Venture capital: A winner and a loser as a rollercoaster 2023 wraps up

OPINION/ANALYSIS

Movac is pumping, defying the venture capital drought.

The Wellington-based VC has just received a $20 million injection from Generate KiwiSaver for its Movac Growth Fund 6, which follows a $70m injection
from the NZ Super Fund (which will chip in half of Fund 6′s initial $100m target, with scope to invest another $20m).

“We’ve raised more than $120m in 10 weeks, which is pretty remarkable in this market,” Movac partner Mark Vivian tells the Herald. He says Generate was the third institution to invest after the NZ Super Fund and another party not-yet-named.

It was notable that NZ Super Fund allocated money directly to Movac.

In early 2020, the Government moved to ginger a slow VC sector with the creation of the $300m Elevate fund – which would co-invest in startups with private VC funds (or, at least, nominally $300m – we’ll get to that).

The bulk of the Elevate funding – some $270m came from the NZ Super Fund, marking the first time the Guardians had got into early-stage investment.

Elevate is funded by Crown agency NZ Growth Capital Partners, which also administers the much-smaller Aspire seed fund (for outfits still at the one or two people doing stuff in the garage phase).

NZGCP chief investment officer James Pinner says his agency didn’t invest in Movac’s Fund 6 because it was outside Elevate’s brief.

But there’s a broader problem: NZGCP didn’t have $70m or, at least, barely.

Pinner said over the weekend that Elevate has now allocated $196m.

And he confirmed that, so far at least, the fund has only received $259.5m (meaning there is $63.5m left in the kitty).

So forget whether Elevate gets another $300m for another three years – which is still an open question. NZGCP needs a $40.5m top-up from the Government simply to hit its original $300m target.

“We are in discussions with Treasury, MBIE and The [NZ Super Fund] Guardians as to whether the fund can be topped up to the $300m originally announced.”

Why is there a scramble simply to gather Elevate’s original funding?

“The initial arrangements left it open as to where the additional $40.5m might come from and when,” Pinner says.

The talks are happening against the backdrop of an economic slowdown and rising interest rates that are challenging most of the private VC sector – arguably making the need for a top-up more pressing – and NZGCP’s ambition not just to renew Elevate with another $300m, but gain another $100m for a new “pre-seed” fund.

Another complication: While Elevate performance data is scarce, it’s simply too early in the fund’s life to get much of a steer on its return (see stats in the postscript below). Pinner does point out that Elevate has succeeded in its aim to spur matching private sector investment – and then some. VC funds that Elevate has backed have raised $700m over the past two and a half years.

The parties say comment is “inappropriate” at this stage of negotiations. It will be the New Year, at least, before any sort of clarity emerges.

But Pinner and his colleagues will be keenly aware both that the NZ Super Fund has just directly allocated funds to Movac, cutting out the middle man, and that, as well as its Growth Fund 6, Movac has just put a new seed fund on the table called Emerge.

Vivian says Emerge will focus on “pre-seed, seed, re-Series A and Series A”, while Growth 6 is focussed on “Series A and beyond” (the “beyond” bit being where Pinner sees it shifting beyond NZGCP’s scope).

National technology spokeswoman Judith Collins said earlier that her party is still formulating its policy, which is expected at some point next year. Last election, the party’s tech policy included a provision for three VCs funds, each running to $100m (or $200m, anticipating matching funds from the private sector, as per the current model) and targetting firms in different stages of growth.

Down rounds ahead

Vivian says while the reception for Fund 6 turned out to be strong, “Investors generally are understandably cautious given the markets this year, and the due diligence processes we’ve been put through have been more rigorous than ever, which is a good thing. Key questions have focussed on how we’ve demonstrated investment discipline in the frothy of the last few years.”

And for the industry and startups in general, he sees tougher times ahead.

“I think there will be less sources of other capital given first-time and second-time fund managers may struggle to raise unless they have tangible investment return records to show increasingly discerning potential investors,” he says.

“Like previous cycles, I think we’ll see investment terms improve for investors. And I’ve got no doubt that we will also see down-rounds in the next 24 months for companies who can’t justify their post-money valuations of their last round by the time they need to raise capital again.”

(A down round is when a startup raises money at a lower valuation than its previous round.)

“We’ve seen this in previous cycles, and this one could be worse, given some of the crazy valuations deals have been done at. And that’s been global, not just here in New Zealand,” Vivian says.

Postscript: Elevate performance

“It is still very early days in Elevate and we would not expect to be able to tell the true performance of our investments for some time to come,” NZGCP chief investment officer James Pinner says.

As at June 30, the audited numbers show a gross TVPI (holding value of the assets of the Underlying Funds to the amount called by them) of 0.92x and net of fees of running the programme, a TVPI of 0.86.

“I would note that most of the funds were holding large provisions at that time given the volatility and uncertainty in the markets,” Pinner says,

“As at September 30, 2022 (the latest quarter we have information on), these unaudited numbers had increased to a gross TVPI of 0.99 and net of 0.91 – this is due to performance in the investments of the underlying funds and they are still holding significant provisions due to the above mentioned economic uncertainty.”

He added, “The performance of the funds is very much as we would have expected at this stage i.e. very early on in the deployment of the funds and will expect to increase as their investments mature and grow.”

I would add that the performance of the funds is very much as we would have expected at this stage i.e. very early on in the deployment of the funds and will expect to increase as their investments mature and grow.