Venture capital: How big will The Big Chill hit New Zealand?

Investors funding startups turn heads in the US and Australia and write down the value of their existing holdings amid rising interest rates, recession fears and falling tech stocks
in public markets.

Industry players say New Zealand might not be so badly hit, given that investors here have been more conservative and bought at cheaper levels. Additionally, local venture capital is typically involved in relatively small Series A rounds rather than later-stage Series B and C shares where investments can be much larger. So while this country has seen record levels of venture capital investment over the past two years, we have never reached the frothy heights seen in some markets.

“[While] venture capital funds are just as subject to the vagaries of international markets, we have tended, particularly for companies that have received the bulk of their venture capital funding from Kiwi funds, to be a bit more circumspect and conservatives when it comes to valuations,” Angel Association of New Zealand executive president Suse Reynolds told the Herald.

“New Zealand transactions have traditionally been ‘cheaper’ than their international comparables, given the added challenges of scaling from less mature and shallower capital markets.”

And a partner at a major local venture capital organization said the heartbreak of much of the venture capital industry involved Series B or C capital raises.

“It’s the mega towers that can be $100 million or more of investment. That’s the place [Australian software company] Canva was sitting, and where the valuations got super crazy.

“Kiwi VCs typically invest in the seed and Series A stage. And because New Zealand VCs tend to invest earlier, our valuations have never seen the same degree of intense rise and fall. Offshore VCs are much more exposed to larger investments and valuations that have more to come down.”

Another big difference: A huge player in the venture capital market here is the Crown-backed NZ Growth Capital Partners (NZGCP) and its $300 million Elevate fund, launched in March 2020. The NZ Super Fund complemented NZGCP’s usual funds with $270 million. injection as part of a government-funded bid to boost the local venture capital market.

And damn it, it is. The record venture capital activity of the past two years is largely due to Elevate’s investment in local funds – a spend that has attracted big names from across Tasman to co-invest for the first time or significantly increase their New Zealand business.

Two-thirds of Elevate’s money was spent quickly.

Elevate has now deployed $194 million, NZGCP Chief Investment Officer James Pinner told the Herald this week.

That leaves $106 million in the pool in terms of NZGCP’s own money, but Pinner says there’s a lot more to do due to its co-investment model.

For example, on May 30, NZGCP said it was committing $30 million to Blackbird Ventures’ second New Zealand fund, which plans to raise $70 million from other investors, so it will have a total of $100 million to be invested in Kiwi startups.

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

And of the roughly $800 million total raised by NZGCP-backed venture capital funds since March 2020, only 34% has been deployed so far.

“So there’s a lot of powder that’s been kept dry,” says Pinner.

NZGCP also manages the Aspire Fund, which invested around $15 million in seed capital last year. As things stand, Pinner says, about the same amount will be invested this year – but that could be increased if market conditions tighten.

At sea, hard times have indeed arrived.

On July 7, the New York Times reported that for the first time in three years, venture capital funding was down.

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

And across the Tasman, venture capital investment in Australian tech companies in June was down 53% (to A$408 million) from June last year, according to Cut Through Venture, which studies the Australian venture capital scene.

And the biggest Australasian VC, Blackbird Ventures, turned heads last week when it cut the valuation of its most high-profile investment, Canva, from $14.4 billion (or 36%) to 25, $6 billion.

Blackbird said it reduced the value of some of its funds “by up to 30%”.

One of the main reasons was a change in evaluation methodology.

Like many of its overseas counterparts, the Australian fund had based the private equity valuation of a company in its portfolio on the valuation agreed upon by private equity investors when it was last raised.

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

A partner at one of New Zealand’s biggest venture capital groups was unimpressed by a Blackbird article outlining the change.

“They gave the impression that they had invented a new and better way of doing things instead of going to the same process that all New Zealand VCs already use,” the partner said.

“Typical bloody Aussies.”

Some across the Tasman are in a sadder mood.

Paul Bassat, the co-founder of Melbourne-based Square Peg – one of Blackbird’s main rivals – posted on June 30: “It’s worth reflecting on what we’ve done wrong over the last year We knew, or should have known, that we were in the very last stages of an incredibly dynamic market.In hindsight, our pace of investing should have been slower than it was.

Bassat warned that Square Peg forecast likely writedowns in the coming months.

Although no monthly scores are released, there is anecdotal evidence that the New Zealand venture capital market remains relatively buoyant, at least for now.

Two new funds have been created.

Entrepreneur Derek Handley recently launched a $44 million fund focused on eco-friendly startups.

And Mark Pavlyukovskyy – a Ukrainian entrepreneur who recently moved to Queenstown – is set to raise $20m 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 its target – but secured the funds in just four months, a clip record for Icehouse.

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

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

And there are still a lot of startups investing, but they find they now have to jump through more hurdles.

In late June, Portainer – an Auckland-based cloud software maker – raised $10m in a Series A round extension that raised a total of $19m. Founder and Managing Director Neil Cresswell told the Herald it really was a two-half game.

His business went through the first stage of its relaunch last year. With the second installment, “there was a lot more due diligence and more attention to how the money would be spent. It was a lot more mechanical”.

Cresswell said there was still cash to land – Portainer’s $10 million raise in June was led by Wellington’s Movac – “but the days of ‘here’s cash, go wild “is over”.

Another qualifier is that he got a third of his money from NZ Fund II through NZGCP’s Elevate, which was such a boost for the local scene.

What will happen when the last third is exhausted?

Will the government pay an additional $300 million? Pinner says talk of Elevate’s “next vintage” is still in its early stages. The amount will depend, in part, on the performance of the fund’s first wave of investments. And on that front, says Pinner, while valuations, like Canva’s, grab headlines, there’s only one valuation that matters: when NZGCP sells its stake — and for a typical investment , it will be five years later.