Simmonds Stewart is a New Zealand-founded law firm which is focused exclusively on the technology sector and has about many Kiwi tech companies on its books, including a big chunk of start-ups and early-stage companies who have or will raise capital in the future.
It recently crunched the numbers on the 2018 deals done in both its New Zealand and Southeast Asia markets. The trend was telling: the majority of New Zealand’s early-stage tech investing came from the angel community, whereas overseas in Singapore, much of it came from VCs, with a much lower percentage done by angels.
Who was behind the capital raised?
Friends and family
Family office/high net worth individuals
NZ corporate investor
Offshore corporate investor
The significant statistic that stands out when looking at the data is the number of onshore VCs funding companies – in New Zealand, there was just one local VC alongside four offshore VCs, whereas Singapore had 19 local VCs and nine more offshore VCs.
Simmonds Stewart partner Andrew Simmonds says while this data only represents a portion of the sector, it aligns with what the company is hearing anecdotally from tech firms raising capital: New Zealand’s angel industry fills the gaps where a VC typically would be funding.
“There was an early effort by the Government to try to set up a VC ecosystem in New Zealand and that was the original focus of the New Zealand Venture Investment Fund (NZVIF), but the attempt to seed a VC market didn’t work in New Zealand. Where the success did land is seeding an active angel community,” Simmonds says.
“What our data shows is that’s kind of stuck: we have an active angel community, but what that is doing is undertaking investment in early stage companies that in other markets, would be filled by VC firms that are focused on early stage.”
Simmonds says while angel investors have done a great job in New Zealand – and it’s better than having no capital – they’re effectively amateur investors and aren’t full-time in the job, especially when it comes to looking for the company’s next source of capital. High net worth investors or family officers are on the rise thanks to Steven Tindall leading the way, but Simmonds says they’re still not bringing the level of resources a VC firm does.
Because of this, New Zealand’s tech firms are somewhat starved of funding when growing in size, which Simmonds says effectively halts their growth.
“A lot of VC-backed companies overseas have a high growth, aggressive strategy being funded – that’s what Xero managed to do with an IPO strategy, but it’s hard to achieve that sort of funding in New Zealand. So they tend to be more focused on a less ambitious growth strategy, and more focused on shorter-term profitability and less risk taking, while probably selling the companies for less than what would otherwise be achieved there was a higher-growth strategy being pursued.”
While angel investment does the best that it can at filling the gaps for bigger deals, many of New Zealand tech sector’s biggest success stories, such as 90 Seconds, Vend and Xero, have pulled in overseas VC firms to leverage the capital needed to scale up, while some have moved their operations out of the country entirely. Rocket Lab founder Peter Beck told Idealog last year that his company moved offshore due to New Zealand’s lack of a VC community.
“Let’s not beat around the bush – in New Zealand, there is no venture capital community here,” he said. “You’ve got folks like Steven Tindall trying to make a difference and doing a good job, but apart from that, the venture capital industry in New Zealand is shocking. I’ve seen so many good companies destroyed by angels, as they’re not providing what good VC does well: recommendations, information, knowledge, and the ability to reach out to a new network.”
This cap on potential investment in the market no doubt mentally hinders New Zealand entrepreneurs’ aspirations for their companies, too. Culturally, Beck said he’s observed how New Zealand founders aren’t bold enough in how big they think they can scale their companies to be.
“When I go to start-up events and listen to entrepreneurs talk, they talk about how they can’t wait to make their first million, while the same group of entrepreneurs in America are talking about how they can’t wait to make their first billion. There’s a scale issue and a cultural shift that needs to occur.”
An industry-wide approach was put forward by Spark chief executive Simon Moutter in 2016 when he proposed that New Zealand companies join forces to create a $100 million venture capital fund in response to the low level of investment, but this was canned due to a lack of interest from other companies and organisations.
Simmonds says despite musing over the years about how to kickstart the VC community in New Zealand, there’s really been no headway been made. The aforementioned idea of a giant corporate and government fund might not have been wise, he says.
“Singapore and other markets’ beauty is that you’ve got lots of smaller sized VCs who are very nimble and have their own specialties of what they invest in. They compete for deals, which means they’re incentivised to work really hard and offer things like connections to the next round of capital, whereas if you have one big, monolithic capital fund, there’s no requirement for them to do that. Unfortunately, we like models in New Zealand that have the one ring to them all approach – like Fonterra,” he says.
Average deal size
Average pre-money evaluation
Offshore VCs have also been showing an increased interest in New Zealand companies thanks to the increasing number of high profile success tech stories, but Simmonds says it’s no substitute for having a local VC ecosystem.
“The thing about offshore VCs is they’re most likely going to expect you to move your company to be where ever they’re based – Rocket Lab is an American company now, not a New Zealand company. New Zealand isn’t going to a build a risk capital base by having overseas investors make money out of our high-growth companies,” he says.
But perhaps the answer is to instead look to overseas markets for leadership in this area. Simmonds says in terms of overseas markets, Singapore is the best to compare New Zealand to, as they have a population of a similar scale to ours (5.6 million) and a vibrant VC community.
“They don’t have any industrial base, they don’t have a defense industry, they don’t have a space industry, and they don’t have car manufacturing – but they’ve been investing and creating a tech sector with nothing but smart people,” he says.
“Being a country that has to make the most of intellectual endeavours, there’s a lot of similarity between us and Singapore. Whilst the economies are different, there’s a lot of things they do in terms of how they intervene to promote their tech sector are all things we’ve done to some degree to differing degrees of success.”
While Singapore’s start-ups are focused on finance and servicing the massive economic region surrounding them, Simmonds says New Zealand’s strength lies in SaaS companies that solve business problems efficiently.
So if the government were to re-attempt getting a VC ecosystem in New Zealand off the ground again, he says it might be an entirely story now.
“We tried to create a local VC community – very early, before Singapore, probably too early, and now there are the companies to invest in but we’ve kind of scared at intervening in the economy in this way. I think we should look at what Singapore has done and give it another go – it’s a relatively small amount of money and the gains could be significant considering New Zealand and how we’re succeeding in the knowledge economy.
He says the VC ecosystem here in New Zealand would help grow and develop New Zealand’s SaaS sector, which has already been proven to be incredibly promising.
“Our tech sector is a lot more mature, now and it’s a lot more obvious what we’re good at. The VCs who are investing in robotics and flying machines and aerospace – okay, we’ve got a rocket company – that’s an outlier. What we’re really good at is software and it doesn’t require massive capital bets to be scalable,” Simmonds says.
“It really suits the Kiwi skillset of being able to fix problems with clever application of tech, rather than investing in something to change the world – ground-breaking technology – investing in that with VC is really high risk stuff, only 1 in 50 of those might ever work. With software, it’s more around execution and whether that will technically work, which doesn’t require so much capital to work out.”
Looking towards 2019, to counter these funding gaps, Simmonds expects a higher number of New Zealand deals will be led by offshore VCs as Australian funds get more comfortable with investing in New Zealand companies.
Meanwhile, he says SaaS and digital will continue to be where most capital is being invested this year and where most of the sales are going to occur.
“It would be nice to think there would be some more listings of software companies in New Zealand, but I don’t think we’ll see that in 2019, but we’ll see some more sales for hundreds of millions and potentially billions as we did with FNZ last year [the deal valued the company at $3.35 billion]”.
And despite what happens with New Zealand’s VC funding, Simmonds says he remains optimistic about the state of the tech sector.
“I’m actually really positive about the New Zealand tech sector, we have made a bunch of really good decisions that have contributed to what is a really vibrant tech economy in New Zealand,” he says.
There’s lots and lots of potential for growth in high wage and salaries, and employment for younger people to have more opportunity to become owners of businesses or of shares that create significant wealth for their families in the future. Other than buying the family farm in the past, that kind of opportunity just didn’t exist 30, 20 or even 10 years ago in New Zealand.”