New Zealand, a country of 5 million people in the South Pacific, has witnessed a shifting tech startup landscape over the last couple of years. While some major global companies like Xero, Rocket Lab, LanzaTech and Seequent have shined a spotlight on New Zealand’s startup scene, the country historically hasn’t had access to much venture capital.
As a country with an economy that primarily exports agricultural products, the New Zealand startup world has usually relied on funding from a community of high-net-worth individuals and family offices who probably made their millions through real estate or farming.
In March last year, the New Zealand government launched Elevate, an NZD $300 million fund of funds program that’s been providing millions to local VCs to invest into the startup community to fill the early-stage capital gap. At the same time, foreign investors have been flooding onto the scene, attracted to the small country that has a reputation for producing great companies. Founders and VCs in New Zealand are hopeful that the increase in funding from multiple sources is a signal that technology might just become the country’s next big industry.
That is, if the momentum that has led to more early-stage capital continues.
We spoke to two founders (Peter Beck of Rocket Lab and Cecilia Robinson of Au Pair Link, My Food Bag and Tend) as well as two investors (Phoebe Harrop, principal at Blackbird Ventures, and Robbie Paul, CEO of Icehouse Ventures) to nail down the top tips for New Zealand founders looking to put their mark on the markets. Here’s what we learned.
Think big and back yourself
New Zealanders typically tend to have an introspective view, failing to think big and globally from day one, Beck said. This is in part due to the fact that Kiwis grow up in a culture that suffers from “tall poppy syndrome,” a phenomenon where people who have achieved any measure of success are derided, cut down or sabotaged. As a result, not many people want to be a tall poppy.
“If you’re going to build a company, it’s incredibly painful, it takes a lot of work,” Beck told TechCrunch. “Why would you waste your time building a little company? Let’s build a big company. So go after big problems.”
In order to psych yourself up to tackle those big problems, don’t be too humble. New Zealand consistently punches above its weight and produces world-class entrepreneurs and tech startups, Paul said.
“Back yourself and know you can win on a global stage,” Paul told TechCrunch. “While starting on a rock at the bottom of the world comes with challenges, there are plenty of advantages, too.”
Don’t get starry-eyed over a big check
“Remember that the least valuable thing an investor ever gives you is their money,” said Beck. “As you think about building your business, how and where you want to go, make sure you utilize investors to help you get there. People get starry-eyed by the check and don’t really sit back and go, ‘Well, is this person actually strategic to me or not?’”
When Beck was building Rocket Lab, he was highly selective about the investors he brought in, saying the differentiating factor between investors is not their capital, but rather who they can call. For example, Khosla Ventures participated in Rocket Lab’s Series A round, which Beck said opened the door to another big VC, Bessemer, to invest, in a Series B. DCVC led the Series C, but by the time Rocket Lab got around to its Series D, Bessemer was paving the way to Greenspring, which is a limited partner (LP) of Bessemer. Sovereign wealth funds, where the real big checks come from, participated in the company’s E round, and they were LPs of Greenspring.
“So as your company continues to grow, there are larger and larger pools of capital that you can then go and attract, and if all you’ve got is John from Pakuranga, John doesn’t have the phone number and credibility to sovereign wealth funds,” said Beck. “It’s all about setting up the company so that when you want to do a bigger round, you can go and tap that venture capitalist’s LPs and then it can tap that LP’s LPs and ultimately end up in sovereign wealth funds or others that can write a $100 million check no problems at all. It’s a smooth path there, and where it’s tricky is when there’s no path or the path is truncated, and the challenge with New Zealand is even though there are some better quality venture capital firms in New Zealand, where are their relationships with LPs?”
If you’re going to build a global company, Beck said bringing on foreign investment is crucial if you want to get enough follow-on investment needed to properly scale.
“There is no $100 million check in New Zealand,” he said.
Hold out for good term sheets
Because New Zealand’s startup scene has been historically capital-starved, it’s a bit inexperienced in writing up good term sheets that not only make sense for the founders, but also make sense for the business as it scales up. Both Harrop and Beck told TechCrunch that angel groups, universities and crown research institutes, the usual sources of capital in New Zealand, have set up poor terms that have stifled growth at, if not outright killed, New Zealand startups.
“There’s been some bad behavior around valuations being too low or investors requiring the company to pay for the fundraising in some way, or inappropriate amounts of ownership being taken early on so really hamstringing the ability of companies to follow venture paths and to attract meaningful follow-on investment,” Harrop told TechCrunch, noting that as foreign investment has increased, term sheets have improved over the last 12 to 18 months. “Particularly for those who aren’t in Auckland and maybe don’t have many founders around them to learn from, hold out for quality investor relationships and don’t just take the first term sheet that’s offered. Think about who can really add value in the early stage and think critically about options rather than going for something that might not help the company in the long term.”
Want more specifics? Here are some red flags Harrop and Beck said to look out for:
Headline valuations
New Zealand’s valuations on average are about 50% lower than most companies coming out of Silicon Valley, said Beck. To come up with an accurate valuation, Harrop suggests spending time in the early days of the startup thinking about valuation as an output rather than an input.
“Start with, ‘What do I need to raise in order to achieve the product and commercial milestones, which will allow me to continue on a venture-backed path?’ Then, ‘What valuation makes sense so that I’m not giving away more than 10% to 20% of ownership at this early stage?’”
Founder ownership
Founders early on should have majority ownership of their startup so they can retain sufficient ownership over subsequent funding rounds.
“It’s really difficult to see a continued venture path for any teams where the full-time, day-to-day founders own less than say 70% at the point they’re raising institutional capital,” said Harrop. “At the end of the day, early-stage investing is about backing individual founders to do their life’s work; they need to be owners of the businesses they are building.”
Founder vesting
Founder vesting is a process by which you earn stock over a period of time, so some or all of a founder’s share of ownership is not vested on day one post-fundraise. Harrop said to have this in place with term sheets.
“Co-founder breakups happen all the time, and if a co-founder walks away with a significant portion of vested equity, it can make the company uninvestable.”
Hidden fees
You can expect to pay small legal fees to have transaction documents prepared, but Harrop said no founder should be paying a fee to their incoming investor just for raising funds.
Employee stock ownership plan (ESOP)
“It’s critical to set aside a 10%-15% pool of shares that can be granted to employees, new hires and also advisers that founders may want to work with and compensate with equity rather than cash,” said Harrop.
Beware the New Zealand incubator
There are plenty of incubator programs and startup workshops all around New Zealand, but not all of them can set you and your startup on the path to the follow-on funding you’ll need to scale, said Beck.
“I generally steer clear of any of these incubator kind of things because unless you’ve got somebody in there who has actually raised proper VC money on a global scale, you just fall into the same New Zealand trap where you’ve got a bunch of Ma and Pa angel investors who have got a network, but it turns out that network is like Federated Farmers,” said Beck. “If you’re a software company, how is that really going to drive your business?”
That said, Beck sits on the investment committee for Outset Ventures, which is an Auckland-based incubator with a deep tech fund, but he reckons they’re doing it right by providing funding, advice and access to a global ecosystem.
When in doubt, Beck said you can always do what he did and jump on a plane to Silicon Valley to figure out how the system functions.
It’s not all about fundraising and going global from day one
Some founders spend too much time fundraising and not enough time building a sustainable business, said Robinson, noting that she had been quite lucky in her businesses and hasn’t felt much need to raise external capital. Robinson’s startups have largely been B2C, and there are plenty of customers in New Zealand.
“If you’ve got a dedicated market of 5 million people, you can really get lost in the U.S. or Australian market, and in New Zealand, you can actually gain a really substantial scale in a short amount of time,” Robinson told TechCrunch. “Over the course of the past decade, My Food Bag, in terms of profitability and often in terms of revenue, has been one of the largest food delivery companies in the world. So I think people underestimate the power of the dedicated market, but you do have to be in a core industry, like food, education or healthcare, to make it work.”
The point here is not to say don’t go global, but rather to use the market you’ve got to ensure you have a really strong business proposition and model before taking it offshore, where you can quickly get lost in the noise and require a significant amount of marketing spend to even be heard. In the early days, at least, you don’t always want to be both figuring out how to run a business and how to launch in Asia, the U.S. or Australia, said Robinson.
“In New Zealand, you have the benefit of quite a close-knit business community, people who know who you are and what you’re trying to achieve and are mostly really supportive.”
Remember that being a Kiwi is a strength
While you, dear founder, might feel very much like you’re from a country full of cows and the people who tend them, all the way at the edge of the world, that’s not how the rest of the world sees you. People hear “New Zealand” and they think: Drastic landscapes! “Lord of the Rings!” The country with the fewest COVID deaths and a government that cares about its citizens!
“Play the Kiwi card,” said Paul. “New Zealand sits favorably on the minds of the international community. It’s an easy conversation starter and chances are most interesting people offshore have some sort of affinity or connection to New Zealand.”
The Kiwi Expat Association (KEA) estimates that there are nearly 1 million Kiwis living abroad at any given moment, an OECD nation diaspora as a percentage of the population that’s second only to Ireland. Paul said to leverage that and find the Kiwis living offshore and on top of many global organizations.
“They’re not hard to find (thanks to KEA!) and they can move mountains for up-and-coming Kiwi startups,” said Paul.
Make the most out of the virtual transition
To some extent, it still makes sense to get on a plane and meet investors face-to-face, but if there was ever a time when people were more open to virtual meetings, it’s now. Seeing as New Zealand’s borders are a mess and flights to anywhere not only take forever, but cost an arm and a leg, Paul said to make the most of the world’s transition to virtual everything.
“It’s never been easier to skip the SFO flight in favor of Zooms with investors, customers and team members,” said Paul. “This cultural shift is really leveling the playing field for Kiwi startups.”
Comment