If you are a startup in New Zealand, your business will need cash in the future to continue and expand. If you are a high growth, innovative business, you might be a ripe candidate for venture capital funding. This article will answer some key questions you may have about venture capital funding, including:
- what venture capital is;
- what kind of companies can get venture capital;
- who are venture capital investors;
- why you might want venture capital;
- what you might have to give your investor;
- and most importantly – how to get it!
What Is Venture Capital?
A growing startup often needs cash. In this context, cash is sometimes described as “capital.” “Venture capital” is a term used to describe the cash given to startup companies. In particular, high growth startup companies often receive venture capital from investors known as venture capital investors (or VC investors).
This capital can come in two forms – equity (shares) or debt (a loan). You can raise venture capital at a certain point in your companies' lifecycle. The table below, summarises the key stages of capital raising for most companies:
|Startup Funding Rounds|
1. Family and Friends
Funds raised from family and friends to kick start your idea in return for a small amount of equity.
2. Seed Round
Another small round of fundraising (generally from angel investors) to build your product and cover expenses.
3. Venture Capital
Major investment round (or rounds) involving venture capital investors investing in the company either in the form of a loan or in return for equity.
What Companies Can Get Venture Capital?
Typically, the type of companies which can obtain venture capital, are high-growth companies. Venture capital investors prefer these types of companies rather than slower growth companies. This is because it increases the investor's chance of earning significant returns.
Most high growth companies are in certain industries, for example, SaaS companies, or biotech companies. However, you may have an innovative business capable of generating a billion dollar in profit in the future. In that case, you may still be attractive to VC investors – even if you are from a different (or new) industry.
Who Are Venture Capital Investors?
In New Zealand, there are several venture capital firms. These firms mostly raise money from private investors and look for high growth companies to invest in.
Further, the New Zealand Government has been running the Venture Investment Fund since 2002 and the Seed Co-Investment Fund via the New Zealand Venture Investment Fund Limited. Whilst there has historically been a low supply of venture capital in New Zealand, these funds indicate that the government is trying to jumpstart New Zealand's venture capital industry.
Additionally, there is increasing interest in New Zealand startups from overseas venture capital firms. Overseas investors can bring a unique perspective and insights from other markets to your business.
Why Would I Want Venture Capital?
Often, startups cannot access more traditional capital types, such as bank loans. Likewise, usually banks will only lend to companies that are cash flow positive and have lots of tangible assets. Unfortunately, startups do not often fit this bill. Many startups are yet to break-even, and for most, their most valuable asset is their IP. Therefore, your startup may be unable to obtain a bank loan.
Most banks will also require the directors to give personal guarantees or give security over their property. This may include a mortgage over their family home, which some directors do not feel comfortable providing.
You may also be too small to access public markets. Generally, you need to have a proven business model and high recurring revenue before you can list. Conversely, this is not a prerequisite to obtaining venture capital. Therefore, many companies use venture capital to build their business, to the point where they are ready for listing.
What Do Venture Capitalists Get Out of the Deal?
Venture capital investors are willing to take on more risks than banks. But this comes with tradeoffs. Your VC investor will request equity (either shares, options or warrants) in your company. If you borrow money, they may also ask for a high interest rate on your loan. This rate will be higher than the rates traditional banks offer, remembering traditional banks might not lend to you in the first instance.
Additionally, your venture capital investors may request other things too. These include:
- A seat on your board of directors: whilst this may not sound appetising at first, this does have its benefits. The VC investor will want to oversee their investment closely. However, they can also be an important partner in your company's growth story. If you pick the right investor, they can introduce you to customers, suppliers and other advisers. They should also have a wealth of experience working with other high growth companies and can share their knowledge based on this experience.
- Liquidation preferences: this will give your investor priority to the company's assets, if things go badly, and you must liquidate your company. The investors will be paid out, behind creditors, but before other shareholders.
- First right of refusals on later share issuances: particularly in venture debt deals, the investor may ask for pre-emptive rights on later share issuances. This means you would first have to offer any shares you intend to issue in the future, to your investor. If they say no, or do not take up all the shares, you can then offer them to third parties.
How Do I Get Venture Capital?
You need to network. VC firms often hold events and meet-ups for startups. These can be great ways to meet your future investors. Also, do not let geographical borders curb your search. Remember, an overseas investor could be a valuable strategic partner for your business.
Additionally, your trusted lawyer may be able to put you in touch with venture capital firms they have worked with before. A venture capital firm will likely take a more serious interest in you if a referral comes from an advisor or a fellow founder with a pre-existing relationship with that firm.
Furthermore, if you are serious about raising capital, you need to have a pitch and a pitch deck ready. Your pitch should succinctly outline the essential details about your business plan and entice venture investors to support your business.
If you do not feel you have the expertise to put together a great pitch, many consultancy firms can help you put one together.
As a high growth, innovative company, your startup may be the perfect candidate to receive venture capital funding. This form of capital raising can be a great way to build your business. Likewise, VC investors, particularly those from overseas markets, can bring a unique perspective and insight into your business. VC investors are willing to risk more than traditional banks. Still, they may ask for other requests, including, a seat on your board of directors, liquidation preferences, or the first right of refusal. Finding the right VC investor involves networking and developing your business' pitch deck.