Elevate NZ Venture Capital Pulse Check 3

As part of our Elevate fund update, James Pinner (our Chief Investment Officer) advised that we have now deployed $198 million into eight venture capital funds since Elevate's launch in 2020. You can view all details of these investments HERE on our website. These eight funds have invested in 97 Kiwi start-ups (more details on some of these below).

The overall performance of Elevate is beginning to trend upwards following some significant up-rounds raised by, and strong performance of, underlying portfolio companies, partially offset by some impairment provisioning to account for downward pressures to valuations since 2022.

We continue to see meaningful impact to the amount of capital available at the Series A/B space in New Zealand, with round sizes trending higher since Elevate inception. We are currently working with policymakers to lift the Series A/B definition that Elevate uses for its portfolio allocations and which it imposes on its underlying funds (from a current maximum of $20 million) to accommodate for this positive trend in the ecosystem.

We do, however, anticipate the worsening macro-economic condition to constrain capital flow in New Zealand, especially from the US which is still grappling with the end of quantitative easing and the fall of Silicon Valley Bank and broader global macro-conditions. There is a clear rebound from the exuberance of 2022.

Internationally, especially in later-stage companies, there is a pronounced shift in focus from growth to profitability, and demand for lower valuations. We are yet to see this fully reflected or accepted in New Zealand. International venture capital funds are being significantly more selective than just a year ago and we anticipate that offshore investments i.e. into Kiwi start-ups will be significantly more challenging but will not dry up completely.

Domestically, bridging rounds are becoming a regular occurrence given slow acceptance of down rounds and increasing difficulty to fill more meaningful capital raises. Venture capital fund managers are also noting a more difficult fundraising environment with offshore investors moving closer to home amidst the uncertainty, and local institutions (i.e. KiwiSaver) still having very limited appetite for New Zealand venture. They recognise the risk of fund raising in the current environment and this is likely to continue for some time yet. However, as noted from the previous pulse session, we don’t feel that there is a need to panic. Funds still have capital to deploy and the pipeline of companies coming through is still strong. The better companies are more prepared, increasingly capital efficient, and more patient in waiting for the right partners.

New Zealand start-ups have come from a long culture of being relatively under-funded and making the most with limited resources and we have seen little evidence of excessive hiring as seen in other parts of the world. These times will be tough for start-ups but this inbred mentality of doing a lot with a little will be extremely valuable through the next few years.

All of us need to continue to support teams and their mental wellbeing but it is also pleasing to see that there has already been much more focus on this in the last few years.

It was also very telling that there were a lot of new faces in the room and the market has grown substantially and is far more diverse than when Elevate started in 2020.

These challenging and uncertain times create opportunities. In particular, an opportunity for local funds to support each other and New Zealand start-ups. Syndication will be a key part of this, and we hope and expect that domestic funds will continue working together to support the most promising Kiwi companies.

There will always be bumps in the road, but we have all the tools in place to continue growing this vital sector, we just need to keep the momentum going and focus on our collective vision for New Zealand technology start-ups and their potential impact on the world.

While there are some pockets of good news in the industry, the difficult raising environment and broader global macro-environment is dampening the mood in the technology start-up ecosystem.

In spite of, and because of this, the group is committed more than ever to deliver commercial returns and tell a cohesive story of venture capital’s meaningful role in the future of New Zealand. This would be key to attract institutional capital in the asset class and to continue meaningfully supporting the most promising start-ups in the country.

• We see great promise in this vintage of Elevate with potential power law companies beginning to emerge within our underlying funds. Meaningful uplifts are still being observed even through market-wide pressures on valuation:
  • Halter raised $85 million in Series C this March 2023
  • Mint Innovation raised $60M in Series C last February 2023
  • Partly raised a record $37 million Series A last December 2022.
• Several other portfolio companies are growing very well, and we have a strong pipeline of companies at the Series A+ stage which is still receiving interest from overseas investors.
• The guarantee provided by the US Federal Reserve to fully protect depositors resulted in limited impact to the few portfolio companies of Elevate underlying funds that had funds in Silicon Valley Bank.
• Collaboration has been strong especially in deep-technology deals. Venture capital funds have been willing to open their due diligence to others and to invite the wider ecosystem to invest. This is encouraging given the typical capital intensity of deep-tech companies early in their life and the need for strong access to capital to succeed.
• The Active Investor Plus (AIP) visa is now available for individuals willing to invest at least $15 million into New Zealand. The group sees this as a massive opportunity to attract needed talent and increase available capital into the ecosystem.

• Venture capital activity continues to be slow and is expected to be slow for at least the next 12 months as capital continue to be expensive. Raising money for funds and for companies will continue to be challenging given the current environment.
• There is an uplift in the number of start-ups but quality is very mixed. Good companies are becoming better, but bad companies are becoming worse.
• Institutional capital remains limited given their aversion of the risk of the asset class and lack of local venture capital track record.
• Big corporations are cutting their R&D budget, resulting to less opportunity for partnership (e.g. customer trials) with some deep-tech portfolio companies.

• We need to be better at telling the start-up / technology story and get it to a wider audience. We have a lot to celebrate and can help transform Aotearoa for the better and solve some global problems.
• To attract institutional capital, the group acknowledges a responsibility to:
  • Track our performance better through better consistency and quality in our data.
  • Increase our visibility and deliver a stronger message of our role in forging the future economy of New Zealand.
• Calls for grants to be revisited and work is still needed on tax credits to ensure they could be availed by start-ups. Carl Jones of WNT Ventures is heading the grants stream in the Start-Up Advisors Council and encourages anyone with thoughts on the topic to reach out to him.
• Greater clarity is needed on New Zealand tax treatment of directorships. This is relevant when placing experts from the US in board committees.
• We need to better collate data and provide access to information on other available source of funding, acknowledging that not all opportunities are appropriate for venture capital.
• There were some concerns for the future pipeline due to changes in immigration settings for PhD students.
• As always, a broader call for immigration settings changes to attract the best talent to New Zealand.