VC fund investing: kiwis look set to be much more involved
Punakaiki Fund is one of the oldest Venture Capital (VC) funds active in New Zealand to directly target retail investors in early stage technology. Looking at their latest wholesale investor round got me thinking about the huge global shift in Angel and VC investing that is taking place.
VC investing has historically been skewed towards local investment. When California based Sequoia Capital opened a London office in 2020, Sequoia’s Doug Leone famously said in an interview that “through the 1980s, Sequoia was known for a rule established by its first partners: if we can’t ride a bicycle to it, we won’t invest.”
In 2021 a US Securities and Exchange study found the average distance between a lead angel investor and the target company was only 37 miles (60km). Many thousands of angel investors around the world followed this trend relying on deal flow sourced in their immediate locality.
A study for the Journal of Risk and Financial Management in 2019 argued that “Geographic proximity of an investor firm to its portfolio company was considered crucial for identifying investment opportunities, monitoring, adding value, and achieving higher performance”.
In these early days, groups of angels and VCs, often the products of school or other friends’ networks, got together to listen to local entrepreneurs pitch them deals. Once selected, a deal was then executed by local lawyers, bankers and other partners in the close vicinity.
The rise of these local led ecosystems has many advantages. They enjoy specialist knowledge of local conditions, resources, education and business. Tightly-knit networks of whanau and friends can elevate a community into a powerful engine for innovation and entrepreneurship.
While this local approach worked for more established, connected investors in the past, a different reality is unfolding. Increasingly in NZ there are growing numbers of retail investors who are extremely interested in investing in tech startups but who have little previous experience in doing so. They are realising the opportunities to invest via VC funds that do the hard work of screening appropriate investments.
There are many reasons why this is happening, but we can speak to a few of the most prominent.
+ A widespread realisation that NZ needs to find ways of overcoming its distance from world markets other than exporting heavy goods by putting emphasis on the “weightless economy,” making money from royalties and goods or services that can be exported electronically — including Software as a Service (SAAS), creative industries, digital gaming, international education, communication and construction services, royalties and licence fees, IT, financial and insurance services. This was enhanced by companies like Xero and Vend that sold to overseas interests for very large valuations
The carbon footprint of a new user, while economically significant, is much lower than that of exporting a physical product. Once the product is made, it can be duplicated endlessly with cost and carbon emissions trending toward zero.
+ NZ’s cultural sector has become globally recognised, elevating figures like Taika Waititi, Peter Jackson and Lorde to become influential figures in the entertainment industry.
+ A rising global sensibility towards ESG, has global consumers buying more than just a product. There is greater recognition that NZ’s brand as liberal, democratic, tolerant and increasingly entwined with the values of mātauranga Māori, is increasingly attractive.
+ Declines in the local real estate market, the loss of tax incentives along with warnings from institutions like Goldman Sachs that NZ will likely suffer further falls, have put the discussion of share ownership vs real estate investment firmly onto the discussion forums of many financial sites like the Hatch Investors Club Facebook pages that tend to serve younger investors.
The upshot of these trends and others is they are beginning to change the NZ investing mind set, encouraging investors to seek to know more about investing via venture capitalists. They have exposed investors to startups and to new markets and new opportunities in in early stage technologies.
As Lance Wiggs says, “In New Zealand we have increasingly well-functioning and highly active pre-seed and seed investment communities, and hundreds of companies are coming through looking for their next round of funding”.
In New Zealand, as many successful founders will attest, attracting investment has never been straightforward. Companies graduating from the Angel and Seed stage often struggle to continue their growth as their funding prospects diminish. Some companies go into a “lean” mode, retaining higher shareholding percentages for founders and early investors at the cost of building their businesses more slowly than they otherwise might. This can lead positive results, but it results in too many NZ companies missing out on global opportunities as others move more quickly to take the space. Punakaiki Fund is addressing some of that gap. There is evidence that the market is and expanding to fill most of the obvious gaps, which previously tended to centre on information asymmetries. Clearly in NZ, you don’t know what you don’t know, about investing in NZ.
Kiwis now have the opportunity to connect, as a group, to the wider start up world via the digital platform of their choice. They are exposed online to a more diverse deal flow, and they also get to be part of a broader global community. There are now around more than 65 Venture Capital Funds in NZ.
These local groups with a global outlook are not just providing access to capital for entrepreneurs. They take an active role in nurturing their investments, providing the companies with introductions and business connections from their local network.
These group dynamics can be extremely powerful, creating bonds that go way beyond simple passive investing.
Through these connections, like-minded investors can build a global community where angel groups are not just investing in global companies and getting access to more deals, they can also help their local startups get access to a broader range of business opportunities in multiple geographies that smaller startups would find hard to penetrate.
There are thousands of VC groups around the world, but in NZ, this is just the start of their international development.
#vcfunding #venturecapital #NZventurecapital #startups #techstartups #Punakaiki #leanstartup #saas