“The cows don’t care,” says Icehouse Ventures chief executive Robbie Paul, when asked about the “big chill” not facing the venture capital sector amid high-interest rates, the economic slowdown and now a bout of banking blues following the collapse of Silicon Valley Bank.
“New Zealand has always ebbed and flowed,” says Paul, who heads an operation that is this week marking a decade of managing venture capital, from an initial $500,000 fund in 2013 to the $616 million holding value of its live investments today.
“A lot of the headlines and a lot of the data about the music stopping are with reference to offshore markets that peaked a lot higher than we did and will trough lower.”
And he maintains that good investments are likely to survive any kind of economic weather, which is where our livestock comes in.
“The way I described it to one of our companies, Halter [a maker of smart collars for remotely managing herds], was that ‘The cows don’t care. They want to be milked. They want to eat good grass. They want to be treated well.’ Meaning so long as you’re building a product that solves a real problem, in a large and durable market, the day-to-day flow or year-to-year flow of macro conditions don’t matter as much.”
Beyond Halter, other recent Icehouse Ventures investments include support for e-waste startup Mint Innovation’s $60m Series C raise, med-tech Kitea Health’s $6m seed round, tax software startup Hnry’s $35m Series B, and Partly’s record-setting $37m Series A raise.
Like its peers, Icehouse Ventures typically co-invests in early-stage companies with other VC firms, and high-net-worth individuals.
Icehouse Ventures’ largest single investment, which it classes in the “more than $25m” bracket, is Halter (now incorporated in the US), where other backers include Australia’s Blackbird Ventures and Rocket Lab founder Peter Beck.
Icehouse Ventures’ second-largest punts, in the “more than $15m” tier, are Mint Innovation (e-waste), Dawn Aerospace (propulsion systems for satellites) and Crimson Education.
And its third largest tier - all in the “more than $5m” bracket - are Parrot Analytics (ratings for the streaming age), Hnry (tax for sole traders), First AML (regulatory compliance), Tradify (job management for tradies), The Insides Company (gut health devices) and Ask Nicely (customer surveys).
All of the above are in relatively promising positions, if still relatively early in their life.
“The most gratifying thing is that now there are 20 companies [Icehouse Ventures has invested in] generating more than $10m revenue, four, generating more than $20m and one generating more than $100m. Collectively, they’re employing about 3000 people, mostly in New Zealand, which is a great impact,” Paul says.
“At the earliest stages, I would say a company like Heart Lab, which is doing AI for echocardiograms, or Hawke’s Bay-based Croptide, which can measure the water needs of plants - I call it a smartwatch for permanent crops - those are solving important problems and have very promising futures.
“On the other end of the spectrum, you’ve got companies like Henry or Halter or Dawn Aerospace, which have genuinely cracked their market. They’ve got product market fit, they’re winning offshore. They’re teams of a hundred, generating tens of millions in revenue.”
The exact nature of that success is still to be written. The above all chip in healthy contributions to the $616m total holding value of Icehouse Ventures’ investments. But private, early-stage companies’ valuations are somewhat arbitrary. It can take a trade sale or IPO to throw them into sharper relief.
But by its very nature, venture capital is high risk. Most startups fail. The industry’s modus operandi is to make many investments, on the basis that a handful of hits can outweigh those who tread water or drown.
Paul says Icehouse Ventures has had 43 failures to date - defined as having less than $1 returned for each $1 invested.
He says examples include Upside Biotechnologies (which until its demise in 2020 was developing a process to take a small amount of uninjured skin from a burn victim, then use it to create lab-grown skin for grafts), Uproar (which aspired to offer video gamers real-life rewards for hitting various milestones in their favourite title), and Area360 (a “storytelling app for cultural organisations”).
The average time from first investment to failure was 4.1 years.
The average age of the companies that failed was 6.5 years.
Icehouse Ventures has 242 live investments.
Paul says high-performers in the lineup include Shuttlerock (digital video ads), First AML (anti-money laundering compliance), LawVu (software for running an in-house legal team), Joyous (HR software), Tracksuit (brand tracking), and Foundry Lab (metal casting).
Icehouse Ventures began as an offshoot of Icehouse, the Auckland-based business incubator. In 2019, it brought in three high-profile new shareholders: KiwiSaver provider Simplicity, Sir Stephen Tindall’s K1W1 and wealth manager Jarden.
Simplicity also committed to investing up to $100m of KiwiSaver funds over the next five to 10 years into funds managed by Icehouse Ventures and invested in high-growth businesses. Simplicity managing director Sam Stubbs billed it as the first investment by a KiwiSaver provider in a venture capital fund.
Earlier this week, Stubbs told the Herald, “We took a stake in Icehouse Ventures, and invest in their funds, because it simply makes sense to combine the reach and capabilities of Icehouse with the scale and patience of Simplicity. KiwiSaver is a natural match for venture capital, because it takes time and patience to help Kiwi entrepreneurs achieve their potential. And when it works, the returns are great. But you have to be patient.” (Befitting an economic downcycle, Stubbs managed to use the “p” word three times in four sentences.)
At the time Simplicity first bought in - four years ago - Icehouse Ventures had invested $106m in 165 companies. Today, it has invested $360m in 307 firms.
If not touching quite the nosebleed high of the US, our venture capital scene grew strongly during the first two years of the pandemic.
Fuelled by cheap money, and co-investment from the Crown-backed NZ Growth Capital Partners’ $300m Elevate Fund (established in early 2020, primarily via the NZ Super Fund’s first investment in venture capital) total VC invest in NZ early-stage firms boomed to a record $160m in 2020, then exploded to a new all-time high of $258m in 2021.
The final tally has yet to come in for 2022, but it was the year that a “big chill” arrived as interest rates rose, recession fears mounted and Elevate’s kitty started to run dry (the Government is still umming and ahing over whether to top it up).
And now 2023 has suffered the jolt of the Silicon Valley Bank collapse, and wider fallout for the banking sector worldwide.
Although they don’t shout it from the rooftops, economic headwinds are not necessarily bad for VCs.
Raising money becomes more challenging, of course. But a slowdown also sorts the wheat from the chaff as startups come under pressure. And as founders’ options dwindle, VCs can negotiate harder and invest at less frothy valuations - or even in down-rounds.
And although this week started in rather hairy fashion as regulators took control of Silicon Valley Bank and froze its accounts, things had brightened even by mid-week as the US Government stepped in to guarantee all SVB depositors’ accounts, including those over the usual US$250,000 threshold for a Federal guarantee.
“The announcement has prevented a venture capital ice age. Most alternative responses would have wiped out a generation of tech companies and New Zealand would not have been spared,” Paul said on Tuesday.
In fact, there could even be an upside. While banking stocks have suffered, early indications are that the SVB episode, and its broader ripples, will put downward pressure on interest rates.
Icehouse stages pitch events, where budding startups can make their case for investment, Dragon’s Den style.
What does Paul look for in an early-stage company?
“In venture, in most cases, you are indexing heavily towards the pedigree of the people,” he says.
“If you look at the investment data of the 307 companies that we’ve backed, you can see that companies that are started by people who have unique domain experience, who have experience with growth companies, and who are building businesses that do something more than just make money, deliver better outcomes.”
That’s one thing that hasn’t changed over the past decade.
Politicians are urged to prioritise unity and decisive action amid economic challenges.