In New Zealand there are typically three main types of funding; Seed, Angel and Series A. The first step is to recognise the differences between the three types of startup funding available in NZ and at what stage to engage with each type. There are many variables when applying for funding and we can help you better understand what is involved at each stage, as well as help you navigate through the range of options successfully.
Funding is a crucial part to any startup making it… so let’s take a look at the startup investment opportunities available to in NZ.
The initial capital used to start a business, the business is usually in conceptual stages.
Securing startup seed funding
If you have never raised funding before, the first questions we will be asking you will be around getting a feel for where your business is at. How much money are we actually talking about? In NZ seed capital is usually within the realm of $20/30k but has stretched up to $100k in a few cases. It can come from individual investments from friends and family with deep pockets, or grants from associations like the Regional Business Partner Network or Callaghan Innovation. These days there is also the option of a crowd-funding campaign.
Angel investment comes from an Angel – an investor who provides financial backing for startups and is part of an Angel Club. There are a few different Angel Clubs across NZ from Ice Angels in Auckland, to Angel HQ in Wellington, to Enterprise Angels, Flying Kiwis, Archangels and many others dotted around the country. The capital provided can be a one time injection of seed money or ongoing support that carries the company through. The business applying for Angel funding is usually a little bit further down the track, may have a prototype and have already tested the market with the product.
Securing Angel funding
For companies a little bit further down the track (those who may already have a prototype or a product built already) typically seed funding may be too small an amount for what that business needs to scale and grow. In this case angel investment is likely to be more appropriate. The point of angel investment is to either expedite the process of getting to a Series A funding round, or to massively scale the company.
With typical angel investment funding rounds in New Zealand, were talking about anything between 100k – 500k, even up to 750k. In almost all cases angel deals are what we call syndicated (i.e. there is more than one angel putting money into the investment pool, it is a joint investment process).
Quite often these Angel investment deals are done through an Angel club, which might be 5 angel investors who all invest 50k. In almost all cases in NZ, Angel deals are what we call syndicated, which means multiple angels are pooling their money together, rather than investing on their own. The club’s job is to organize the investors so that your are dealing with a $250k pool of money, rather than 5 investors, making the process more straightforward.
Series A is the name of a round typically given to company’s first significant stage of venture capital financing. The name refers to the class of preferred stock sold to investors in exchange for their investment.
Differences between the Angel funding round VS the Series A. To gain Series A type funding in NZ, means the company has to be at a point where it has completely validated its proposition to the market. It has got proof points, data, traction, customers, contracts and it’s proven the idea works and has legs. It’s already operating in a commercial space. In New Zealand, Series A investment rounds are somewhat rare in compared to the United States.
In the U.S. ventures can often get Series A funding on very little data or proof points. The risk adversity in the States is a lot higher, which enables ventures to receive significantly larger amounts of funding. It’s not uncommon for businesses in the states to receive 5 or even 10 million dollars of funding on the back of a good pitch, but these amounts are unheard of in the New Zealand startup market.
The biggest rounds that we have seen in NZ are more in the 2-3 million range for Series A. That is usually when venture capital companies like MOVAC, GD1 and Spark Box come in and put almost over 1 million in. In NZ investors will want to see that this is already a de-risked idea, it’s proven, it works and it has validated itself in the market.
HIGH NET WORTH INDIVIDUALS:
ANOTHER SOURCE OF FUNDING OUTSIDE OF SEED, ANGEL & SERIES A
Another way to fund a startup business, for companies looking at middle range investment is what we refer to as high net worth individuals – people who typically have a large asset bases, usually 10’s of millions of dollars.
The most common occurrence of this is when a startup has a strong alignment with these individual’s specific investment interests and expertise, this calls for understanding which investors have a track record of investing in what types of companies, and where their personal interests lie. Usually the investor will put the whole amount they’re investing, coming in, and will want a significant equity stake for the investment, they may want to be part of the board and have input in the direction of the company.
High net worth funding deals are uncommon in the New Zealand market, they tend to be private and heavily based on personal connections. They often are lucrative deals because the high net worth individual who makes the investment, usually has a thorough understanding of the space in which they are investing, providing the startup with access to expert advice as well as that all important cash injection.
NZ VENTURE INVESTMENT FUNDS (VIF) & SEED CAPITAL INVESTMENT FUNDS (SCIF) AND HOW THEY WORK
Navigating through VIF’s & SCIF’s in the way of access and processes can be somewhat tricky for a new or even established venture. Going through the Angel network, Creative HQ can access Seed Capital Investment fund (SCIF) enabling a match of investment of up to 500k of what the private sector has put in and normally up to 250k for a first investment round. A match fund allows for funds to be matched by other sources. For example if you were able to get 200k out of Angel HQ and Angels then SCIF would match that with another 200k, so you would get 400k funding in total.
Is matching normally a done deal, if you know the way to navigate? It’s a done deal, unless their funds are tapped out, that would be the only way you wouldn’t get match funding. In all other cases if you make an application and it’s gone through proper channels, like Creative HQ and Angel HQ and received as investment, it’ll be matched by SCIF.
ARE YOU PREPARED TO GET FUNDING?
In order to get funding you need to be really clear about the differences between Seed, Angel and Series A investment rounds and what stage your business is at on the scale. The main difference between the funding types is the amount of money your business is getting, and the amount of evidence and traction you’ve got for your product, that will equate to the appeal your startup has for investors. An example of this could be: you’ve been in business for 2 months and you’ve just signed a contract with a major client worth several million dollars, with an idea that is absolutely feasible, but perhaps you don’t have money to execute on it. In this case you’ve got exclusive access to something that is really valuable so you can leverage your idea.
In this situation you might be skipping Seed or Angel funding and going straight into Series A funding rounds because you need the money to execute. You will have to have the proof points here to go along with it. Typically, people who are just starting out that have a good idea, it’s about Seed funding to launch the idea into the marketplace and get some traction and prove your idea is valuable.
Which pot of funding you are wanting to access and how much do you need?
Being clear about how much you need and where you are going to access it is very important in securing investment. The main question from the investor will be; what will you do with the money? And the question after that will be; what will you do if we give you only half, or double that. Being prepared for these types of questions will determine how successful you are in terms of financing your startup.
Be compelling to investors, put your own money in.
Investors like to see startups financing their initial funds, and managing to find small amounts from other sources. Even if its comparatively small amounts it goes to show that you are vested in your idea and in growing your business.
Acceleration programmes and incubation programmes that Lightning Lab and Creative HQ provide are also useful in this way. Your venture is surrounded by people and other businesses and can pave the way for a powerful and connected network leading to well fitting investment deals.