New Zealand investors favour deeptech, report shows

The latest Young Company Finance deal data shows resilience in the New Zealand startup ecosystem, particularly for deeptech ventures, with 67 deals funded in the first half of 2023, compared with 66 in the same period last year.

Early-stage investors provided $71.6 million of funding for New Zealand startups, down four percent since last year, amidst an environment of geopolitical and economic uncertainty and higher interest rates. Globally there has been a big drop in startup investment since the highs of 2021.   

For the rest of the year conditions are expected to remain challenging and capital hard to come by.

The deal data is included in the Startup Investment report, published today by PwC New Zealand, Angel Association New Zealand and NZ Growth Capital Partners (NZGCP).

Deeptech – technology solutions based on scientific and engineering principles –  was the hottest sector, accounting for almost half of all deals. Among its sub-sectors, healthtech received 46 percent of the funding, followed by cleantech at 22 percent. 

Software investment nearly halved to 22 percent from 40 percent year on year, while SaaS came in at 16 percent. 

This inclination towards high-impact, long-term value reflects a broader trend that emerged in 2022 and is something Suse Reynolds, executive chair of the Angel Association New Zealand, expects to continue. 

She says New Zealand investors tend to err towards long-term value-based investing than momentum-based investing, which focuses more on speed to market and revenue growth.

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Deeptech startups, which are generally grappling with 'big issues' such as climate change and health, for instance, fit the bill for value-based investing, she says. 

She also sees “enormous potential” for New Zealand in agritech and the blue economy (economic activities associated with oceans and water resources). 

“While revenue growth is important, particularly when it’s harder to raise capital, it’s not the only indicator of value, and New Zealand investors are thinking longer term.”

The level of investment contrasts global trends, where funding was well off the 2021 highs, and also down from last year’s investment levels.

Jacques Richer, associate investment director at NZGCP, adds that while the data is good, it should be considered with cautious confidence. 

"Although the current data is positive and demonstrates investor confidence in H1 of 2023, generally about two-thirds of deal activity happens in the second half of the year, so we’ll be looking at the full year results to confirm this trend.”

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Shifting investor behaviours 

The report also shows a notable shift in investor behaviour, with three-quarters of deals supporting ventures already in investors’ portfolios compared with one-quarter in new companies, whereas typically those numbers would be two-thirds/one third.

“This could adversely impact the pipeline of new startups if the trend continues in the longer term,” says Tereza Bebich, partner at PwC New Zealand.

Startups attracting investment tend to be those that can demonstrate they are hitting their milestones, show efficient use of capital, and have realistic valuations, the report says.

Three-quarters of the deals were syndicated to reduce risk while 21 percent took the form of convertible loans; half were preference shares and the rest ordinary equity.

The shift to prioritising existing portfolios reflects the cash-strapped investment environment, says Rob Everett, chief executive of NZGCP. 

"In times like these, it is natural for investors to prioritise companies in their portfolio that are already performing,” he says. 

However, he says that global data reveals that current hot sectors – AI and cleantech – are bucking this trend, with the cash available going to new startups in this space. 

The previous hot sector, SaaS, has been heavily invested in over the past two-and-a-half years, and investors are now looking to balance their portfolio risk, he says. 

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Navigating investment

While the investment arena may seem bleak for startups seeking investment, there is hope.  

All investors want “new blood” in their portfolios, says Everett. The key is establishing a clear capital strategy.

“Right now, investors are asking the hard questions,” he says. A founder has to be ready to answer:

• How are you using the cash? 
• How long can you last before your next funding round? 
• How will you demonstrate what you have achieved between funding rounds? 

“You’ve got to really plan ahead to see what the most impactful ways of spending that cash are on the basis that the next round of funding may take quite a while to land,” he says. 

PwC’s Tereza Bebich agrees. She says startups need to show clear paths to profitability. 

However, she says investors have had some huge gains where they “take risks” in startups they believe in, citing opportunities in less common sectors such as gaming. 

The government can help navigate the present economic environment by introducing further co-investment funds, which would reduce the risk for private venture capital, she says. 

The UpStart Nation report, released mid-year by the government-appointed Startup Advisors Council, recommended a further $500 million of taxpayers’ money be allocated over the next decade to continue the work of the Elevate fund of funds. It is run by NZGCP with oversight from the New Zealand Superannuation Fund.

The fund has already had $300 million contributed to it so far, used to support other venture capital funds that invest in Kiwi startups.