About the Bill
The draft legislation was tabled in Parliament on 22 August.
The highlights are:
- the guardians of NZ Superannuation (colloquially known as the NZ Super Fund) will manage the fund, which unsurprisingly will be called the Venture Capital Fund (or VCF)
- the VCF will be a fund of funds. i.e. it will invest in multiple private venture capital funds (VCs), who in turn will invest in (predominantly) NZ tech companies. We are big fans of this multi-fund approach, as the breadth and competition it will bring to tech investing means good news for companies and founders
- the Super Fund will appoint NZVIF to manage VCF’s investment activities. i.e. NZVIF will select the VCs who will receive funding, and will manage the fund’s investment in those VCs.
The Bill itself largely deals with the mechanics of establishing the new fund, and its management and governance. The interesting commercial details, like eligibility criteria for VCs and the investment criteria that each successful VC will be required to follow, are left to a policy statement to be issued by David Parker.
MBIE has released a draft of the policy statement for targeted industry consultation last week. Industry workshops are scheduled for 12 September and 16 September, with the consultation period closing on 20 September. You can email firstname.lastname@example.org for a copy of the consultation document.
This may seem like a tight timeframe, but the Minister is aiming to have the Bill in force by the end of 2019. The intention, it seems, is to have the VCF deploying funding to the first VCs as early as possible in 2020.
About the policy statement
The draft policy statement proposes that the VCF:
- must invest at least 70 percent of its funds in VCs with a New Zealand connection, i.e. funds that are New Zealand tax resident or with a permanent establishment in New Zealand, and who have at least one senior investment professional resident in New Zealand.
- may invest up to 30 percent of its funds in overseas VCs, provided those funds are earmarked for investment in New Zealand.
- may co-invest with its VCs, up to a threshold of 20 percent of its New Zealand investment fund and 20 percent of its international fund.
VCs must match the funding received from the VCF with at least an equal amount of private funding. VCs will need to invest:
- 75 percent of their total funds, not just funds received from VCF, in Series A and B raises by New Zealand companies. Series A is defined as a raise of $2 million to $5 million, and Series B as a raise of $5 million to $20 million.
- Up to 25 percent of total funds may be invested deals outside this critera – i.e. in seed, Series C or later deals, or in non-New Zealand entities (with a hard 10 percent limit on non-New Zealand investments).
We expect the consultation process will refine these details, probably to give VCs a little more flexibility around investment decision making.
However, regardless of the details, we think the large amount funding on offer, coupled with the developing depth and strength of New Zealand’s tech sector, will make VCF funding highly attractive to NZ’s investment community.
What will all this mean for our tech sector?
The best-case scenario is that the new fund spurs a wave of professional VC style seed, Series A and B investment activity, as happened in Singapore in response to similar Government programmes. If this happens, this will likely create powerful momentum for the New Zealand tech sector.
There will be some impact on the current investment landscape:
- Angels may return to their sweet spot: there will be less of a call on angel and high net worth investors to lead investments in Series A and later stage deals. Over the last few years, this has strained NZ’s investment ecosystem as these expansion/go big or go home investment propositions have soaked up a lot of angel and high net worth capital. We expect angel investors to refocus on earlier stage deals requiring smaller investments offering higher returns, i.e seed and pre-Series A investing
- Less angel-led follow on rounds: angels will be less called upon to provide follow-on funding to paper over the existing Series A gap. It will be great for companies and angel investors alike to have access to VC investors to pick up the baton and lead future funding rounds
- An icrease in available angel money: with less angel and high net worth money tied up in follow on rounds and leading Series A type deals, we think that over time there will be more angel capital looking for a home. This could see Angel groups looking for new and exciting deal flow, for example University spinouts which are currently not a big feature of our startup ecosystem.
VC funds to watch
We expect to see the likes of Movac, GD1, Tuhua and Punakaiki polishing their resumes and information memorandums. Some of the PE funds with a successful track record of investing in tech, like Pioneer and Pencarrow, might also be thinking about this opportunity.
We also expect overseas fund managers to think about setting up in New Zealand to take advantage of the new funding and activity this will stimulate. Blackbird have timed their run to perfection with the announcement of Partner Sam Wong setting up a dedicated, Auckland based NZ fund. It won’t just be the Australian VCs that are interested, we are also aware of interest from some niche investors in the US and Southeast Asia.
VCs will want to get their applications into VCF as early as possible, in order to get amongst the current crop of New Zealand tech companies seeking out Series A and B funding. Equally, we think the VCF will want to start deploying funding as soon as possible, because investment horizons are long. The sooner the money is deployed, the quicker the New Zealand VC sector will develop and boost New Zealand tech companies.
How will VCs win?
As far as the VCs themselves are concerned, we think there are two key elements they will need to address to be successful both in terms of deal flow and investment returns:
- Nailing their value proposition: because there will be many VCs competing for the same deals at the same time with similar amounts of money available, they will need a well-defined value proposition to pitch to investee companies. This will include domain knowledge, industry connections, founder friendliness and international connections
- Promoting their connections to other later-stage funds: connectivity to international follow-on funding will be crucial. For many high growth companies, the NZ VC funds will not be large enough to provide funding through to exit, so connections and relationships with larger international VCs will be critical to maximising the growth and exit value of portfolio companies. Even in a much larger and more developed capital market like Singapore, this is still a critical focus for local VCs.
We are excited about the VCF and the energy it will bring to the sector in 2020 and beyond.
This was originally published on Simmond Stewart's website.
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