The Moxie Sessions: Faust-stage funding: is the devil in the dollars?

Opinion

Vaughn Davis

NZVIF departing chief executive Franceska Banga

The Goat Farm's Vaughn Davis discusses how easy it is for tech start-ups to attract capital

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It’s almost 6pm but it’s hot in the upstairs kitchen at Auckland innovation hub GridAKL. Condensation beads on our beer bottles and sweat stains the t-shirts of the dozen or so tech types around the Moxie Sessions table. Outside, the monkeys scream and squabble, and as the ceiling fan strains to stir the syrupy air a bright green gecko stalks a spider in the highest corner of the room.

OK, I started lying from the monkeys onwards but it sure was hot.

Despite the warmth, we’d gathered in the fashionably-free-of-air-conditioning venue to point the Moxie ponder-gun in the direction of something equally hot – tech startup companies – and ask what happens when one first takes on funding. What are the downsides to the dollars? And is one dollar (or million) as good as any other?

To guide the discussion, we welcomed speakers with three perspectives on the issue. Franceska Banga heads* the New Zealand Venture Investment Fund, and has spent the last 15 years trying to turn tax dollars into tech startup success. Sean Simpson founded and leads Chicago-based LanzaTech and has raised over $200 million in the last 10 years. And representing the foot of the fundraising ladder was Avertana co-founder and LanzaTech alumnus Sean Molloy 

For the past 15 years, Ms Banga has headed a government-backed fund that’s put over $150 million into New Zealand companies, helping stimulate over $1.7 billion in fundraising. Not surprisingly she sees the supply of funds as being a key factor in turning ideas into successful companies and hates the often-heard comment that “there’s always enough money for good companies.”

She admits that getting that first $500k to $2m won’t usually be too much of a hurdle, but it’s that next round – typically between $1m and $10m – that has founders floundering. 

“One of the biggest mistakes a company can make is to underestimate both the time it takes and the amount of capital required to achieve its aspirations.”

As founder and chief scientist of LanzaTech, Sean Simpson knows a bit about raising funds. In the company’s 10-year history it has attracted north of $200m US in investment and in 2014 relocated from Auckland to Chicago – a move partly driven by US investors and local government tax incentives. 

For Simpson, the key is to have a clear path for growth that extends beyond the first round – and that means looking past local funding sources. The problem with that, he says, is that New Zealand founders are not well equipped to do that. “It’s difficult to be trained here in the disciplines you need to raise big dollars.” 

One way to get that training, of course, is to work alongside someone who’s done it. That’s exactly what LanzaTech alumnus Sean Molloy did (his company, Avertana, also specialises in extracting value from waste). For Molloy, the potential for world domination – and he’s only being slightly tongue in cheek – was a key measure when deciding which potential idea he and his partners would turn into a company. 

From local seed capital (including K1W1) in 2014, Avertana quickly headed offshore and 2015 saw it successfully pitching to US fund managers. A key to that success, Sean says, was telling the money side of their story as compellingly as the tech side. “Investors need to understand your capital plan.”

Understanding the US investor culture was also important. “As New Zealanders, we tend to talk ourselves down … but you need to remember that they’re expecting you to inflate your numbers and are probably working to half of whatever you project.” 

While their geographical focuses might differ, Ms Banga, Mr Molloy and Mr Simpson agree that seeing beyond the next funding round is key – avoiding that “oh shit we just landed a million bucks … what now?” dilemma (albeit one that many companies would be happy to have).

They’re also aligned on the value investors bring beyond their chequebooks. A top venture capitalist, they say, is “the greediest person in the world” but that Gordon Gekko perspective can deliver exactly the focus on growth that a tech or product-focussed startup needs. So, rather than seeing investment as a compromise between growth and ownership, the right money and the right investors can be a win-win. 

While an experienced, hands-on investor might not have the magic formula for making a company succeed, Mr Simpson says, they’re at least likely to know what failure looks like, and can help founders avoid some of the things that have killed other companies.

Knowing how to make widgets (or software, or great customer experiences) is great. But knowing how to make money is where many New Zealand founders fall short. And that, the discussion around the Moxie table suggested as the beer bottles emptied and the thermometer finally fell, is where finding the right investors can be the difference between local success and world domination. 

*Ms Banga has resigned as head of the fund since our session.

Every month, The Moxie Sessions brings together a small group of business thinkers to discuss ways New Zealand can take advantage of the internet to boost its national competitiveness. For more, see http://themoxiesessions.co.nz

Check out the standing invitation, the podcasts and the records of previous events at hemoxiesessions.co.nz, and follow @moxiesessionson Twitter.

Vaughn Davis is principal at social media and advertising agency The Goat Farm.

Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.


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NZVIF was set up to try and address the lack of VC investment in NZ. 15 years later the issue is largley the same or worse as point=ed out, there are major issues with trying to raise $1 - 10m in this country. What this does mean is that the best commercial opportunities are heading offshore for funding (and benefiting from higher quality investors).

As for the claim that raising $500,000 - $2m won't usually be much of a hurdle, shows how totally out of touch NZVIF is with the market. Equity Crowd Funding has helped alleviate some of the issues with trying to raise capital but it is still a lot of hard work and not a given.

If NZVIF is refering in part to their Sedd Co-investment Fund as being the solution, it is interesting to see how poorly that performs, and how it has largley missed most of the successfully start-ups over the past 10 years.

I also assume that Franceska Banga has never worked for a start-up company (NZVIF aside) and tried to raise money, otherwise she might actually understand how hard it is.

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The countervailing argument is that there are a lot of so-called entrepreneurs who know nothing about business and the capital raising environment in which they operate. Every day in the papers you see some dipstick starting up a business that is doomed to failure, which experienced business people know. Yet these same idiots bleat that they can't raise capital at the delusional valuation they are after.

So I couldn't agree with Franceska any less. In my opinion the good businesses in NZ easily get funding in whatever form they need. It's just that there are so few good businesses in the first place, and too many dreamers in the start up community that would willingly burn of lot of other people's money if they had half a chance.

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Dude / Dudesse... that's not the countervailing argument, that's exactly what I said! Lots of startup founders know diddly about business and capital raising. Good investors can help.

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Sorry, it was the countervailing argument to Franceskas comment in the article.

Although I'm not sure I agree with your latest comment here either. Most investors are very time constrained, and very rarely in practise add any value. So if they think lots of help is required, to me that's a red flag that should put them off. The reality is a high class shouldn't need any business help - maybe other than the off phone call introduction.

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Agree most investors in ealry stage businesses add no value and in fact in a lot of cases destroy value - because they either do not really understand how start-ups operate, or they overestimate the skills / connections they have or they simply do not have the time that is required (and therefore slow things up).

Any investor should be honest about their true value to a company, in most cases it is they are a cheque book.

Just look at the SCIF / NZVIF performance they have generally added no value to the companies they have invested in, in fact the most successful ones are those (Xero, Orion etc) that probably never needed NZVIF funding in the first place.

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Not sure I agree that the good companies easily get funding. It is hard for all early stage companies, what happens in NZ is those that are "connected" get funded more easily - some of that is being investment ready, some to do with being in the right "clubs". This does not mean good companies being funded, again NZVIF's record shows that that club does not fund the good oportunities in NZ.

Also those that are willing to super hype the story seem to attract capital - mainly freinds and family, and now equity crowd funding (NZers are always suckers for the "guaranteed lotto win").

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Those that are 'connected' are usually the ones who have been successful earlier, and are more likely to be the 'good' ones anyway.

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