Our portfolio company, Compliance Audit Systems, has released a video showing the current workflow of their key product ACABIM, and how it produces automated consenting reports:
This is the first article in a series by our Research Intern, Odette Lees.
Investment into early-stage companies1 in New Zealand has been growing rapidly over the last 10 years. This is shown through increases in both Angel and VC funding collectively, as well as through increases in the average deal size year on year. Overall, more companies are needing more capital each year, and the industry has been trying to rise to meet this demand.
In 2011, NZVIF estimated that $2 billion would need to be invested over the next 10 years to support the next generation of start-ups in NZ2. Almost 90% of that investment has already been made in the last 7-8 years, and with the current annual growth of investments made into early stage companies, an additional $1 billion may be invested by 2021.
So, what does this mean for the early stage industry as a whole? Over the next 5 years, we estimate that a total of $3.15 billion needs to be invested to keep up with the growth of the early stage start-up industry and its investment demands.
Efforts have been made to try and achieve this, with the government unveiling a new $300m early-stage intervention this year, and Simplicity pledging to invest $100m into early stage companies (through Icehouse Ventures) over the next 10 years. When factoring in these interventions and increases in VC capabilities over the next 5 years, there is an estimated $1.7-1.9 billion available from angel groups and venture capital funds to invest into early stage businesses. Family groups and independent angels which are not formally recorded will account for further available money, and if private equity funds are included, that number jumps to $3.2-3.4 billion.
These numbers show that over the next 5 years, the funding gap will shrink significantly. This is dependent on the deployment of all the available capital and cash going to all the right places. It doesn’t mean that the funding problem will be solved in this time frame. However, it does show that the government intervention is well-sized to address the funding issue.
There are several possible situations that could arise which would affect the closure of the gap, despite the favourable position the industry appears to be in at the moment. One is that an injection of more available money will increase the rate of growth of start-ups in New Zealand in which case, the gap would widen again.
Another is that if the assignment of that capital is not balanced to ensure companies are able to be financed across all stages of investment i.e. pre-seed to Series A+, then the Series A gap will remain. Angel investors and early-stage VC funds in New Zealand who focus specifically on pre-seed and seed investments invest heavily in New Zealand, and if money pours in solely at this stage, it will become harder for companies to access money once they progress past it. The government intervention will specifically address this Series A gap, with funding provided if VCs can match that funding and invest 70% of their total capital into Series A and B deals in New Zealand3. Alongside these funds, who will focus on addressing the Series A gap, it will also be important for smaller funds to ensure they can provide sufficient follow-on capital to their portfolio companies.
While the short-term funding landscape is looking relatively bright, there is not much room for industry change before the gap becomes significant again. Sustainable, long-term solutions need to be implemented in the next 5 years, and beyond, to ensure that the industry can keep up with the dynamic start-up landscape. In the next article, we will discuss three possible solutions to help keep the gap closed.
Matū is a venture capital fund that targets very early-stage science and technology projects being commercialised out of research institutes and in the private sector. Following the principle of mohiotanga, we seek to share insights from our research where possible, in order to build on the knowledge already in the community and help enable people to act.
1 Early stage is referred to as investments made into start-up companies by venture capital funds or angel investors from Seed capital up until Series A+.
2 New Zealand Private Equity & Venture Capital Association, “Ensuring Venture Capital Plays Its Part in Growing the NZ Economy,” November 2011.
3 Simmonds Stewart, “Venture Capital Fund Bill,” September 6, 2019, https://simmondsstewart.com/blogs/venture-capital-fund-bill/.
Andrew Simmonds of law firm Simmonds Stewart has written an excellent summary of the Venture Capital Bill, which covers not just the details of the bill itself but also likely impacts, which funds to watch, and what VC funds will need to aim for in order to win a chunk of the pot of money available.
Read more here: https://simmondsstewart.com/blogs/venture-capital-fund-bill/
A great story out of University of Auckland today, Rocket Lab CEO Peter Beck has been appointed Adjunct Professor of Aerospace Engineering. For someone who never went to university, skipping to the top of the hierarchy is amazing recognition for the achievements that he has led in creating an aerospace industry in New Zealand.
Over at the Sydney Morning Herald, Richard Dale and Adrian Bunter have written an op-ed about why companies find it difficult to secure angel investment. In short, founders are unprepared for the level of documentation and interrogation needed, and expect to secure funding faster than the angel process allows.
At Matū, we recognise that not all projects are equal and will do our best to support early-stage ventures (particularly those led by academic researchers) that may not have had any experience in capital raising. We also try to move a little faster than angel investment groups (although it doesn’t always happen). But the article provides a good summary and checklist of elements that have to be formed and produced in order to get a company through due diligence.
MBIE are now beginning industry consultation on the Venture Capital Fund (VCF) Bill, which would establish the fund-of-funds that provides $300mil of government funding towards the early-stage investment markets. Of note is the proposal for some percentage to be allocated towards international funds, and restrictions on the use of funds for particular stages (mostly Series A/B) of investment.
See the press release here: http://www.voxy.co.nz/business/5/346437
See the latest Cabinet paper here: https://treasury.govt.nz/publications/cabinet-paper/dev-19-sub-0221-venture-capital-fund-bill-policy-approval-and-approval-introduction
See the collection of documents from Treasury here: https://treasury.govt.nz/publications/information-release/venture-capital-fund
Our Managing Partner Greg Sitters has just given a presentation to a full house of 400 people on early-stage governance at Callaghan Innovation’s Southern SaaS conference. A hot topic, given that there were two times more questions than any other talk so far!
Alongside Angel Association of New Zealand colleagues Deb Hall and Suse Reynolds, Greg will also be presenting a longer presentation on Governance 101 for early-stage founders as part of the conference.
Engaging with the investment, commercialisation, and start-up community is an important part of values at Matū. Under the principle of mohiotanga, we want to help share our knowledge and grow the talent pool. After all, it will make our jobs easier in the long-run too!
See the Southern SaaS program here: https://www.eiseverywhere.com/website/3805/programme/
The Venture Capital Fund Bill has been introduced into parliament on 22 August, with a first reading upcoming. This is an important piece of legislation that will authorise the government to set up the Venture Capital Fund, which is the new name for the $300 mil Series A/early-stage market intervention. It firmly puts the control in the hands of the Minister of Finance through policy statements, and confirms that it will follow a “fund of funds” model co-investing alongside existing funds.
Congraulations to Dr. Andy West, one of our General Partners, who has been selected to join the Board of the SODA incubator in the Waikato, and has also been elected Chairperson. There is a lot of opportunity for Matū to work with founder incubators like SODA, and to help lend our expertise and connections, so we are excited to form a closer relationship.
Some interesting commentary at TechCrunch talks about the rise of founder-led biotech companies, in contrast to the VC-led model that is more common in the US. Since the risk in commercialising biotech is so high, and the capital required is huge, traditionally VC firms have taken the technology off the researchers and installed their own experienced teams to execute the vision. More recently, increasing numbers of biotech firms are led by the researchers themselves, who can learn the process of building a business and taking the product to market themselves.