New Zealand should get ready for more Silicon Valley investments. Two Silicon Valley household names Scott Nolan and Sam Altman says they will be looking for innovative Kiwi companies to invest in.
Their view is there has been a discernible growth in the startup ecosystem, leading to a higher density of startups in New Zealand creating new and exciting opportunities in the tech sector.
“It is highly likely that we would in the future be investing in more companies in New Zealand,” Nolan told Idealog.
Nolan is a partner at the $US2 billion Founders Fund, started in 2005 by Peter Thiel and Ken Howery. The fund has invested in Airbnb, Palantir, SpaceX, Dropbox, Spotify, and Facebook among others.
Altman is president of Y Combinator, a startup accelerator which provides seed funding and bootcamps for startups. In the past 10 years Y Combinator has funded over 700 startups.
The two are on a part-work and mostly-holiday tour of New Zealand over the summer, stopping first in Queenstown.
They spoke to a sold-out event in Wellington on December 17 and will be speaking to another packed-out event in Auckland today.
Scott Nolan, Founders Fund
Y Combinator already has two investments in New Zealand, one in Glass Jar, an online platform for flatmates managing finance, and Science Exchange, an ebay of sorts for those conducting science experiments.
Founders Fund has no direct investments in any New Zealand company but its founder Peter Thiel has personally invested in Xero.
“We are seeing more and more reasons to invest in startups outside of Silicon Valley,” Nolan says. He adds that New Zealand has developed specialist industries centred around world class technology, and there is opportunity for layering over that.
Their key message for startups is that it is completely possible to build a global business out of the antipodes.
“What I would say is you can be ambitious, you can compete on the world stage and can create world-changing companies,” Altman says.
Startups do get faced with the “valley of death” problem, he adds, when they are trying to raise money to expand - typically at Series A and B capital raising stages.
This can be a problem when you have, for example, 10 companies to raise money from in New Zealand. “That’s when you have to head over to the US, raise your money there, spend a few months travelling around. But once you raise your money, you can operate out of NZ,” according to Altman.
“The Valley has become increasingly a difficult place to operate, it has become quite expensive. Silicon Valley investors are now more open to investing around the world,” Nolan says, adding New Zealand offers, among others, a lower cost of living.
Altman says the size of New Zealand would also make it an ideal place to build and test products and services aimed at servicing government. “An example is, if you were building drones, in the US, you have to wait around 4 years for legislative decisions. Startups find it hard to operate under such uncertainties.”
New Zealand’s size also makes it easier to test quality, gain feedback, and deploy services aimed at government.
New Zealand has unique advantages as a consequence of being a small country, Altman says.
Sam Altman, president, Y Combinator
Another key takeaway from Nolan and Altman is don’t give up when investors tell you your product is not going to work.
Nolan, who used to work as an engineer in SpaceX before it became a huge success, says: “Before we launched the rocket, everyone kept saying to us what we were doing was stupid, and that it would be the worst investment made.
“But we kept the customer engagement. We talked to people, knew they wanted a reliable, low-cost transportation to space,” he says.
The few factors that led to SpaceX succeeding was that it kept developments going; focused on listening to what potential customers want; making sure there was progress on what it was developing. “Sure, we didn’t always succeed in doing what we set out to do but, after each failure, we got closer to what we set out to do,” Nolan says.
When asked how they spot which companies would succeed, Altman who started investing since he was 19, adds: “It is easier to predict failure than to create success."
YCombinator for instance, looks about about 10,000 companies per year, investing in about 250. “We have a huge volume of data (about the success, failures). It is not rocket science.”
What becomes clear is those who succeed are usually those with a clear mission to change the world, to deliver something to the market they operate in. “The founders of Airbnb, for instance, believe they are working on something that is important to the world,” Altman says.
Most successful startups are not driven by money, Altman says. This is especially true for those who end up building multi-billion dollar companies who have had chances to sell out earlier on.
Nolan adds that Founders Fund meet more than 1,000 companies per year and “once you have been a part of this, you get an intuition on what it takes to be successful and you can spot that in people when you meet them.”
Being mission-driven ranks high on the list of being investible. The hallmark of being mission-driven, Nolan says, is demonstrated by those who push on despite having to operate under difficult circumstances. It has to do with keeping on, especially at the level when things are “so horrible, you think things can’t work, on a suboptimal level, you keep pushing things financially to the level where you think you will quit or sell.”
And when does a startup realise it is time to cut loss? Altman says it is always helpful to get outside advisers to provide reality checks.
Some internal checks startups can do include keeping the conversation going with the market, getting users' feedback on whether you are creating a product that people want; whether the product is doing what it is supposed to do (and if not, how to find ways to fix that), and tracking the project’s development milestones.
And when startups throw too much money for a Christmas party, it is time to get worried. Altman says raising too much money is not always good. “There is a strong correlation between those who raised US$30 million to $40 million in their first round, to those who fail. It important to build a culture of frugality.”
Kiwi startups are however pretty resourceful at making do with very few resources, Nolan says.
“What we have seen is startups are very ‘scrappy’ [resourceful]. They take what they have, to push on with what they have to do.”
Nolan and Altman are in New Zealand after a consortium rallied together to make their visit a success. These include AUT University, CreativeHQ, Derek Handley, GridAkl, The Icehouse, KiwiConnect and Lightening Lab.