Tough raising money at the moment

Make no bones about it – raising money to start or expand a business in New Zealand at the moment is tough, REALLY TOUGH. That said, the good news is that Angel Investors invested over $50million in young New Zealand Companies in 2009 (see this link, note the number is probably larger given that this is only the reported number). However, I suspect that this number is comprised, in large measure, of follow on rounds into companies that investors were already committed to.

My experience at the moment is as follows:

  1. There is very little NZ VC money available for new deals today and i don’t see this changing anytime soon. The issue for the Venture Capital community is that it has not been able to generate the exits and returns needed to build confidence with institutional investors. This is not an issue restricted to New Zealand. If you look at the AVCAL (Australian) data, VC returns have been a disaster with returns of -1.4% from 1985 – 2007  – it’s a risky game. Don’t get me wrong there is some VC money in New Zealand, but it’s not much and concentrated in too few funds. What’s left has the luxury of picking off the very best of deals with shortest return paths. Many people are working hard to rectify this issue but currently the jury is out on when we will see meaningful money return to VC.
  2. Deal swaps between investors i.e. i will look at yours if you look at mine. All investor groups up and down NZ are swapping Information Memorandums at the moment. Generally these are for Companies seeking second or third round funding and have “runs of the board”. The quality is great but view groups are going out of their current portfolios.
  3. Time to get a deal done is extending – given the volume of deals in the market at the moment it’s taking much longer to get “expressions of interest” from investor groups. Plan on a minimum of 8 weeks just to get to “YES, i want to look at you”.
  4. Angel Deals getting done – the Angel networks up and down the country appear to be still getting new deals away, this is great, but i worry that the follow on funding requirements are not being adequately considered or that the hope of an offshore funding round is still prevalent in the business strategy.
  5. Investors, more conservative, investing later – in the current environment investors are taking their time over deals and unless they form an emotional attachment to a deal they are preferring stuff that has elements of proof behind it – proven product and / or proven revenue and / or proven team.

So, what’s this all mean?

  1. Syndication is the new mantra – the only way to get deals of any size done at the moment is through syndication across investor groups. Investors need to work on their syndication relationships across the country and Ventures need to plan on raising money from multiple groups. To do this find an anchor investor and then leverage their network to raise money from other groups.
  2. Plan your follow on rounds now – the first investor group is most likely – in the current climate – to be the second investor group. Structure the investment with this in mind and make sure the investor group can do more than one round of investment – plan on at least two or three.
  3. Think very carefully about Ventures requiring more than NZ$3million to trade to profitability, after you’ve halved the revenue forecast and doubled the costs. Why NZ$3million? I think that this is pretty much the limit of syndicated private investor networks. It’s a gross generalization, clearly, their are some investors that could do more, but you could count them on one hand.
  4. Think long and hard about Asia as a market and place to raise funds – generally the word we get from the US is that VC is struggling as an asset class. However, the general feeling at the Singapore conference was that Asia was awash with cash, BUT, that this cash was in funds chasing deals US$10 million or more. So if you need significant chunks of money to fund a growth strategy focusing on Asia might not be such a bad idea.  Also, Asian consumer markets are not as mature as western markets and growing strongly.  Better to launch products on a rising tide.

Carpe Diem

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