Startup investment outlook 2024

2023 threw up plenty of venture capital challenges for founders, with less funds available from more risk-averse investors, compared to the abundance of 2021. 

Though many investors predict the availability of funds to remain fairly tight in 2024, with follow-on capital remaining a key focus of the market, there is plenty of optimism that the tide is turning, and opportunities remain for communicative and well-prepared founders prepared to do more with less.

As Caffeine reported late last year, Rob Vickery founder of Hillfarrance Venture Capital, estimated around half of seed-stage companies in New Zealand will be out of money and attempting to raise new rounds in the second and third quarters of 2024.

"The splurge of startup venture capital from 2020 to mid-2022, coupled with first-time fund managers who deployed too early without reserves, is a dangerous cocktail starting to create a hangover," he said.

The five startup investment backers Caffeine canvassed to get their views on the investment outlook for 2024, are more upbeat, though agree challenges lie ahead.

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Sarah Park, co-founder, Even Capital

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“Stay alive till 2025”, is my new catchphrase. There are a lot of  companies who’ll be running out of cash by the end of March or end of June in 2024. The biggest challenge for venture capital in New Zealand is what happens with those companies.

Founders need to be very clear whether they have met or exceeded their existing investor expectations and carve a careful investment story that is compelling for existing investors as we don’t want to be throwing good money after bad. Some investors will make a risk/opportunity call if it’s worth investing again to support companies through this challenging period for capital. 

For new business we want to see really clearlý what the problem is they are addressing,  and what their solution is. Secondly, how can they deliver that in a more capital constrained environment?

Later stage companies that are doing well and have cut costs to extend the runway will need to be thinking about how and when to invest in growth again. 

While some series B companies may no longer be looking at an exit via IPO ( initial public offer) or M&A (merger and acquisition) due to challenging market conditions continuing in 2024, they should be thinking about how they can create some liquidity for their early investors and employees through a secondary market by selling some shares to new investors coming on board.

A lot of early investors would potentially take up those opportunities because some of the VC funds will be getting to the end of their capital and will want to be in a position where they can demonstrate a successful track record as they seek to raise their next fund.

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Robbie Paul, CEO, Icehouse Ventures

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The best way to look at the investment landscape in 2023 is to take the data from the last five years and just remove 2021. By contrast to 2021, 2023 was not as rosy, but in comparison to any other year in the past ten, it’s fine.

I’m really optimistic about 2024. There’s a few things that I think will keep New Zealand  buoyant. 

One is the inflow of capital through the investor-immigrant programme and through returning Kiwis who have generated a lot of wealth and built some great experiences offshore. 

The other is through the increased participation of Kiwisavers in this space. If they keep their investment proportionate to what it is today, relative to their total funds, that could be hundreds of millions of dollars over the next decade allocated to this space.

For startups wanting to raise in 2024  the best thing to do is to learn from others who are slightly ahead of you. Observe founders who have raised recently. The best founders make it a concerted effort to have as many conversations with local and offshore investors as possible. They tend to leverage the amazing network that is the Kiwi diaspora to get connections at the highest levels of the most suitable firms anywhere in the world for potential investment discussions. 

Right now investors want to have more comfort that companies have longer runways to achieve milestones that can merit additional capital at higher prices. That translates into greater operational efficiencies, less burn, more purposeful spending but, at a high level, investors are still looking for phenomenal entrepreneurs that have unique perspectives, infectious energy, great gravitational pull and the foundations to build something that can be really consequential for New Zealand.

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Phoebe Harrop, partner, Blackbird Ventures

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In 2023 there were still really high quality opportunities in a lot of interesting, innovative companies across Australia and New Zealand but fewer were getting funded. It’s not necessarily a bad thing; probably more of a correction.

My prediction is that we’ll see a similar state of affairs in 2024.  You have a lot of investors who did successfully raise funds in the last couple of years and have money to invest, but it will be at that ‘new normal’ slightly slower pace.

The threshold to attract further funding, from existing or new investors has probably gotten higher. Investors know it’s going to be more difficult to raise in Series B. They're going to put more scrutiny on Series A to make sure the company is really intentional. There’ll be renewed focus on customer love, and unit economics, if not actual profitability of the company, asking “Is the business model really working?”

The increasing cheapness and availability of AI tools is changing the way that most founders are building startups. Whether it’s being able to use code-writing assistance to help your engineering team be more productive, or using ChatGPT to help with marketing copy, they’re all small ways we’re starting to see AI make startups more efficient.  It is something I will definitely be asking founders about. It should help them be able to do more with less.

Something we’ve started to see and probably will see more of, is startups moving out of the venture path. For whatever reason in the current funding environment they might not be making the cut for venture capital, which is really reserved for the highest risk and highest growth companies. More founders will look for alternative sources of funding to reach profitability and growth.

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Jason Graham, partner, Movac

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Investors are preferring to support their existing portfolios rather than investing in new deals. It just comes down to de-risking their portfolios. 

Both investors and companies probably got a bit caught out with how the market shifted so rapidly. In that environment, it's about shoring up the investments you have. 

If you’re looking to raise in 2024, you need to have a clear plan around the milestones you need to meet with the capital you're raising, and a pathway to sustainability.The days of just being able to rely on on the capital being there under any scenario are gone and a clear plan of action is needed.

There are still plenty of deals going down and I don’t think early stage has been hit as hard. Series A, B and C have become more of a challenge. 

By the end of 2024 I think it will be shifting positive. There are two facets to that. One is that the worst is behind us in terms of the impact on raising funds for new investments. That step back investors took in 2022 and 2023 hopefully has abated by the end of this year. 

What you also have behind that is a real structural shift that reflects changes in interest rates.  Ultimately, that 2020-21 bubble was driven by really low interest rates. If you get 0.5 percent  in a bank account,venture capital looks really attractive. If you can get 6 percent in a bank account venture capital doesn’t look particularly attractive. 

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Mitali Purohit, partner, Nuance Capital

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The market is starting to settle; everyone is feeling a bit comfortable. A lot of the hard decisions have been made by companies and investors.  Now, when we say you need to reduce your burn rates, it’s not a shock. Last year it typically would have been received with some resistance from founders. Now it’s seen as good business practice.

We know there are companies that weren’t able to hit some of their milestones because the market changed, but what investors will look for is what changes you made to survive that phase, and what your next three or four years looks like.

If you have come out of this period, it shows you are a strong stable business, and it shows how effective the management team is at executing and pivoting when required. 

Transparency is key. Those founders that couldn’t meet milestones, but were transparent and communicated regularly to inform shareholders and investors, will find it easier to follow-on.  

It’s the same for investors. As a fund we have to communicate more often this year because we need to let our investors know the changes in our portfolio; why they’re happening, how we are changing our strategy in terms of how we invest, and what companies we will follow on with.

One of the things we saw where there was a lot of capital available, a lot of deep tech companies were looking at grant funding, but were not focused on it. When things changed  suddenly they were focused on leveraging grant funding alongside to extend the runway.

2024 is the year to make capital last as long as possible and use the time to build relationships with potential new investors. Start your soft fundraising journey early. 

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