The Gap

There’s a lot of work going on at the moment trying to address the funding needs of hundreds of companies that are emerging from New Zealand.

Investors, groups of investors and funds are all lifting their sights, raising and contributing more money as the success of the sector becomes increasingly obvious. To be blunt people are making a lot of money as a result of founding companies and investing, and they want more.

The FMA and NZX are conducting a study on the financial markets, and asking why we are seeing no IPOs in New Zealand.

And the government (via MBIE) is investigating the venture capital funding gap and seeking to introduce policy to accelerate investment.

At Punakaiki Fund all I can say is that our major problem has always been raising money. We have never, in our five years of investing, had a shortage of deal flow, of great companies to invest in. It’s incredibly frustrating to have to pass on opportunity after opportunity, and then watch those companies raise inadequate or no funding.

In my work with NZTE over the last few years I’ve most often had to suggest to founders that they seek to avoid raising money, as doing so is very difficult and trying generally leads to poor outcomes. Ideally, I advise, companies should raise funds from their customers. Boardingware, to be renamed Orah, one of the companies Punakaiki Fund has invested in, is not alone in taking its payments a year in advance, while Onceit (another Punakaiki Fund investment) takes payment before procuring products for its customers. These companies are able to grow with much lower, or even no, external funding. But Paysauce, as a new listed company with public figures, makes just a few hundred thousand dollars a year and is reliant on continuous funding for survival.

Actually that’s not strictly correct. Software as a Service (SaaS) companies can, after a certain minimum revenue of say $500,000-$1 million, always survive if their funding dries up, albeit at the expense of letting go of staff to lower costs to match revenue. This happens distressingly often in New Zealand, and it has benefits and costs.

The benefits are that we are very good in New Zealand at creating and growing companies with sustainable business models. We know, as investors, that founders will drive these companies frugally and not over-invest in frivolous or non-revenue or product driving activity.

The downside is also clear though. We do not often enough see companies receive funding that allows them to win. Even lousy companies, you see, that raise a huge amount of money increase their chances of winning. It’s almost distressing to watch this occur when we look at so many companies with products and markets that are outrageously great grow slowly enough to be at risk of being overtaken by better funded, but in other ways inferior competitors. Funding is a valid way to win, and in New Zealand we very rarely have that weapon. Xero did, raising well beyond its stage at IPO. Perhaps Paysauce will do so – their product seems ahead of their revenue, and being one of a very few listed early stage companies here they have a very public chance to win.

At Punakaiki Fund we have investments in several companies that could do extraordinarily well with extraordinary funding. In general we are able to provide only a percentage of the funding they could really use, and they end up “only” doing very well. We are grateful, on the other hand, that growth VC investor Movac has placed, we believe, half of the committed funds to date from their Fund 4 into Punakaiki Fund companies, and Vend, Mobi2go and Timely are all charging forth with rounds of $5 million or more. While we placed over $2 million into two of those companies earlier on, we were unable to stretch to the next level.

The bigger opportunity we are missing, as an ecosystem, is for large investors who actively placing very large investments into early stage, yet proven, companies. This sort of risk capital is very common offshore, but here our limited funds, along with a very poor 10-15 year track record for venture capital investment into pre-commercial companies, we see investment mainly into companies with safe levels of revenue.

We see occasionally some pre-revenue companies attracting very large sums, such as Nyriad, Avertana and Mint Innovation. These are high risk generally, and investors are advised (by the companies) to treat their investment as having a high chance of complete loss. Occasionally also we see small companies with, say, under $2 million in revenue receive large rounds from offshore. Ask Nicely is one of the more well known companies in this category. That’s all good, but we need more, a lot more, money to go to companies at an early stage.

It’s the ones who are missing out that are causing frustration. How would our ecosystem look if we had another $250 million per year being professionally invested?

For a start that would fund 2,500 high value jobs at $100,000 each, and it would definitely accelerate or arguably ensure the creation of some unicorns. It would also generate a lot of tax paid (think of the PAYE and GST), as well as investor returns.

Those investor returns have historically been, in New Zealand, atrocious. A lot of angel funding was misdirected for many years, and companies received poor advice and governance. But now things are a lot better. The quality of the companies coming through has improved. The quality of work done by investors (many have been filtered out) has increased sharply. The quality of governance still lags but has also improved a lot. There are a growing number of public success stories, and there are a lot more to come.

But I despair for the money left in the table by most investors. Yale University, with US$29 billion of investments, places 18% of its portfolio into venture capital. NZ Super, ACC and Kiwisaver, collectively around $120 billion, invest nothing. If they placed 5% of their portfolios into venture capital then $6 billion would need to be allocated. And given that they have privileged access to what I consider to be the most dynamic and under-priced market for venture capital globally, they should be placing a good percentage of that domestically. Indeed they should not place money internationally as they are unlikely to get access to the best funds. But here in New Zealand it’s the time and place to make big allocations to venture capital, and they have a home ground advantage.

The asset class deliverers high returns at low correlation to the stock market, and is a great place to invest into when markets are high. New Zealand funds and individuals would do well to consider investing.

But please avoid investing into angel stage companies, not until, at least, you have made a series of small investments and have genuinely done the work required to understand what you are doing. Investing is work, and experience is earned the hard, and sometimes expensive way. It’s a lot of fun though, and if you can help and understand the space well then lean in.

Meanwhile the main opportunity is with later stage companies, and they need a much higher degree of work to investigate, invest into and drive performance, and they need much larger investment sizes. This is the province of a handful of very high net worth investors and an even smaller number of funds. We need more of both categories, and with more finds to allocate.