Auckland-based online grocery start-up Supie tried and failed to raise $3m in venture capital shortly before its collapse. It had previously raised around $7.5m.
Auckland-based online grocery start-up Supie tried and failed to raise $3m in venture capital shortly before its collapse. It had previously raised around $7.5m.
The failure of online grocery firm Supie has shone a light on start-ups, and their increasing difficulties raising money.
Here’s an explainer about venture capital (VC): why it’s suddenly gone from feast to famine and why the two main political parties have cold-shouldered proposals to help the sector.
A start-up founder has a bright idea, but often anticipates years of losses before they can win over enough customers to get into the black (Supie, founded in 2021, forecast its first profit next year, when its founder Sarah Balle anticipated 100,000 customers, from around 60,000 at the time it closed its doors).
It’s often too high-risk to get a loan from the bank. Instead, start-ups turn to venture capital firms - who work on a model that sees them make investments in many start-ups, on the basis that most will fail but a handful will become big hits.
In Dragon’s Den style, a VC takes a share of a start-up in return for their money - say $1 million for a 30 per cent stake.
Start-ups usually stage a “seed” round, when they seek typically hundreds of thousands of dollars, before a “Series A” raise, often in the single-digit millions, then, all going well, “Series B” and “Series C” raises that run into the tens of millions.
Data released ahead of Budget 2023 confirmed New Zealand had been caught up in the global venture capital crunch, with early-stage companies pulling in $112m of funding during the second half of 2022 - a 43 per cent drop from the record-breaking first half of 2021. Photo / 123rf
In Supie’s case, it raised $2.5m in a 2021 round led by Auckland-based VC firm Icehouse Ventures. Then, last year, it raised $3.9m from another, emerging alternative: crowd-funded equity, via the Snowball Effect platform.
VCs and founders ultimately want an “exit” - which could be the start-up listing on the sharemarket in an initial public offering or IPO, allowing venture capital firms, founders and other investors to cash out or at least sell down their stakes, or a “trade sale” - the start-up being sold to a larger, established company in its sector. In Supie’s case, it might have been bought by, say, The Warehouse Group to bolster its grocery operations.
Here’s why the venture capital landscape has suddenly got a lot meaner.
1. Higher interest rates
The pandemic saw record low interest rates, plus Governments pumping stimulus money into their economies. This cheap-money worldwide boom in venture capital from 2020 through to mid-2022, in New Zealand and worldwide. After that, rising rates saw investors’ money lured elsewhere.
2. The exhaustion of the $300m Elevate Fund
In 2020, the Government sought to goose New Zealand’s sluggish VC scene with the creation of the $300m Elevate Fund. Elevate co-invested with private VC funds, making it easier for them to raise money. It also helped to attract a wave of US and Australian VC firms to New Zealand.
It helped feed the boom. But now, Elevate is nearly exhausted. (Elevate got $40.5m in Budget 2023, but it wasn’t fresh funding but rather the final instalment of the funding allocated three years ago.)
The outgoing Government created the Startup Advisors Council, consisting of some of our most successful entrepreneurs and venture capitalists, to come up with a list of ideas to help early-stage companies.
But neither the Labour-led Government nor National adopted that idea. As things stand, Elevate will simply run dry.
The Startup Advisors Council also recommended tax breaks for people who invest in venture capital funds, and removing barriers for KiwiSaver funds to invest in start-ups. Both concepts got the cold shoulder from the two main parties.
In fact, across Labour and National, only one start-up-friendly idea featured in their manifestos: National’s pledge to provide for more visas for those working in tech. National also promised to investigate one of the Startup Advisors Council’s ideas: removing a tax on unrealised gains on employee stock ownership plans (esops), which would make it easier for cash-strapped start-ups to reward or lure staff with shares.
One glimmer of hope for VCs and start-ups: likely Technology Minister Judith Collins says the new Government will consider extra measures once it’s in power and has a better lay of the land, although she has cautioned that tax breaks for start-up investments are likely off the table, saying Government debt levels are too high.
3. Meaner VCs
The worse the economy, the easier it gets for venture capital firms to drive a hard bargain. High-performing start-ups can still play VCs off against each other. But, overall, it’s become a buyer’s market. That VC that would give you $1m in return for a 30 per cent stake in your company will now want a bigger chunk.
Supie was willing to stomach a dreaded “down round”, or raising money at a lower valuation than a previous funding round. In its final months, it tried to raise $3m at a $6m valuation, according to emails sighted by the Herald - way lower than the $20m valuation used for its $3.9m raise through Snowball Effect last year.
But it still wasn’t enough to attract new investors. Icehouse - which joined other existing investors to put another $1m into Supie this year, according to Paul - did not want to tip in any more funds. Nor did any other party (a second Snowball Effect campaign was part of the mix) as the grocery start-up’s bid to find $3m failed.
4. A push for profit
During the pandemic boom times - and any tech bubble - VCs are happy for start-ups to rack up losses as they prioritise growth and piling on customers. Today, start-ups who are in the black, or have a clear path to profit, are more likely to attract venture capital money. And as Supie recently discovered, there’s less patience for current investments, too.
5. Blah tech stock performance
During much of the pandemic, tech firms’ share prices shot to the moon. But then tech stocks fell back to Earth. That matters, because VCs often use the valuations of publicly-listed companies in the same field - a reference point when VCs put a value on their holding in a start-up, or assess what they think a start-up is worth.
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.
