Recent technology-sector IPOs and merger and acquisition (M&A) activity suggest many investors view IT, software and technology companies as an attractive proposition, in spite of the recent global downturn in this market. But investor sentiment alone does not provide sufficient impetus for successful capital raising, even with high levels of confidence in the New Zealand economy and through Asia-Pacific.
Also critical is a compelling global growth story, coupled with the confidence that management and the underlying technology will deliver.
Being able to communicate your future outlook, and ensure it is well understood by potential investors, is a must. Kiwi companies are getting better at this, displaying public ambition and a capability that was uncommon 10 years ago. New Zealand has been an isolated market with a relatively limited ability to attract top talent.
So, out of necessity, our technology companies developed great global growth stories and strategies from the start, while retaining unique Kiwi attributes like agility, pragmatism and resourcefulness.
Also significant is the growing competence across various disciplines in management teams and at execution level. This is being recognised by an expanding stable of high profile US and Australian investors. New Zealand’s growth story has been supplemented by the recent NZX listings of technology businesses such as Wynyard Group, SLI Systems, Gentrack, ikeGPS, Serko, Vista Entertainment and E-road, with IPOs of other software and technology companies in the wings.
Offshore, technology deals have soared to near-record highs in the first half of 2014, outpacing other sectors. Global technology M&A volumes and values are expected to remain strong in the second half of the year, although values will likely cool from their recent highs.
EY’s April 2014 Capital Confidence Barometer survey indicated more than 60% of technology executives remain confident in global economic growth.
An interesting area of Asia-Pacific M&A has been the growing deal-making activity of three Chinese internet firms: Alibaba, Baidu and Tencent.
The three are competing for mobile users and expanding into new businesses. It is encouraging that global technology companies appear to be increasing investment in R&D and capital expenditure, suggesting they are gearing up to embrace innovation and adaptation.
While there is a vibrant early-stage tech sector in New Zealand, the appetite from New Zealand-based funds for early stage (pre-expansion) tech risk is very limited, and these businesses cannot always get access to capital. If they do, it’s often pieced together through multiple – and messy - rounds of funding. An aggravating factor is that these businesses are often small, with a relatively small funding requirement.
This makes the risk/reward tradeoff of doing due diligence, challenging. So where do early-stage through to early-expansion NZ tech companies look to raise capital?
Some US investors and funds are willing to take on early-stage risk and like the New Zealand tech story, as reflected by the recent investment interest in this sector, like Valar, Intel Ventures). With good advisors and industry networks, there are opportunities to identify and introduce these US investors to New Zealand opportunities.
So what makes for a successful capital raising?
Here are three key tips:
Lean on your advisors and use their extensive networks, experience and expertise It may seem obvious but if you use financial, tax, legal and investment banking advisors only to tick the boxes, their time will be a cost to your business rather than an investment.
A key part of the capital raising process is ensuring the right infrastructure is in place, such as financial reporting systems, corporate governance and compliance, and risk management and internal controls. Ideally your advisors would also be tech savvy / connected individuals.
Be open to ideas and to challenges Don’t see due diligence and detailed Q&A as a check-up or a process designed to identify your failings. It’s there to take stock of your company’s position and improve your strategic operations. Be aware that compelling growth potential comes with significant risks, therefore make sure you understand and evaluate the tech risk and landscape.
Plan your capital raising Spend time preparing and refining your equity story and refining your management capability. Investors don’t generally buy into a company’s history; they’re buying into its future.
They need to understand how their cash will be put to best use to improve shareholder value. Your management will often be the best critic of your story. If they don’t buy it, you probably need to go back to the drawing board.
Be open on your company’s capital strategy. Idle cash on the balance sheet isn’t a compelling story, even with a clear, medium-term business plan. EY’s most recent global M & A update reveals widespread deal-making strength has led to higher deal volumes.
Aggregate deal value in the first quarter of 2014 of US$66.6 billion was topped only once in the past six years, by the post-dotcom-bubble record of US$71.2 billion in the third quarter of 2013. Key themes include smart mobility, investment in cloud/SaaS solutions, mobile video game technologies and bets on the evolving wearable and internet of things. At what stage could New Zealand businesses raise capital?
For seed (start-up) and early stage (product development) companies, there’s a healthy local angel, friends and family – and now crowd funding – network out there to get companies not yet ready to enter the venture pipeline up and going. Most rounds of US investor funding (and the most money-generated) usually come when a company begins generating revenue.
As lucrative as it can be to invest in young startups, most venture capital and private equity funds diversify their investments among companies at various stages, investing up and down the value chain.
Corporations are also active in venture investment as they realise it can lead to the ability to fold innovation and technology into their own organisations Great stories, opportunities, confidence and capital are all out there it’s just a case of connecting!
But don’t forget: revenue solves a lot of problems.
The US state: Are we in a bubble?
US venture capitalist Jeff Grabow says we're not in a VC bubble.
Data from the EY US Venture Capital Centre highlights that US venture capital funds raised substantially more cash from 1997-2002 (US$230 billion) than from 2009-Q1 2014 (US$89 billion).
Conversely, from 2011 to 2013, the number of deals and dollars invested were flat - around 3650 deals and US$34 billion each year. Compare that with a peak of 6300 deals and US$95 billion in capital deployed in 2000.
In New Zealand, since the start of the GFC, with increasing commercial pressures and an absence of local venture capital funding; there has been a marked increase in public listings, foreign acquisitions and investments by offshore funds, particularly in the past two years.
In the past three years, at least six TIN 100 companies have listed: Snakk Media, Wynyard Group, SLI Systems, Serko, IkeGPS, Eroad, Gentrack, and Vista Entertainment Solutions. Two more, Wherescape and Orion Health, are likely to list before the end of the year.
Since 2010 over 30 TIN and TIN100+ companies have been sold to foreign buyers, including 18 from the US and three from Australia. In the past two years at least six US largely high profile US investors have invested in TN100 companies.
These include Valar Ventures, Matrix Capital Partners, Khosla Ventures, Intel Capital, Capital Royalty and The Riverside Company.
Greg Shanahan is managing director of the Technology Investment Network Ltd and Anthony Self is an executive director in the Transactions team at EY. The views expressed in this article are the views of the authors, not EY. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information.