Supie faced competition from established supermarket giants. Photo / The Spinoff
OPINION
The easiest job of any venture capitalist is identifying why a start-up could fail.
The service or product may not work. If it does work, it may not be economical. If it is economical, the team may not be able to sell it. If the team can sell it, they may not be able to outclass competitors.
These risks and others were identifiable when we became shareholders in Supie as part of its second capital raise in December 2021.
Many observers have tweeted conclusions related to Supie’s failure over the past two weeks. In some ways, they are all correct. Start-ups often fail as a result of a combination of many challenges.
In other ways, none of them are correct. The challenges highlighted are identical to those faced by some of New Zealand’s greatest success stories. More on this below.
Icehouse Ventures has funded 320 start-ups since 2001, of those 47 have failed. In portfolio reviews we have struggled to identify patterns or common causes. Some fail because their technology does not work. Others due to market or regulatory shifts. And some simply cannot attract the capital they need.
In one review, we compared the companies that delivered positive returns to those that resulted in losses in light of three features that most investors agree are critical ingredients for success: experienced founders, deep and relevant insights, and globally unique technology. Was there a glaring delta between those who were successful and those who failed? No.
Venture capital firms are defined by outsized returns generated by a small portion of the portfolio. As an example, our $100k investment in Crimson in 2014 has already returned two times more than the entire 10-company fund it was in - and our remaining shares are worth another seven times the fund. That two of the 10 companies have failed is not consequential.
Competition is part of the game.
There’s one factor that deserves less credit for Supie’s failure: competition. Sure, Foodstuffs and Woolworths are formidable competitors. The reported annual revenue of Foodstuffs North Island was $4,299,346,000 in 2023.
How could an investor in their right mind support a start-up like Supie in light of such competition?
Accounting software company Intuit was 23 years old and generating $6.7 billion in revenue when Xero was launching, uh, accounting software. Online marketplace TradeMe was raising $100,000 around the same time online marketplace eBay was valued at more than $5 billion.
Perhaps we should take a time machine back to 2003 and tell the Mowbrays that Zuru is crazy. Mattel is generating $12b in revenue.
The hardest job of any venture capitalist is believing why a start-up will become immense.
Why is this so hard? Because you must form beliefs that are unbelievable. A start-up based on a “believable” mission or “reasonable” objectives will not deliver outsized returns. An efficient market will exploit the opportunity long before a start-up can grow to capture it.
In the same month we first funded Supie, we also funded fusion energy start-up OpenStar, a company attempting a scientific feat that many consider impossible, and Brain-Computer Interface start-up Transaxon.
LinkedIn billionaire and venture capitalist Reid Hoffman shared a view that investors must do two things to be successful: (1) Form a view that is contrary to others and (2) Be right. Facebook investor Peter Thiel suggested investing in start-ups that are at the intersection of “seems like a bad idea” and “is a good idea”.
Investors must maintain their beliefs despite waves of bad news, budget blowouts, and deadline overruns. Want to take a guess at how many of our 320 companies have achieved their original three-year forecasts? Two! (Crimson and Ethique).
Just two years prior to selling for hundreds of millions of dollars, one of our companies had only a few days’ cash left. It is never easy to determine when “the last chance” should be provided with an additional investment.
Investors must also maintain their resolve despite voices of authority suggesting otherwise.
Plenty of investors have volunteered that their friends in the industry could have told us Supie would fail. The same messages came through from the finance leaders when we funded Sharesies, FMCG leaders when we funded Ethique, and aerospace leaders when we funded Dawn Aerospace.
Investing is not a single decision.
In July 2016 we invested $180k in a nanotech start-up and $250k into Mint Innovation (a company that uses micro-organisms to extract gold from electronic waste). Both companies had teams of two, were based on robust research, and had the potential to generate significant value if key technical milestones were met.
Seven years later, we have invested $1.1m in the nanotech start-up (which is still going well) and $17.9m into Mint Innovation. What’s led to the 10 times difference? Successive investments based on key milestones and clearer evidence of the company’s potential to generate massive value.
Supie is a similar story. Our funds made a calculated seed-stage investment on terms that could result in a great return without needing everything to go splendidly. We had 0.17 per cent of our funds invested in Supie at the time they failed.
The approach of “concentrating capital” is when an outlier start-up’s extraordinary growth will be responsible for the majority of returns from any fund. This is observable across the industry and closer to home with legendary venture investor Sir Stephen Tindall’s investment entity K1W1. Their investments in Rocket Lab and Lanzatech became magnitudes larger than they started as a result of successive milestones and capital raises.
Our Growth Fund II has attracted more than $75m this year specifically to execute on this strategy. It invests in a subset of companies that have survived the tumultuous seed stage and are typically 5 to 7 years old with teams of greater than 50, millions in revenue, and most importantly, have the potential for more growth ahead of them than behind them.
While any individual investment within a fund like Growth Fund II still comes with its commensurate risk, start-ups that reach this phase are - by and large - out of the woods. There’s more growth potential in front of them than behind them.
These start-ups are beneficiaries of all of the battle scars and learnings from the unsuccessful ones - start-ups like Supie.
Do I regret that Supie could not achieve key commercial milestones, attract new investors, or merit larger allocations from our funds? Definitely.
But do I regret backing Sarah? A mission-driven, tenacious, and exceptional founder. Absolutely not.
- Robbie Paul is CEO of Icehouse Ventures
Auditors PwC: Cited disruptions to operations from that IT upgrade.