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

ANALYSIS

Movac pumps, challenging venture 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 contribute half of Fund 6’s initial $100m target, with room to invest another $20m).

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

It was notable that NZ Super Fund allocated money directly to Movac.

In early 2020, the government moved to stimulate a sluggish 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 to that) ).

The majority of Elevate’s funding, some $240 million, came from the NZ Super Fund, marking the first time the Guardians had engaged in seed investment.

Elevate is run by crown agency NZ Growth Capital Partners, which also runs Aspire’s much smaller seed fund (for teams that are still one or two people doing things in the garage phase).

NZGCP chief investment officer James Pinner says his agency did not invest in Movac’s Fund 6 because it was out of Elevate’s reach.

But there’s a broader 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, at least so far, the fund has only received $259.5 million (meaning $63.5 million left in the kitty).

So forget about whether Elevate gets another $300 million over another three years, which is still an open question. NZGCP needs a supplement of $40.5 million from the government simply to reach its original target of $300 million.

“We are in talks with the Treasury Department, MBIE and The [NZ Super Fund] Guardians on whether the fund can be reloaded up to the originally announced $300 million.”

Why is there so much fighting just to raise the original funds for Elevate?

“The initial arrangements left open the question of where and when the additional $40.5 million could come from,” says Pinner.

The talks are taking place against the backdrop of an economic slowdown and rising interest rates that challenge most of the private VC sector, possibly making the need for a top-up more pressing, and the ambition of NZGCP to not only revamp Elevate with another $300 million, but win another $100 million for a new “pre-seed” fund.

Another complication: while performance data for Elevate is scant, it’s simply too early in the fund’s life to get much guidance on its performance (see the statistics in the postscript below). Pinner points out that Elevate has succeeded in its goal of stimulating private sector investment, and then some. Elevate-backed venture capital funds have raised $700 million in 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 any kind of clarity emerges.

But Pinner and his colleagues will be well 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 a new seed fund on the table called Emerges.

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

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

Down rounds ahead

Vivian says that while the reception to Fund 6 turned out to be strong, “investors in general are understandably cautious given the markets this year, and the due diligence processes we’ve done have been more rigorous than ever, which is good. The key questions have centered on how we have demonstrated investment discipline in recent years.”

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

“I think there will be fewer sources of other capital as first-time and second-time fund managers may struggle to raise unless they have tangible ROI records to show increasingly discerning potential investors,” he says. .

“As in previous cycles, I think we will see investment conditions for investors improve. And I have no doubt that we will also see rounds down in 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 down round is when a startup raises money at a lower valuation than its previous round.)

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

Postscript: Elevate Performance

“It’s still very early days at Elevate and we wouldn’t expect to be able to tell the true return on our investments for some time,” says NZGCP’s chief investment officer, James Pinner.

As of June 30, audited figures show a gross TVPI (holding value of the underlying Funds’ assets up to the amount required by them) of 0.92x and net of program execution fees, a TVPI of 0.86 .

“I’d like to point out that most funds were heavily provisioned at the time given the volatility and uncertainty in the markets,” says Pinner,

“As of September 30, 2022 (the last quarter for which we have information), these unaudited figures had increased to a TVPI gross of 0.99 and net of 0.91; this is due to the investment performance of the underlying funds and they still maintain significant provisions due to the aforementioned economic uncertainty.”

He added: “The performance of the funds is very similar to what we would have expected at this stage, meaning very early in the rollout of the funds and we expect to increase as their investments mature and grow.”

A veteran trader with a private sector fund told the Herald: “While Evate’s first-period returns of 0.84 net of fees are clearly quite low, overall we would expect investing in the general partner/limited partner structure to Average funds result in an initial drop in value, since fees are paid as a percentage on all committed capital, not just withdrawn capital, so the initial return is generally easy to reduce and difficult to increase, and the investment cycle for venture capital is seven to 12 years.”

He added: “There have been some poor investments across the portfolio, particularly anything to do with cryptocurrency, but mostly this is an industry thing. There have also been some good wins, notably Halter. Halter is the startup of smart collars for cows founded by a former Rocket Lab engineer. An Elevate update released in September also features mint, quantify, traffic Y Next among the fund’s success stories. Elevate typically supports companies indirectly, after investing money in partner-managed funds like Movac, Blackbird, and GD1.