Article by Peter Griffin.
A tepid fundraising environment for startups in 2023 spurred a return to business fundamentals as angel and venture capital became harder to find.
But investors are enthusiastic about the opportunities to inject capital into fledgling New Zealand Web3 companies led by capable founder teams with a clear idea of the unique proposition and potential for scale that exists in their nascent businesses.
A recent Web3NZ webinar Capital Raising for Web3 Businesses, hosted by Kevin Whitmore, Callaghan Innovation Business Innovation Advisor, heard from three venture investors and the Angel Association NZ, giving up to date perspectives from the midst of a subdued venture capital market.
The Angel Association’s Michelle Cole said that the regular PwC report looking at angel and early stage investment in New Zealand had Web3 companies attracting around 4% of early stage investment in late 2022.
Web3 a tiny sliver of the funding pie
By the middle of 2023, PwC was no longer breaking out Web3 as a category, reflecting the dearth of deals being completed. While SaaS (software as a service) remained strong claiming 26% of early stage funding, the leading category is deep tech, which accounted for 36%. Cole said the shift away from SaaS investment revealed a maturing market as tech founders who have exited their startups looked to back high value startups creating valuable intellectual property based on fundamental science and technologies.
“You're getting a lot of the tech founders that have exited and now they then want to play, and so they are a little bit more braver, their risk appetite is slightly higher in how they would like to invest,” she said.
However Cole added that our cohort of experienced start-up founders on the angel investment scene are in hot demand as entrepreneurs seek out investment dollars coupled with valuable startup experience.
“They are getting very tapped out,” she said. “They're quite busy and some of them are wanting to sort of slow down a little bit.”
Nahwaz Ahmed, General Partner at GD1, where he runs the dedicated Web3 Fund, said his current focus is on early stage New Zealand Web3 companies seeking pre-seed and seed funding.
“We're happy to be a first check and to help you find more investors through our networks,” he said.
“We're quite generalist across the world of Web3 and crypto but I would say 80 percent of the things that we would probably invest in are more infrastructure type projects. And that's across the various genres of crypto,” he added.
Seeking Web3 infrastructure projects
Ahmed’s interest in Web3 infrastructure projects spans decentralised finance, non fungible tokens (NFTs), and scaling of blockchains. Around 20% of his focus was on consumer Web3 applications, such as decentralised applications, digital wallets and real world asset types.
When it comes to investing in a Web3 startup, GD1 is looking for a clear path to growth.
“I really like to invest in things where I could see the business actually making money rather than it being quite theoretical for a long time,” said Ahmed, who has been involved in Web3 investment for six years.
“So it's quite crucial for me to understand your go-to market type strategies and how you're going to acquire users, whether it be a DeFi platform, or a new blockchain.”
NZVC is a small venture capital interested in pre-seed, seed funding, and a “little bit of Series A”, focusing on business to business SaaS and deep tech.
“The fund is $17 million and we invest sort of $50,000 to 250,000 cheques,” says NZVC partner Mark Pavlyukovskyy.
“We've done about 40 investments to date of which I'd say probably six are web3 and crypto. That includes things like Easy Crypto, which is New Zealand's biggest [cryptocurrency] exchange,” added Pavlyukovskyy, who is an investor in California-based cryptocurrency services firm Swan Bitcoin.
More than a lifestyle business
Pavlyukovskyy found himself hunkered down in New Zealand in the wake of the pandemic and became familiar with the local start-up scene. He said a notable aspect of New Zealand startups is that many entrepreneurs were focused on building what he describes as a “good lifestyle business” with sustainable revenues and a strong customer base.
But he issued a reminder of what the venture capital industry is all about - high growth, speed to market.
“Venture capital investments… are geared towards companies that want to build some kind of technology that can scale really quickly, which is the reason you take money up front,” he said.
“Is the founder ready to do a marathon, or do a sprint for the finish line versus kind of running this as just a regular kind of business?”
Philip Stehlik, co-founder and partner of Europe-based venture investment firm, Crane Earth, is casting his eye across New Zealand for startups leveraging decentralised technologies to tackle the climate crisis.
Understanding climate impact potential
“That goes into supply chain, in decarbonisation, into water quality, anything that is around the climate spectrum is what we invest in,” said Stehlik.
A key requirement for Crane was a founding team that had technical and business skills, but also understood the climate impact the venture could deliver for the planet.
“What I would look for is that you have an amazing founding team where you have at least 80 per cent of the needs covered,” he said.
“So you have a technology founder, you have a business founder and often also somebody who understands the science of what you're actually doing. So that's a crucial part.”
Advice for Web3 startup founders:
Don’t get lost in the hype - business fundamentals matter
“I'm getting very sensitive, especially when the hype cycle is picking up again, because a lot of people are coming in for the wrong reasons. It's like, Oh yeah, let's launch this token. Let's do this thing fast. And that's just not the kind of crowd that will stick around. Inevitably stuff will get tough, you will not only have up cycles. So that's just something to watch out for, I would say, in the up cycle.” - Mark Pavlyukovskyy
Build funder relationships before you look for capital
“I really like talking to founders well before they raise, because it allows me to see what we're looking for in early stage founders, which is the capability of execution.
“So if they talk to me, three, four, five months before they're actually raising and I can see what they've done over that five months, before they actually start to raise, you really start understanding the way that they're able to kind of build these things.” - Nahwaz Ahmed
Demonstrate your passion for the venture and your desire to succeed
“This is something I tell to all very early stage founders - if you're working on something that you are not really burning for, then it's going to be a really tough, tough time to bring this into the world.” - Philip Stehlik