New Zealand founders looking to raise venture capital face a raft of challenges, not least of which is physical distance from potential investors. What they do have in their favour is a generation of founders who are often willing to share their knowledge and organisations such as New Zealand Trade and Enterprise (NZTE) that are set up to help them follow the money.
NZTE investment managers Richard Campbell and Nadine Hill, together with Ambit CEO and co-founder Tim Warren, provided an introduction to the unique Kiwi VC scene during Techweek 2020. Their advice falls into five key areas for new founders to consider, noting New Zealand-specific considerations.
1. Plan your capital raising from inception
Ambit, a company founded in 2016 which creates AI chatbots, has just completed its third capital raise, undertaken over the COVID-19 lockdown. It has raised around $1 million in this round and has, for the first time, brought on an international investor from Hong Kong—Twenty Seven Ventures. Ambit has previously raised $500,000 and $1.8 million and it is unlikely to stop there. Warren says he has planned for six rounds of VC funding, with a round taking place every 12 to18 months.
“It’s rare that companies just raise a bit of money once and then become something huge and wonderful. I’ve just looked at what companies tend to do. It’s a five-year horizon—you’d can’t forecast beyond that,” he says.
Ambit employs 20 staff and has an office in Auckland and a virtual presence in Sydney. Of its three founders, Warren is the only one working in the business; the other two founders, Josh Comrie and Gareth Cronin, are retained in a governance and advisory capacity, with Comrie on the board. Warren estimates that COVID-19 has delayed the business strategy for up to five months, and he expects that most New Zealand companies are in a similar position.
2. Build relationships with investors over time
Warren says it’s important to build a good network and that he has been nurturing relationships with VC investors since the company’s inception. “The key thing you are doing is building trust,” he notes, adding that “if you want money, ask for advice; if you want advice, ask for money.”
Hill agrees that a lot of successful VC investment is often relationship-based and that’s why it’s important to understand what they are looking for by “getting to know more than what’s on the website”
The more potential investors you have in play come capital raising time, the better the outcome is likely to be. “Keep a warm group of investors in the process, rather than narrowing down on one,” Hill advises.
3. Be well prepared when meeting potential investors
It might seem obvious, but Hill made the point that being well prepared with a strong financial model and compelling pitch deck is essential. The questions VCs likely to ask are: What problem are you solving? What impact do you expect to make? What traction have you had? What sectors are you targeting? What are the objectives of the capital raising?
Warren says investors are looking of the ‘three P’s’: people, product and progress, in that order. He says that raising capital is time-intensive and one investor question can take up to 20 hours of team worktime, so you need to be prepared for a rigorous due-diligence process.
4. Be wary of giving away too much equity
Founders should be careful not to give away too much equity too early in the funding cycle. Warren’s view is that it shouldn’t be more than 15% to 20% per round, if you want to end up being rewarded for all the effort that’s been put in. He says New Zealand investors are often too focussed on the valuation, whereas overseas investors are more willing to ensure that founders retain a healthy amount of equity.
“A lot of overseas investors when they see the state of New Zealand dilution of founders or ‘cap tables’ they are a bit disappointed and it makes us less investable. We’re good at getting people early on but because as nation we’re a bit mean with valuation. It means it’s hard to fund ourselves outside the country. It’s a bit of a vicious circle,” Warren says.
Kiwi investors may also be more reluctant to fund more than one round, and he notes that his own local investors—Lewis Holdings (David Levene’s fund) and K1W1 (Stephen Tindall’s fund) are staying the distance, with Ngaio Merrick from Lewis Holdings having recently joined the Ambit board of directors.
5. Be careful if bootstrapping instead of seeking venture capital
While bootstrapping (only self-funding via revenue earned) a company’s growth means you can develop the company at your own pace, it can also mean that you miss opportunities because a competitor has more resources. “The danger is that you are not growing when someone else is,” notes Hill.
When asked about crowdfunding, Hill points out that it can be very helpful for business-to-consumer companies because it provides a great opportunity to connect directly with your customers.
Meanwhile, Warren says that company’s which are “really niche” and find ‘product to market fit’ early often don’t need to seek outside investment. He quotes a saying he heard in Silicon Valley: “You know you’ve got product market fit when it slaps you in the face.”