. In addition to funding mechanisms such as our Super Fund, we could explore tools such as corporate bonds that are available for purchase by members of the public, or technology investment funds and syndicates like there already are in real estate.



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