The 2019 budget put aside $300m for venture capital for small to medium-sized startups with the hope it will allow businesses to grow locally and stay in New Zealand for longer.
In a small rural town on the east coast of the North Island a cannabis-growing business is planning for the future. The first seed, planted just over three years ago after a hui about the regeneration of the rural Gisborne region, has now grown into the Hikurangi Cannabis Company. Their farm in Ruatoria is far from the boardrooms and tailored suits of a shiny investment firm, but Hikurangi has managed to raise millions by convincing investors to take a risk on medicinal cannabis.
The 2019 budget set aside $300m for venture capital to help make it easier for small to medium-sized businesses, like Hikurangi, to grow. The government wants the new fund to facilitate businesses to take the next step in expansion. It has been welcomed by small businesses that say venture capital has been underfunded for a long time, and will help keep startups in New Zealand as they expand.
While new businesses are well served, the package provides much-needed support for local mid-sized startups in the $2m and $15m range, said economic development minister David Parker at the budget announcement. “The world is in the middle of a technological revolution and we need to chase down as many of these commercial opportunities as possible,” Parker said. The goal is to “lift the level of innovation in New Zealand”.
Local success stories have relied on venture capital to reach their potential and the fund is designed to make that success easier to access. When the UBCO’s electric farm bike was thrust into the spotlight of the American market with extensive media coverage after it won the innovation award at Fieldays 2014, they needed money to grab that moment. Without the help of investors on each step of their journey, UBCO would not have been able to enter the US and Australian markets so quickly.
“Investment has been critical to UBCO’s birth and growth. We wouldn’t exist without investment and we wouldn’t continue to exist without investment,” said CEO Timothy Allan.
After building its brand as an efficient, environmentally friendly alternative to the farm bike, the Tauranga company is now targeting the urban environment. It wants to offer a low-emissions alternative to the city car or moped commute. The experience of international expansion and growth into new areas makes Allan excited for the potential of the $300m fund to make it easier for businesses to access the tools they need to grow.
“It’s important for businesses like ourselves, and I’m absolutely sure it will encourage and assist more companies to get moving and to be internationally successful.”
For small companies, taking the leap to ask for a big chunk of capital funding can be intimidating and confusing. A lot of work goes into ensuring companies are presenting a well-thought-out plan to potential investors. This is not as easy as it sounds, according to Nick Hosking, senior commercial manager at Kiwibank.
“It’s not like going to an ATM and saying ‘I have an idea, can I have some money for it?’ The process takes a lot of time to get right,” he said.
“These companies need to do due diligence in terms of products, market penetration overseas, and putting together what we call an information memorandum for prospective clients and investment from investors. It’s a lot of work; it’s not easy to access venture capital.”
While many brands have great ideas, products and people, when it comes to proving the numbers, they may need a bit of extra help, said Hosking. Not everyone is Nadia Lim pitching her ‘My Food Bag’ idea.
“It can be hard to do it alone, but there are plenty of great business support networks out there who can provide guidance around the process, as well as your business banking manager at Kiwibank.”
The Hikurangi Cannabis Company has had to deal with huge risks as it establishes itself as a medicinal marijuana grower. The company was the first in New Zealand to hold a licence to grow medicinal cannabis, but medicinal cannabis is yet to be legalised. It was a risky move for their investors.
“The social enterprise and the mission of the organisation was probably a greater driver for that initial investment than people making a lot of money. People could also look around the world at the cannabis industry and see that a lot of prohibition was lifting,” said CEO Manu Caddie.
“We know it’s super risky – it’s not even legal for commercial production in New Zealand – but there seems to be growing scientific evidence for use of the plant in medicine, so people can see that it’s a real thing.”
Caddie believes it costs money to make money, and good advice is always worth paying for. He has made sure he has surrounded himself with great people.
“Having the best lawyers and investment bankers has put us in a good position.”
While it’s important to be on top of your numbers, Allan believes investors will ultimately be more likely to give money to people they connect with. “While I don’t think it’s the be-all and end-all, I think it’s important that people know who you are, ideally for the right reasons.
“If people don’t feel comfortable with you then it won’t eventuate. It’s about finding specific investors who fit with you and your company, and that takes time. The more people you talk to, the more you realise it takes time and effort to get investment.”
Caddie agrees that it’s the people and the mission that often attract investors, especially to high-risk businesses. “Surrounding yourself with people who have been there before and have some experience helps those of us who haven’t been in business before. The people make a company more attractive to investors. It’s not all about the revenue.”
Now the new $300m fund presents a huge opportunity for New Zealand businesses where traditionally the biggest funding gap has existed, according to Hosking. Companies have often relied on the private sector during the second round of investment when they’re positioned to scale and can start to get thirsty for cash. This fund will hopefully provide a public sector alternative that will have long-term benefits for New Zealand.
“I certainly think [this new fund] is a great start. If this goes some way to keeping more of our innovative businesses based in New Zealand, then I am all for it.”
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