Business owners like Plantae CEO Lisa Friis (R), who spent a year persuading supermodel Rachel Hunter to front her skincare brand, need cash to expand. (Photo: Plantae).

Closing the gap: Why this Budget may offer hope for cash-starved NZ firms

If commentators are reading the tea leaves right, the government is gearing up to put its money where its mouth is and help businesses caught in New Zealand’s infamous funding gap.

Lisa Friis doesn’t strike you as the sort of woman who needs help getting in front of potential investors.

Tall, with a stylish blonde bob, the CEO of organic skincare company Plantae is an 18-year veteran of the international investment banking industry and an angel investor herself. She spent a year persuading celebrity model Rachel Hunter to front her brand. “I don’t give up,” the Nelson-based businesswoman says.

Yet Friis presented at the New Zealand Trade and Enterprise-organised ‘InvestHer’ showcase aimed at raising the profile of female-founded businesses, because “it’s hard when you’re on this side of it, as a woman trying to raise money.”

Plantae is already exporting around Asia and has big goals for the Chinese market. “This is really important, because of the pull New Zealand Trade and Enterprise have. We’ve got a roomful of people that actually want to spend money.”

Also presenting at InvestHer was Yabble, a venture aimed at disrupting the traditional market research model by offering consumers a way to profit from their data. Its founders Kathryn Topp and Rachel O’Shea have lengthy experience in the market research and marketing sectors respectively, and are arguably further ahead on the business development curve than others at the showcase. “We learned quickly that we probably didn’t place as much value on our idea as others did. It was to do with naivete I think, not necessarily our gender,” O’Shea says.

“It was a positive event. I think sometimes you need positive discrimination to help those who struggle.”

Just three to seven percent of venture capital worldwide goes to female-founded businesses, and the InvestHer showcase of nine mostly or solely female-founded companies was an attempt to redress the balance, NZTE investment manager Teresa Pollard says. The agency has copped flak for the women-only focus, with some claiming that female-founded startups get their share in New Zealand’s buoyant angel investment sector.

But InvestHer had a double purpose, Pollard says. “My vision was, wouldn’t it be great to promote and celebrate female founders. Number two, wouldn’t it be great to showcase them to people who typically don’t invest in startups.”

It is why NZTE persuaded share broking and investment banking firm First NZ Capital to co-host the seminar. “When I presented the data, the growing number of female entrepreneurs, they’d never thought about it,” she says.

“They could be contributing to and advising on the next Xero, the next Pushpay of New Zealand.

“If they don’t lean in early and start impacting what’s happening in early stage capital they won’t get the IPO (initial public offering) pipeline that they need, and we won’t see the next people listing on the NZX and ASX.”

Pollard refers to a problem that has nothing to do with whether you’re a male or female business founder. The inescapable truth is that there’s an almost complete absence of funding available in New Zealand for startup businesses to graduate to the next level. Homegrown ventures such as aerospace darling Rocket Lab and biotech success story LanzaTech may go offshore for a host of reasons, but you can be sure that among them is this country’s infamous funding gap – a grim void of next stage investment, known in the trade as venture capital (VC).

It is fair to say that New Zealand now has a healthy angel investment sector, and entrepreneurs with a decent, well executed idea can usually find backing for their fledgling enterprises. Latest figures show around $80 million was invested in early stage companies in 2018, up from just $24m in 2008.

It’s at the next hurdle that the wheels seriously come off. Last year a paltry $20 million of domestic venture capital funding was invested into companies at the expansion stage, an amount that has barely moved in several years. Based on the number of new enterprises coming through, the New Zealand startup sector estimates it’s short anything from $200m to $300m a year in funds needed to grow businesses beyond the early stages.

Tauntingly, there is a steady flow of funds from private equity firms willing to invest in businesses once they mature. But during those awkward teenage years of building a business the local well is all but dry.

“We really don’t have a venture capital industry,” says Jenny Morel, founder of No 8 Ventures, New Zealand’s first US-style venture capital fund. “I think we’ve overdone the angel funding level and completely underdone the serious capital that comes with advice and connections, and ability to connect with offshore VC firms.

“I think that is holding our companies back. And we’re now seeing more and more companies going offshore… and unfortunately that means we lose the CEOs to live overseas, and we lose the important part of the company.”

Things are stirring of late, however. This week business incubator The Icehouse announced Icehouse Ventures, an entity that will manage $100 million worth of investment over the next five years in startup companies seeking to expand. Partners in the new initiative include the aforementioned NZ First Capital, and Sir Stephen Tindall family’s venture capital fund, K1W1.

The money is being put up by KiwiSaver provider Simplicity – the first time a KiwiSaver fund manager has invested in this more riskier end of business, managing director Sam Stubbs says. “This is a fantastic opportunity for our members to tap into a broad range of New Zealand’s boldest and brightest companies,” he says.

Sam Stubbs, Robbie Paul and Matt Blackwell of Icehouse Ventures. (Photo: Supplied.)

Back in 2002 New Zealand had no such thing as a venture capital sector. The government of the day’s solution was to set up the New Zealand Venture Investment Fund (NZVIF), with the aim of jump-starting an industry by investing taxpayer dollars alongside private funds. Today it has $245m in funds under management, but has not received any additional government funding for some years.

Many argue while NZVIF has been a successful catalyst for our now thriving network of angel investors, a new strategy is needed to crank up the crucial expansion investment sector. The fund is currently awaiting instructions from the government on what future role it will play in the New Zealand venture capital sector.

Meanwhile the government’s innovation agency, Callaghan Innovation, has released a curious report. Growing the Pie highlights New Zealand’s ‘unicorns’ – the nine or so businesses built by NZ entrepreneurs that are today worth more than $1 billion. These include Rocket Lab, now an acknowledged American company, online auction site Trade Me which was sold to British private equity firm Apax this year, and LanzaTech which is also US-based.

The report espouses the benefits of NZ businesses being sold offshore. In more mature economies a successful sale, or exit, is almost always a cause for celebration and New Zealanders rarely forget their roots, Callaghan Innovation CEO Vic Crone says.

“It’s understood that the entrepreneur, and others in the innovation ecosystem, will reinvest the money they’ve earned and the lessons they’ve learned back into their communities. They’re highly likely to grow another business,” she says.

The report catalogues the diaspora of Navman, Peter Maire’s navigation technology venture which was sold to a US buyer in 2004 for $100m. Maire used the proceeds of the sale to invest in a range of enterprises including health tech company Orion Health and GPS crystal maker Rakon, with varying success. Navman itself spawned several businesses including fleet management specialist ERoad and marine electronics firm Navico.

Growing the Pie quotes leading lights of the New Zealand innovation sector, such as Stephen Tindall. Overseas sales are part of New Zealand transitioning from a nation of farmers and SMEs to people who think about how to grow global companies, he says. “When we exit them, then obviously we use the profits to grow more of them, so it’s a whole ecosystem. I really do believe we should just keep pouring petrol on the fire, and don’t be scared about selling shares offshore.”

Andrew Simmonds is a commercial lawyer who specialises in startups and raising capital. “I do think that publication is entirely political,” he says.

“I think it’s designed to address nervousness, or to provide cover, because in the upcoming Budget they’re going to announce major further investment in the venture capital sector.

“That’s my reading of the tea leaves, that there is going to be an effort made to re-stimulate the creation of professional venture capital funds in New Zealand.”

The nervousness is because this involves the government investing tens of millions of taxpayer dollars in companies that could still potentially be sold offshore

“I agree with what Callaghan Innovation is saying. We shouldn’t worry about that, because that creates tremendous benefits back to the New Zealand economy, not only through the capital but through the expertise that grows and is repeated in the application of new ventures,” Simmonds says.

“That’s the whole basis of Silicon Valley, of the Israeli incubation system, and the emerging Singapore system.”

A local venture capital industry won’t get going without some form of government stimulation, but it’s not like promising firms can’t find funding, he says. International VCs are getting more and more interested in New Zealand companies, particularly our creative business-to-business software solutions such as Xero.

“The capital can be found generally, eventually,” Simmonds says. “It is just a missed opportunity if we don’t do it (create a local VC sector).”

Government sources are coy on the prospect of an upcoming announcement. A spokesperson for Finance Minister Grant Roberson said the details of the May 30 Budget were still being finalised and it wasn’t possible to say whether there would be anything in it regarding NZVIF.

Callaghan Innovation’s Crone acknowledges growing NZ firms face a funding gap, particularly when they reach that crucial point of needing to raise between $2m to $20m, and that many are forced to cede control to overseas investors before they’re ready.

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Solutions to the funding gap are complex, and while governments can have a role “ultimately the private sector needs to be the one that addresses it because that’s where the biggest returns are”, Crone says.

Meanwhile National revenue spokesperson Paul Goldsmith says his party is set to discuss initiatives for stimulating the venture capital sector.

“I think there is an opportunity for government to play a role, and the legitimate debate is how far that extends. That’s something we’re going to be openly debating in our policy process in the second half of this year.”


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