Fundraising for New Zealand Startups: Leveraging the 'Kiwi Card'

New Zealand's Evolving Tech Startup Ecosystem

With a population of 5 million, New Zealand has experienced notable changes in its tech startup environment in recent years. Companies such as Xero, Rocket Lab, LanzaTech, and Seequent have brought international attention to the nation’s burgeoning startup sector.

Historically, access to venture capital has been limited within New Zealand. The country’s economy has traditionally been driven by exports of agricultural goods.

Traditional Funding Sources

Consequently, New Zealand’s startup ecosystem has largely depended on financial support from affluent individuals and family offices. These investors often accumulated their wealth through industries like real estate and agriculture.

Government Intervention and Foreign Investment

In March of the previous year, the New Zealand government introduced Elevate, a NZD $300 million fund-of-funds initiative. This program aims to address the gap in early-stage capital by providing funding to local venture capitalists for investment in startups.

Simultaneously, an influx of foreign investors has been observed, drawn by New Zealand’s track record of fostering successful companies. Founders and investors alike are optimistic that this increased funding from diverse sources indicates a potential shift towards technology as a key national industry.

The continuation of this positive momentum, particularly regarding early-stage capital availability, will be crucial for realizing this potential.

Insights from Industry Leaders

To gather valuable advice for New Zealand founders aiming to succeed in the market, we consulted with prominent figures in the industry. These included Peter Beck (Rocket Lab), Cecilia Robinson (Au Pair Link, My Food Bag, Tend), Phoebe Harrop (Blackbird Ventures), and Robbie Paul (Icehouse Ventures).

The following represents a compilation of the key insights gleaned from these conversations.

• Peter Beck, founder of Rocket Lab, offered guidance on navigating the challenges of scaling a hardware-focused startup.
• Cecilia Robinson, with experience across multiple successful ventures, shared perspectives on building and managing consumer-facing businesses.
• Phoebe Harrop, a principal at Blackbird Ventures, provided insights into what investors look for in New Zealand startups.
• Robbie Paul, CEO of Icehouse Ventures, discussed the evolving landscape of venture capital in New Zealand.

Embrace Bold Ambition and Self-Confidence

A common tendency among New Zealanders is a lack of expansive vision, often failing to initially consider global opportunities, according to Beck. This inclination stems, in part, from the prevalence of “tall poppy syndrome” within New Zealand culture. This phenomenon involves the criticism, undermining, or active sabotage of individuals who demonstrate success.

Consequently, many individuals are discouraged from striving for prominence.

“The process of establishing a company is demanding and requires substantial effort,” Beck explained to TechCrunch. “Why dedicate resources to creating a small enterprise when the potential exists to build something significantly larger? Focus on addressing substantial challenges.”

To prepare for tackling these significant challenges, it’s crucial to avoid excessive modesty. Paul highlighted that New Zealand consistently demonstrates exceptional performance, fostering world-class entrepreneurs and innovative tech startups.

“Have confidence in your abilities and recognize your potential for success on an international scale,” Paul conveyed to TechCrunch. “Although initiating a venture from a geographically remote location presents obstacles, numerous benefits also exist.”

Key Takeaways for Entrepreneurs

• Embrace ambition: Don't limit your vision to small-scale ventures.
• Cultivate self-belief: Believe in your capacity to succeed globally.
• Recognize advantages: A unique location can offer unexpected benefits.
• Overcome cultural barriers: Challenge the constraints of "tall poppy syndrome."

Successfully navigating the entrepreneurial landscape requires a willingness to challenge conventional thinking and a firm belief in one’s own capabilities. The New Zealand context, while presenting unique hurdles, also provides a fertile ground for innovation.

Global competition demands a proactive and confident approach. Entrepreneurs must be prepared to address large-scale problems and pursue ambitious goals.

The Pitfalls of Prioritizing Investment Size

According to Beck, the most crucial contribution an investor provides isn't simply financial capital. He emphasizes the importance of evaluating investors based on their strategic value and network. Entrepreneurs should carefully consider whether a potential investor offers more than just a substantial check.

During the development of Rocket Lab, Beck prioritized investors based on their connections, not solely on the amount of funding they offered. He explained that the ability to leverage an investor’s network can be more valuable than the capital itself.

Leveraging Investor Networks for Growth

Khosla Ventures’ involvement in Rocket Lab’s Series A funding round, for instance, facilitated an investment from Bessemer Venture Partners in the Series B round. Subsequently, DCVC spearheaded the Series C funding.

As Rocket Lab progressed to its Series D round, Bessemer Venture Partners played a key role in introducing Greenspring Associates, a limited partner (LP) of Bessemer. The company’s Series E round attracted participation from sovereign wealth funds, who were also LPs of Greenspring.

“As a company expands, access to increasingly larger capital pools becomes available,” Beck stated. “However, an investor lacking extensive connections, such as someone local, won’t possess the necessary relationships to reach sovereign wealth funds.”

Building a Pathway to Larger Investments

Beck advocates for structuring a company to facilitate access to larger funding rounds by tapping into the limited partners (LPs) of venture capitalists. This creates a clear pathway to attract substantial investments, potentially reaching $100 million or more.

A streamlined path to funding is essential; a truncated or nonexistent path presents a significant challenge. He points out that New Zealand, despite having improving venture capital firms, often lacks the established relationships with LPs necessary for securing large-scale investment.

The Necessity of Foreign Investment for Global Expansion

For companies aiming for global reach, Beck asserts that securing investment from international sources is vital to obtain the follow-on funding required for proper scaling.

“Significant investment amounts, such as $100 million, are not readily available within New Zealand,” he concluded.

Securing Favorable Term Sheets for New Zealand Startups

Due to a historical lack of substantial capital investment, New Zealand’s startup ecosystem possesses limited experience in crafting effective term sheets. These documents must benefit both founders and the long-term scalability of their businesses. Experts Harrop and Beck have observed that traditional funding sources – angel groups, universities, and crown research institutes – have frequently established unfavorable terms that have hindered, or even terminated, the progress of New Zealand-based startups.

Harrop explained to TechCrunch that issues include undervaluation, investors demanding payment for fundraising, and excessive early-stage equity acquisition. These practices can severely restrict a company’s ability to pursue venture capital and attract subsequent investment. However, with increased foreign investment over the past 12 to 18 months, term sheet quality has demonstrably improved. Founders, particularly those outside of Auckland, should prioritize strong investor relationships and carefully evaluate all options before accepting an initial offer, according to Harrop.

Below are specific warning signs identified by Harrop and Beck that founders should be aware of:

Concerning Valuation Metrics

Beck noted that average valuations in New Zealand are approximately 50% lower than those of companies emerging from Silicon Valley. Harrop recommends that startups initially focus on valuation as a consequence of achieving key product and commercial milestones, rather than as a starting point for negotiation.

The question to ask is: “What funding is required to reach these milestones and maintain a viable venture-backed trajectory?” Then, determine a valuation that limits initial equity dilution to between 10% and 20%.

Founder Equity Retention

To ensure continued access to venture funding, founders should maintain majority ownership of their startup in the early stages.

Harrop stated that it is challenging to envision a continued venture capital path for teams where full-time founders collectively own less than 70% of the company when seeking institutional investment. Early-stage investment fundamentally involves backing the founders and their vision; therefore, they must retain significant ownership.

Founder Stock Vesting Schedules

Implementing founder vesting – a process where stock is earned over time – is crucial. This prevents a departing founder from retaining a substantial, fully vested equity stake.

Harrop emphasized that co-founder disputes are common, and a significant vested equity holding by a departing co-founder can render the company uninvestable.

Unanticipated Expenses

While modest legal fees for transaction documents are expected, founders should not be required to pay their investors a fee simply for securing funding, Harrop clarified.

Employee Stock Option Pool (ESOP)

Harrop advises allocating 10% to 15% of shares for an ESOP. This pool can be used to attract and compensate employees, new hires, and advisors with equity instead of cash.

Evaluating New Zealand Incubators

While numerous incubator programs and workshops exist throughout New Zealand, Beck cautions that not all provide the necessary support for securing follow-on funding and scaling the business.

Beck expressed skepticism towards incubators lacking individuals with proven experience in raising substantial venture capital on a global scale, warning that they can perpetuate the cycle of reliance on smaller, local angel investors with limited networks. He likened these networks to organizations like Federated Farmers, questioning their relevance for software companies.

However, Beck acknowledges Outset Ventures, an Auckland-based incubator with a deep tech fund, as an exception, praising their provision of funding, guidance, and access to a global network.

When uncertain, Beck suggests firsthand experience – traveling to Silicon Valley to understand the system’s dynamics.

Prioritizing Business Building Over Fundraising

Robinson observed that some founders prioritize fundraising over building a sustainable business. She noted her own success in building businesses with limited external capital, particularly in the B2C space, where a substantial New Zealand customer base exists.

“New Zealand offers a dedicated market of 5 million people. Companies can achieve significant scale relatively quickly within this market, without being lost in larger markets like the U.S. or Australia,” Robinson told TechCrunch. She cited My Food Bag as an example of a company that achieved substantial profitability and revenue, comparable to global food delivery leaders.

The recommendation is not to avoid global expansion, but to establish a strong business model and proposition within the domestic market before venturing offshore, where marketing costs can be substantial and visibility can be limited. Robinson also highlighted the supportive nature of the New Zealand business community.

Leveraging the “Kiwi” Identity

Paul emphasized that New Zealand’s international reputation is a significant asset. The country is often associated with stunning landscapes, the “Lord of the Rings” franchise, and a progressive government that prioritizes citizen well-being.

“The ‘Kiwi card’ can be a powerful conversation starter,” Paul said. “Most international contacts have a positive perception of New Zealand.”

The Kiwi Expat Association (KEA) estimates that nearly 1 million New Zealanders live abroad, representing a significant diaspora. Paul recommends leveraging this network to connect with influential individuals in global organizations.

“KEA can facilitate connections with Kiwis who are willing to champion emerging New Zealand startups,” Paul added.

Embracing Virtual Collaboration

While face-to-face meetings remain valuable, Paul noted that the increasing acceptance of virtual meetings presents a significant opportunity for New Zealand startups. Given the challenges of international travel – lengthy flights and high costs – embracing virtual platforms is more practical than ever.

“The shift to virtual collaboration levels the playing field for Kiwi startups, making it easier to connect with investors, customers, and team members globally,” Paul concluded.