Investors pour more venture capital into start-ups despite worsening economy
Now may not be such a bad time for entrepreneurs to grow a start-up business, according to an annual study produced by consultant EY.
Investment funds poured a record $384 million of venture capital into Kiwi startups last year despite the darkening economic outlook and a dearth of private-capital deals at the bigger end of town.
Colin McKinnon, executive director of NZ Private Capital, said the increase, from $319m in 2022, was encouraging.
But he said he would also like to see more activity from the “angel investor” community, who are often the first to back entrepreneurs with smaller sums, to keep the pipeline of new businesses start-ups flowing.
Private investors tended to react to economic uncertainty by keeping their hands in their pockets, but not so professional venture capital funds, which tended to come in at a slightly later stage and that had already raised money invest, he said.
Overall, the amount of private equity invested into businesses, including more established firms, fell to $1.9 billion, from a bumper $2.9b in 2022, according to EY’s research.
McKinnon said that reflected the fact there was only buy-out valued at more than $150m, being an investment into Pushpay by Australia’s BGH Capital, compared to six such sized deals in 2022.
One factor was that uncertainty over the future direction of interest rates had made it harder for business founders and later-stage investors to agree on valuations for firms, he said.
“Now that interest rates may have topped, I know there are a number of transactions that are in the pipeline.”
Veteran Kiwi angel investor and company director Marcel van den Assum said moribund economic growth was not putting people off coming up with innovations, and in his view the quality of “science-based” start-ups was improving.
“It probably proves the adage that even during tough times, innovation continues in fact they can support innovation.”
Investors in New Zealand and around the world were becoming more “judicious”, which meant follow-up funding could be harder to secure, he said.
“We are going through a tougher cycle. There's no two ways about that.”
But a lot of start-ups took 10 to 12 years to achieve success so could expect “ups and downs” at some point along the way, given the nature of investment cycles, he said.
“The economic climate is not experienced entrepreneurs off.”
Van den Assum said three venture to watch were Blackcurrent, Jooules and Forest Lodge Orchard.
Blackcurrent, in which he is an investor, helps businesses analyse and better manage their electricity usage using sensors, cloud-based software and software that taps into power companies’ data.
Jooules, in which he is an indirect investor, is attempting to use microbes in bioreactors to produce commercial quantities of consumable proteins from feedstocks that include carbon dioxide.
It was a good example of a company that “cuts across economic cycles” by addressing the fundamentals of food security, van Assum said.
“It’s a long-term aspirational initiative, creating alternative proteins out of thin air effectively.”
Forest Lodge Orchard has established a “zero carbon” cherry orchard in Central Otago that employs technologies such as electric tractors and electrically-power frost-fighting fans. putting