Venture capital: A winner and a loser as the 2022 roller coaster comes to an end

ANALYSIS

Movac pumps, defying venture capital Drought.

The Wellington-based VC just received a $20 million injection from Generate KiwiSaver for its Movac Growth Fund 6, which follows a $70 million injection.
the NZ Super Fund (which will contribute half of Fund 6’s original $100 million target, with the option to invest an additional $20 million).

“We raised over $120 million in 10 weeks, which is pretty remarkable in this market,” Movac partner Mark Vivian told the Herald. He says Generate was the third institution to invest after the NZ Super Fund and another as-yet-unnamed party.

It should be noted that the NZ Super Fund allocated money directly to Movac.

In early 2020, the government gingered a slow venture capital sector with the creation of the $300 million Elevate fund – which would co-invest in startups with private venture capital funds (or, at least , nominally $300 million – we’ll get there).

The bulk of Elevate’s funding – some $240m – came from the NZ Super Fund, marking the first time the Guardians have embarked on a seed investment.

Elevate is managed by agency Crown NZ Growth Capital Partners, which also administers the much smaller Aspire seed fund (for outfits still 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 fell outside of Elevate’s mandate.

But there’s a bigger problem: NZGCP didn’t have $70 million, or at least barely.

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

And he confirmed that, so far at least, the fund has only received $259.5 million (meaning there’s $63.5 million left in the pot).

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

“We are in discussions with the Treasury, MBIE and The [NZ Super Fund] Guardians as to whether the fund can be topped up to the $300 million originally announced.

Why is there a scramble just to gather initial funding for Elevate?

“The original arrangements left open the source and date of the additional $40.5 million,” Pinner said.

The talks are taking place against a backdrop of a slowing economy and rising interest rates that challenge most of the private venture capital sector – arguably making the need for a top-up more pressing – and the ambition of NZGCP not only to renew Elevate with an additional $300 million, but earn an additional $100 million for a new “pre-seed” fund.

Another complication: while performance data from Elevate is sparse, it’s simply too early in the fund’s life to get any good direction on its return (see stats in the postscript below). Pinner points out that Elevate has been successful in its goal of spurring matching private sector investment – ​​and more. Elevate-backed venture capital funds have raised $700 million over the past two and a half years.

The parties say the comment is “inappropriate” at this stage of the negotiations. It will be the New Year, at least, before some sort of clarity emerges.

But Pinner and his colleagues will be acutely aware both that the NZ Super Fund has just allocated funds directly to Movac, cutting out the middleman, and that, in addition to its Growth Fund 6, Movac has just put in a new fund bootstrap on the 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 track “ beyond” being where Pinner sees it moving beyond NZGCP’s range).

National Technology Spokesperson Judith Collins said earlier than his party is still formulating its policy, which is expected sometime next year. In the last election, the party’s technology policy included provision for three venture capital funds, each reaching $100 million (or $200 million, anticipating private sector matching funds, under the current model) and targeting companies at different stages of growth.

Turns down ahead

Vivian says that while the reception to Fund 6 has been strong, “investors are generally cautious given the markets this year, and the due diligence processes we have been through have been more rigorous than ever, which which is a good thing.The main questions focused on how we have exercised investment discipline over the past few years.

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

“I think there will be fewer sources of other capital given that first-time and second-time fund managers may find it difficult to raise unless they have records of return on investment. tangible to show potential investors more and more demanding,” he says.

“Like previous cycles, I think we will see improving investment conditions for investors. And I have no doubt that we will also see declines over the next 24 months for companies that cannot justify their post-money valuations from their last round when they need to raise capital again.

(A downturn is when a startup raises funds at a lower valuation than the previous round.)

“We’ve seen this in previous cycles, and this one could be worse, given some of the crazy valuation deals that have been done. And it’s been global, not just here in New Zealand,” says Vivian.

Postscript: Improve performance

“It’s still very early in Elevate and we don’t expect to be able to tell the true performance of our investments for some time,” said NZGCP Chief Investment Officer James Pinner.

As of June 30, the audited figures show a gross TVPI (value of holding the assets of the underlying funds at the amount called by them) of 0.92x and net of program management fees, a TVPI of 0.86.

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

“As of September 30, 2022 (the last quarter we have information on), these unaudited figures had changed to TVPI gross of 0.99 and net of 0.91 – this is due to the investment performance of the underfunded funds. underlyings and they still hold large reserves due to the economic uncertainty mentioned above.

He added: “The performance of the funds is very much in line with what we would have expected at this stage, which is very early in the deployment of the funds and we expect to increase as their investments mature. and develop”.

A veteran trader with a private sector fund told the Herald: “While Evate’s returns of 0.84 net of first period fees are clearly quite poor, we would generally expect that investing in the structure general partner/limited partner for medium funds will result in an initial drop in value, as fees are paid as a percentage on all capital committed, not just capital drawn, so initial performance is generally easy to deduct and difficult to mark up, and the investment cycle for venture capital is seven to 12 years.

He added: “There have been some bad portfolio investments – especially anything crypto – but that’s mostly an industry thing. There have also been some good wins, especially Halter. Halter is the startup of smart collars for cows based by a former Rocket Lab engineer. An Elevate update released in September also counts mint, Quantify, Trader and Seequent among the fund’s successes. Usually, Elevate supports companies indirectly, having invested money in funds managed by partners such as Movac, Blackbird and GD1.