Venture capital: A winner and a loser as a rollercoaster 2022 wraps up

ANALYSIS

Movac is pumping, defying the risk 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 $70 million 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 raised more than $120 million in 10 weeks, which is very remarkable in this market,” Movac partner Mark Vivian told the Herald. He said Generate was the third institution to invest after the NZ Super Fund and another yet-to-be-named party.

It was notable that the NZ Super Fund received money directly from 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 and private VC funds (or, at least, nominally $300m – we’ll get to this). ).

Most of Elevate’s funding – some $240 million – came from the NZ Super Fund, marking the first time Guardians have entered early stage investment.

Elevate is managed by Crown agency NZ Growth Capital Partners, which also manages the smaller seed fund Aspire (for teams still of one or two people doing things in the garage phase).

NZGCP chief investment officer James Pinner said his agency did not invest in Movac’s Fund 6 because it was outside Elevate’s brief.

But there is a wider problem: NZGCP did not have $70m or, at least, barely.

Pinner said over the weekend that Elevate has already allocated $196 million.

And it is confirmed that, so far at least, the fund has received only $ 259.5m (which means there is $ 63.5m left in the cat).

So forget if Elevate gets another $ 300 million for another three years – which is still an open question. The NZGCP needs an increase of $40.5m from the Government simply to meet its original target of $300m.

“We are in discussions with Treasury, MBIE and The [NZ Super Fund] The Guardians know if the fund can go up to the 300 million dollars they initially announced.”

Why is there a fight simply to raise Elevate’s original funding?

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

The talks are taking place amid an economic slowdown and rising interest rates that are challenging much of the private VC sector – arguably making the need for a top-up more urgent – and the NZGCP’s ambitions are not just to renew Elevate with another $300 million dollars, but get another $100m for a new “pre-seed” fund.

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

The parties say the comments are “inappropriate” at this stage of the negotiations. It will be the new year, at least, before any sort of clarity appears.

But Pinner and his colleagues will be well aware both that the NZ Super Fund has just directly received money from Movac, cut out from among people, and that, as well as its Growth Fund 6, Movac has just set up a seed fund new on there. table called Emerge.

Vivian says Emerge will focus on “pre-seed, seed, re-Series A and Series A”, while Growth 6 will focus on “Series A and beyond” (the little “beyond” is where Pinner sees it moving beyond the scope of the NZGCP) .

National technology spokeswoman Judith Collins said earlier that her party is still formulating its policy, which is expected at some point next year. In the last election, the party’s technology policy included a provision for three VC funds, each up to $100m (or $200m, anticipating matching funds from the private sector, according to the current model) and targeting companies at different stages of growth

Go down ahead

Vivian says that while the reception for Fund 6 has been strong, “In general, investors are very savvy about the markets this year, and our due diligence process has been stronger than ever, which is a good thing. The key questions focused on how we have demonstrated investment discipline in recent years.”

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

“I think there will be less sources of other capital to fund managers the first time and the second time can struggle to raise unless they have tangible records of investment returns to show potential investors increasingly discerning,” he said.

“Like previous cycles, I think we will see improved investment terms for investors. And I have no doubt that we will also see downgrades in the next 24 months for companies that can’t justify their post-money valuations in their latest rounds 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 rounds.)

“We’ve seen that in previous cycles, and this one could be worse, given some of the crazy deals they’ve done in. And that was global, not just here in New Zealand,” Vivian said.

Postscript: Increase performance

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

As of June 30, the audited numbers show a gross TVPI (holding value of the assets of the Fund underlying the amounts called) of 0.92x and net of the program’s running costs, a TVPI of 0.86.

“I would note that most of the funds have kept large provisions at this time given the volatility and uncertainty in the markets,” Pinner said,

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

He added, “The performance of the funds is much as we would expect at this stage, that is early in the deployment of the funds and will be expected to increase as the investments mature and grow.”

A veteran operator with a private sector fund told the Herald, “While the 0.84 return Evate net of fees in the first period is clearly very poor, we would generally expect that investing in the general partner/limited partner structure for the average fund will cause an initial decline in the value, as fees are paid as a percentage on all capital committed, not only on drawn capital, so the early performance is generally easy to mark down and difficult to mark up, and the investment cycle for risk capital is seven. up to 12 years.”

He added, “There have been some poor investments across the portfolio – notably anything crypto-related – but mostly this is an industry thing. There have also been some good wins – notably Halter.” Halter is the smart-collar-for-cow startup founded by a former Rocket Lab engineer. An Elevate update released in September also counted Mint, Quantifi, Tradify and Seekent among the fund’s success stories. Elevate usually backs companies indirectly, after putting money into partner funds including Movac, Blackbird and GD1.