Did Covid kill startup investment? Report reveals 2020 figures

A new report on NZ startup investment, from PwC, the Angel Association and NZ Growth Capital Partners, celebrates the recent offshore sale of software companies Seequent ($1.45 billion) and Vend ($450 million) as a coming-of-age.

The twin deals represent "the realisation of value at this scale creates not only an opportunity for founders and investors to reinvest funds and expertise in new startups, but it also attracts a wider pool of investors to New Zealand to help get future startups off the ground. We now have a startup ecosystem that is more self-sufficient and sustainable," says PwC partner Anand Reddy in the report.

And Reddy says the future looks bright, in part because fears of a new tax break for R&D being too narrow to make up for scrapped Callaghan Growth Grants have proved unfounded.

Interest in New Zealand startup investment did not diminish in 2020, despite some dire predictions early in the year as Covid-19 struck. A total of $158m was invested into 108 deals, and this is the third year of $100m-plus of investment in startups and also the third year of more than 20 per cent year-on-year growth in dollars invested, Angel Association chairwoman Suse Reynolds notes.

NZTE investment GM Dylan Lawrence says, "We are seeing a two-speed economy emerging in New Zealand, with those in the tech sector more likely to be thriving, as businesses around the world explore the use of more technology. Because of the pandemic, digital or digitally enhanced offerings are in peak demand.

"The qualities that underpin our tech sector - agility, inventiveness, a practical approach to problem-solving, and willingness to collaborate in partnerships - work really well in such a challenging time."

The report profiles online education startup Kami as an example of an NZ startup that has prospered globally during the pandemic.

But there's no red meat in terms of recent headline trends in the sector, including:

• Australian venture capital funds' increasing activity on this side of the Tasman

• The wrenching evolution of Crown agency NZ Venture Investment Fund (NZVIF) to the new NZ Growth Capital Partners - which saw government money for startups dramatically expanded with its new $300m Elevate fund, with $240m from the NZ Super Fund, which now also has an oversight role in investments. For context, the old NZVIF invested a total $173m in startups between 2002 and 2019.

• The fact that many NZ startups "struggle to fully develop because of the shallowness of specialised domestic early-stage capital markets" as a Treasury report on venture capital put it (the report coincided with the NZVIF/NZGCP shakeup).

• The old chestnut of the "need to shift investment from our excessive focus on property" as the same Treasury report put it.

The property question is touched on briefly in a profile of Publons, the Wellington academic publishing startup sold to US company Clarivate in a multimillion-dollar 2017 deal.

Tech entrepreneur Dave Moskovitz says: "It's easy to get to $1 million, it's how to get from $10m – $100m that's the challenge."

For many tech startups, that's meant looking offshore - which has often led to being sold offshore, with mixed results.

"The property market attracts a huge amount of capital to what are unproductive assets. But only a fraction of investment in New Zealand is going to early-stage productive assets, at a time when New Zealand is lagging against other similar economies."

Moskowitz muses, "We need to think, can we bring the next 15 years down to five or 10 years, so we mature more quickly? What would that take? More specific government policies? Curriculum changes? This would be a game-changer for New Zealand."

Part of the solution, the US expat says, is to move beyond our celebrated DIY/making-the-best-of-what-we-have mentality.

"While it's great that we're willing to 'have a go,' in order to be successful at scale we need to stop doing this. We need to go get that specialist experience, looking for it overseas if necessary. The number 8 wire approach is a good starting point, but when you get beyond that, you need specialist skills."

$14m for agritech fund

Meantime, the Crown, via NZGCP's new $300m Elevate fund, continues to be the largest player on the local angel investment scene, as it continues to follow NZVIF's model of co-investing with NZ or offshore funds.

Elevate is committing $14m into the Finistere Aotearoa Fund, which will target agri-technology companies needing Series A and B investment, NZGCP said this morning.

The Finistere Aotearoa Fund - a subsidiary of Silicon Valley venture capital fund managers Finistere Ventures - will match Elevate's commitment at least dollar-for-dollar with private capital. That means at first close at least $28m will be available to invest into agri-tech investments in New Zealand-connected entities.

Finistere Ventures is aiming for a final close of $42m, which if achieved would see Elevate's contribution rise to $21m.

The New Zealand operation will be managed by long-time investment manager Dean Tilyard, and based in Palmerston North, NZGCP says.

Finistere Ventures, which was co-founded by Arama Kukutai, a New Zealander based in California, has a global agri-tech focus with offices in the United States, Ireland, Israel and New Zealand. Kukutai was recently named one of the Herald's top 20 emerging tech leaders.