New Zealand, a country of just under 5 million people, has historically flown under the radar of venture capitalism. A geographically isolated country with a “no worries!” culture and an economy based on raw materials, Aotearoa hasn’t stood out to investors in the Asia-Pacific region, especially not when they could set their sights on larger markets in China and Southeast Asia.
Now, investors see New Zealand as a country with a track record of building companies with global exits in SaaS, health tech and deep tech. Notable companies and exits like Xero, Pushpay, Aroa Biosurgery, Vend, Seequent, Halter and Rocket Lab have put local startups on the map, but the scene is still immature and will need steady direction before it becomes a globally competitive ecosystem. That said, the signs are all pointing to technology being New Zealand’s next export industry, as long as everyone keeps pushing in the same direction.
“For a very long time, startups in New Zealand had been crying out for capital,” said Imche Fourie, co-founder and CEO of Outset Ventures, a deep tech incubator in Auckland that invests in seed and pre-seed science and engineering companies. “That’s changed so much the last couple of years partly because the government’s been putting more initiatives into attracting international capital. It’s been ridiculous how much money is flooding into the country at the moment.”
Despite the pandemic, venture and early-stage investment in New Zealand is reaching record highs. In 2020, VC investments totaled NZD $127.2 million (USD $86 million), up from NZD $112.2 (USD $76 million) in 2019, due to a near doubling of transactions from 46 in 2019 to 92 in 2020. According to Crunchbase, money raised by New Zealand startups increased 30%, from around $1 billion to $1.3 billion, from Q1 2020 to Q4 2021. In addition, in 2020, investors provided more follow-on capital than ever before at 56%, or NZD $109 million (USD $79 million), which shows a dedication to supporting startups through to exit, according to a PwC analysis.
New Zealand investors say most of the money is coming from either international (mainly U.S. or Australian) VCs or the government. Last March, the New Zealand government launched the Elevate NZ Venture Fund, an NZD $300 million (USD $203 million) fund of funds program that invests into VC firms aimed at filling the Series A and B capital gap for high-growth New Zealand tech companies.
The fresh capital signals a shift both in the country’s economy and mindset around diversifying its exports and strengthening GDP at a time when the cost of living is quickly becoming unsustainable for many Kiwis.
Housing prices in New Zealand are among the most unaffordable among OECD nations, and an active supermarket duopoly sees Kiwis spending the fourth-most per capita on groceries in the world. Not to mention the banking and electricity oligopolies running the country. Taken together, you’ve got a society primed for wealth inequalities.
For a country with limited resources that relies on trade, developing thriving tech exports may not just be a good idea — it may be a necessity to survive.
“We’ve long had a strategic focus in New Zealand on moving away from commodity exports like timber, wool, milk powder, and attracting more value for what we export,” Phoebe Harrop, a principal at Blackbird Ventures, a New Zealand and Australia-based VC, told TechCrunch. “Technology startups are the pinnacle of that strategy. And it’s something we should be good at because we have a really good education system and we have this unusual cultural dynamic of people going out and spending time overseas in Silicon Valley, London, Amsterdam, Berlin, getting world-class experience, and then usually wanting to return home and do something here.”
Blackbird was the first to benefit from Elevate with a $21.5 million funding round, and GD1 recently got $45 million for its fund that targets early-stage companies on the fast track to going global.
Peter Beck, founder and CEO of aerospace company Rocket Lab and general investor and mentor within New Zealand’s startup scene, said funding isn’t really the country’s biggest problem. It’s the culture that holds New Zealand back.
“Probably the biggest handicap is just not thinking big enough and being prepared to go after the really big ideas and opportunities,” Beck told TechCrunch. “If you think like a small country, then you’re going to be a small country. If you think like a big country, then you can be a big country even if you’re physically not. New Zealanders are really good at tech, and they’re really good at building stuff, but they’re not very good at commercializing stuff.”
Tall poppy syndrome
Most Americans haven’t suffered much from “tall poppy syndrome,” but it runs rampant in countries like New Zealand and Australia. The idea comes from the tallest poppy getting cut down and manifests in a cultural phenomenon in which people who have achieved some kind of success are held back, undermined and criticized. The result is that no one really wants to be a tall poppy.
“We self-sabotage,” said Beck. “When a business does become successful, there’s always an angle of trying to take it down.”
Not only does New Zealand lack a culture of celebrating success — it also fails to celebrate failure, Beck said.
“If you’re an entrepreneur in New Zealand and you blow a company up, you’re done,” he said. “Go get a 9-to-5 job because that’s it for you. Whereas in the Valley, it’s almost like a badge of honor. Like if you blow up a company, well, you’re not going to do that to my company. You’ve learned something. It’s not viewed as pure ignorance. Startups fail for a number of reasons.”
There is a slow shift happening in New Zealand’s startup world around thinking bigger, investors and founders say, and part of that is due to success stories that both inspire and instruct blossoming startups.
“What has potentially been lacking and is now improving is an understanding of what ‘good’ looks like in terms of high ambition and the potential of what technology startup models are, and then internalizing that culture against the tall poppy syndrome, that tentativeness around expressing and pursuing ambition,” said Harrop. “The more people who are exposed to what it’s like to work in a high-growth, mission-driven startup that is trying to create something new and fresh and better for the world, the more people that will be attracted to it.”
A maturing VC scene
Small thinking, poor access to capital and just pure ignorance have led to unfavorable terms for New Zealand startups seeking funding in the past, which has ultimately held back technological developments.
Historically, New Zealand has relied on angel funding and a grassroots LP base that’s backed by individuals who’ve made their money as farmers or through real estate. This has been part of the beauty of New Zealand’s entrepreneurial scene, but it becomes a challenge when you’re talking about scale.
“I don’t know if all founders are well enough educated in how to make decisions on where to take investment from,” said Fourie. “I think we’re still seeing quite a lot of founders just taking the first money that gets offered to them. And so as a result, we are seeing founders who are taking money from investors who don’t do good terms.”
Most of the bad terms are coming out of angel groups, universities and crown research institutes that take far more money than is reasonable for early-stage companies, which will only stifle the startups’ growth later on, Fourie said.
“New Zealand angel investors put in extraordinarily small capital and take an extraordinarily large portion of the company,” said Beck, noting that he’s had to help completely recap companies he’s taken to Silicon Valley because they were “totally uninvestable.”
“The valuation is nowhere near where they need to be; the dilution is super high,” he said. “If you turn up in Silicon Valley trying to raise a round and your company’s valued at $1 million and you’re diluted 30% to 40%, it’s just a non-starter because sophisticated VCs understand that the entrepreneur needs a certain amount of skin in the game, especially when it comes to the later rounds.”
While Beck reckons New Zealand valuations tend to be two to three times lower than anywhere else, he and other investors have noted that this is just a sign of maturity. As more international venture capital firms come in and write better term sheets, more education circulates around New Zealand founders and local investors start to step up their game.
From New Zealand-first to global-first
Whereas New Zealand’s isolation has historically created a “New Zealand first” mindset, the burgeoning tech scene is on its path to maturity by thinking “global first.” Having a global-first mindset can mean building a product that will have global applications; it can mean targeting larger foreign markets for scale; or it can mean choosing international investors who can connect startups to deeper pockets.
For example, medtech startup Heartlab recently raised $2.45 million in seed funding to expand its AI-powered heart scanning and reporting platform to cardiologists in the U.S., and Foundry Lab is shopping around its metal casting microwave to automakers in the U.S. and Europe.
Rocket Lab tried a different tactic that other companies have since followed. In 2014, it became a U.S. company, which Beck said didn’t go down well among the other poppies, who accused the company of selling out.
“In order for us to grow and become successful, we needed to become global, and I think we really need to celebrate and promote that amongst all of our startups,” said Beck. “If you want to take it to the world, then you have to be a world company, and New Zealand always wins out the back of it. I don’t think it’s reasonable to expect the next Microsoft to be headquartered in New Zealand. But the next Microsoft may have offices here and it still might be founded by Kiwi.”
A big part of becoming a global company is having access to global investors. Beck said the differentiating factor among investors is not their capital — it’s who they can call. As companies grow, there are larger and larger pools of capital that they’ll have access to, but those truly deep pockets that startups need to scale just can’t be found in New Zealand yet.
A bright future?
New Zealand has the potential to become more than just the place where “The Lord of the Rings” was filmed and the country with the fewest COVID deaths.
“I think tech is really a huge enabler for New Zealand’s future,” said Beck. “You just need smart, motivated people, and there are plenty of those.”
As more funds and managers have cropped up in recent years, feeding a layer of early-stage tech companies that are only just now coming to fruition, we can expect the winners from those rounds to start raising Series A and B rounds over the next couple of years.
“I kind of imagine it like a wave shifting upward,” said Harrop. “Over time, I would expect and hope to see some of the more institutional pockets of capital, like Australia’s superannuation funds, really actively participating in venture capital, doing direct investments and fund-to-fund stuff. We’re still not there with KiwiSaver funds, our equivalent, but I’d expect that to come online in the next five years or so.”
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