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The investors who fund startups are pulling in their heads in the US and Australia, and slashing the value of their existing holdings amid rising interest rates, recession fears and a dive in tech stocks on public markets.
Industry players say New Zealand might not get hit so hard, however, given that investors here have been more conservative and bought in at cheaper levels. As well, local venture capital is usually involved in relatively modest Series A rounds rather than the later-stage Series B and C action where investments can be much larger. So although this country has seen record levels of venture capital investment over the past two years, we never hit the frothy heights seen in some markets.
"[While] venture funds are just as subject to the vagaries of international markets, we have tended, particularly for those ventures which have received the bulk of their venture funding from Kiwi funds, to have been a bit more circumspect and conservative about valuations," Angel Association of NZ executive chairwoman Suse Reynolds told the Herald.
"New Zealand deals have traditionally been 'cheaper' than their international comparables given the added challenges of scaling from less mature, shallower capital markets."
And a VC insider said the grief for a lot of the venture capital industry involved Series B or C capital raises.
"These are the mega rounds which can be $100m or more of investment. This is the place [Australian software company] Canva was sitting, and where valuations got super crazy.
The startups with the best metrics - the top 25 per cent - can choose between domestic and offshore funding, the insider said, and could attract the unicorn hunters willing to invest at "crazy" valuations in Series B or C rounds.
But "Kiwi VCs usually invest in the seed and Series A stage. And because New Zealand VCs tend to invest earlier, our valuations never saw the same degree of intense run-up and intense mark-downs. The offshore VCs are much more exposed to larger valuations which have higher to fall," the insider said.
Another big difference: here, a huge player in the VC market is the Crown-backed NZ Growth Capital Partners (NZGCP) and its $300 million Elevate Fund, launched in March 2020. The NZ Super Fund topped up NZGCP's usual funds with a $270m injection as part of a Government-bankrolled bid to gee up the local VC market.
And gee it up it has. The record VC activity of the past two years has been in no small part because of Elevate's investment in local funds - a spend-up that has drawn big names from across the Tasman to co-invest for the first time, or dramatically increase their New Zealand activity.
Two-thirds of Elevate's money was spent at a rapid clip.
Elevate has now deployed $194m, NZGCP chief investment officer James Pinner told the Herald this week.
That leaves $106m in the kitty in terms of NZGCP's own money, but Pinner says there's a lot more on tap due to its co-investment model.
For example, on May 30, NZGCP said it was committing $30m to Blackbird Ventures' second New Zealand fund, which is anticipating raising $70m from other investors, so it will have a total $100m to invest in Kiwi startups.
Pinner says for every $1 chipped in by NZGCP, private VC funds have invested around $3.50 of their own money.
And of the total $800m or so raised by VC funds backed by NZGCP since March 2020, only 34 per cent has been deployed so far.
"So there's a lot of powder that's been kept dry," Pinner says.
NZGCP also runs the Aspire fund, which invested about $15m in seed capital last year. As things stand, says Pinner, about the same amount will be invested this year - but that could be increased if market conditions get tougher.
Offshore, the tough times have well and truly arrived.
On July 7, the New York Times reported that for the first time in three years, venture capital funding was falling.
Investments in US startups fell 23 per cent over the past three months, according to market tracker PitchBook.
And across the Tasman, venture capital investment in Australian tech firms in June was down 53 per cent (to A$408m) compared with June last year, according to Cut Through Venture, which surveys the Aussie VC scene.
And the largest Australasian VC, Blackbird Ventures, turned heads last week when it slashed the valuation of its highest profile investment, Canva, by US$14.4 billion (or 36 per cent) to US$25.6b.
Blackbird said it had reduced the value of some of its funds "by up to 30 per cent".
A key reason was a change in valuation methodology.
Like many of its overseas peers, the Aussie fund had based the private equity valuation of a company in its portfolio on the valuation agreed to by private equity investors in its most recent raise.
Now, with its more mature investments like Canva, Blackbird says it has moved from "last round" methodology to a "mark-to-market" valuation, where an external value uses comparable listed companies as the benchmark.
A partner at one of New Zealand's larger VC groups was unimpressed by a Blackbird post outlining the change.
"They made it sound like they had invented some new and better way of doing things versus moving to the same process that all New Zealand VCs already use," the partner said.
"Typical bloody Australians."
Some across the Tasman are in more rueful mood.
Paul Bassat, the Melbourne-based co-founder of Square Peg - one of Blackbird's chief rivals - posted on June 30: "It is worth reflecting on what we have got wrong over the last year. We either knew, or should have known, that we were in the very late stages of an incredibly buoyant market. In hindsight, our pace of investing should have been slower than it was."
Bassat warned that Square Peg was making provisions for likely write-downs in the months ahead.
While no monthly scores are published, there is anecdotal evidence that New Zealand's VC market remains relatively buoyant, at least for the time being.
Two new funds have emerged.
Entrepreneur Derek Handley recently launched a $44m fund with a focus on environmentally-friendly startups.
And Mark Pavlyukovskyy - a Ukrainian entrepreneur who recently relocated to Queenstown - is in the advanced stages of raising $20m for the newly minted NZVC fund.
Icehouse Ventures said this week that its Seed III fund, which opened in March, had not only raised $35m - some $5m over its target - but secured the funds in just four months, a record clip for Icehouse.
"Kiwi entrepreneurs have proven again and again their success is largely separated from these economic conditions, with startups like Lanzatech and Rocket Lab emerging around the 2008 crash," said Icehouse chief executive Robbie Paul.
Blackbird is now targeting $100m rather than its original $80m for its NZ Fund II.
And there are still plenty of startups landing investments, but they're finding they now have to jump through more hoops.
In late June, Portainer - an Auckland-based cloud software maker - raised $10m in an extension of a Series A round that raised a total of $19m. Founder and chief executive Neil Cresswell told the Herald it was very much a game of two halves.
His firm breezed through the first leg of its raise last year. With the second tranche, "there was significantly more due diligence, and more focus on how the money would be spent. It was a lot more mechanical."
Cresswell said there was still money to be landed - Portainer's $10m raise in June was led by Wellington's Movac - "but the days of 'here's some money, go wild' are gone".
Another qualifier is that it scored a third of its NZ Fund II money from NZGCP's Elevate, which has been such a fillip for the local scene.
What will happen when the final third is depleted?
Will the Government chip in another $300m? Pinner says discussions over Elevate's "next vintage" are still at an early stage. The amount will depend, in part, on the performance of the fund's first wave of investments. And on that front, Pinner says while swoons in valuations, like Canva's, catch headlines, there's only one valuation that matters: the point where NZGCP sells its stake - and for a typical investment, that will be five years down the track.
Meanwhile, the post-election rally cooled in the United States.