The Startup Advisory Council (Council) recently published a comprehensive report, "Upstart Nation", aiming to accelerate innovation and development in New Zealand’s startup ecosystem (Report). The Report sets out a detailed strategic plan to maximise the potential of New Zealand startups. We’re taking a closer look at some of the recommendations.

In this update, we look at the Council’s recommendations to ensure an ongoing and sustainable supply of capital for New Zealand startups.

Characteristics of a sustainable investment ecosystem

Since the Government established the New Zealand Venture Investment Fund (now New Zealand Growth Capital Partners (NZGCP)) in 2002, New Zealand’s domestic venture capital industry has been slowly growing. Despite these funds, many startups have ventured offshore to source international funding to scale up.

One of the Council’s stated goals is to establish a sustainable New Zealand investment ecosystem with the following characteristics:

• consistent creation of high-growth, impactful, financially successful startups;
• private venture capital backing the lifecycle of startups that is then recycled back into future startups;
• domestic and offshore venture funds supporting startups scaling up;
• consistent institutional investment in the startup market; and
• a diverse, inclusive, and representative startup and investment community.

Growing the investment ecosystem

The Report estimates that the current investor ecosystem invests approximately $400 million per year. To meet the Council’s goal of doubling the number of startups over the next seven years will require at least $2 billion in new funding sources then sustained funding of at least $800 million per year, both from Government funding and institutional and private capital.

The Report suggests that the Government should:

• commit a further $500 million over the next ten years to the NZGCP Elevate programme and allocate $50 million to boosting seed funds;
• support the growth of the investment ecosystem by developing a programme to promote and support angel and venture investment; and
• support Māori-led startups and Māori investors by committing $20 million of capital to the establishment of a $50 million Māori-led fund with a preference towards sourcing, developing, and investing in Māori-led businesses.

Promoting KiwiSaver investment in startups

One of the Council’s key strategies for increasing the availability of institutional capital is to remove barriers to KiwiSaver funds investing in startups. Currently, Reserve Bank data indicates that only 0.18% of the $97 billion in KiwiSaver funds is invested in unlisted shares, including private equity, infrastructure, and venture capital.

The Report identified the following barriers to KiwiSaver fund managers investing in startups and venture funds:

• Fund managers provide a bias for liquidity, as KiwiSaver members can switch between funds at any time.
• KiwiSaver funds are benchmarked against fees and returns, but private equity investment increases overall fees and lowers short-term returns.
• Fund managers need to be able to mark illiquid assets to market regularly, in between the quarterly reporting cycle of venture fund managers.
• Greater understanding is needed of how venture capital and private equity work.

The Council proposed the following solutions to make it easier for KiwiSaver funds to invest in startups and venture funds:

• The Government guarantee the short-term liquidity of any investments in an eligible New Zealand venture fund by buying, and then on-selling, interests in venture funds if a member withdraws or transfers funds.
• Move from daily liquidity to 90-day liquidity.
• Refine the fee reporting regime to show the underlying assets classes in the fund.
• Provide guidance on asset allocation to build fund managers’ confidence in allocating capital to illiquid assets.

Our view 

KiwiSaver funds and high-net-worth angel investors present immense potential to bolster investment in early stage startups in New Zealand, which should be supported by putting in place strong infrastructure and other protections to promote such investment. This is in the context of global investment trends by overseas pension funds in illiquid assets, such as infrastructure.

If the Government takes steps to encourage KiwiSaver funds and other high-net-worth angel investors to invest in early stage startups in New Zealand, and reduces barriers to investment, there is a real opportunity to create a sustainable investment ecosystem in New Zealand.

Read our Upstart Series:

Upstart Nation #1: Building a sustainable startup ecosystem

Upstart Nation #2: Taxation

Upstart Nation #3: Talent