What's Happening in NZ Tech Financing?

So, I join North Ridge Partners and my partners say, “why don’t you write a piece for the Tech Round-Up on the New Zealand tech scene?”

Challenge – I’m an investment banker with experience running really big and really small transactions, ranging from privatising power companies to IPO’ing candle-making companies and everything in between. I’ve done brewing, industrial manufacturing, logistics, wineries, telecoms, media, healthcare, retirement villages, and the odd bit of tech - a SaaS IPO and (a personal highlight) helping PowerbyProxi with a pre-Apple raising. But, until very recently, a pure tech specialist, I was not! (For the record, I now work in a team of 15 dedicated tech specialists across the region, and am averaging seeing around five tech companies a week - the transition is underway!).

We keep hearing how vibrant the tech scene is in New Zealand. North Ridge Partners believe it is - so much so that they headhunted me to cope with the demand they’ve experienced since refinancing Magic Memories during the pandemic lockdown of 2020. So I thought I’d share with you some of my research into the tech financing scene here.

Recent headlines in our media suggest that there is a huge opportunity for NZ companies and investors:

“Momentum is building for New Zealand Tech” – Medium.com, 3 June 2020

“$2 billion payday for investors in Seequent and Vend” – Stuff, 12 March 2021

“Demand for NZ Tech Companies Heating Up” – Radio NZ, 16 March 2021

“There has never been a better time to invest in technology” – Mike “MOD” O’Donnell, Stuff, 20 March 2021

“New Zealand Game Developer Ninja Kiwi sold Offshore for $203 million” – NZ Herald, 25 March 2021

Is there a huge amount of new interest in our tech sector, looking to capitalise on the coming together of various factors? These include: (near) ubiquitous broadband connectivity (or availability); the rise of flexible working/working from home since the pandemic; the “death of distance” making NZ less of a faraway place for technology offerings, especially software, and SaaS in particular; the desirability of NZ as a place to live and work (definitely enhanced recently); and overlaying our expertise in non-tech sectors onto technology (e.g. in areas like AgTech and FoodTech). Some of these could be Covid-related, some not.

Or is this nothing new, except now it’s getting more media attention?

One way to look at this is to crunch the numbers on the level of activity in NZ tech financing transactions in recent years. The charts below show the capital-raising activity and M&A activity (i.e. businesses being sold, usually to offshore strategic acquirers) over the last five years[1].

The first chart below considers capital-raising activity. We have segmented the data (sourced from PitchBook) into early-stage (Seed and Series A) and growth equity (later stages). 

Chart 1: NZ Tech Sector - Capital Raisings

As you can see, the early-stage activity has remained fairly constant, and a similar story emerges if you look at deal numbers as well – although 2017 and 2018 were characterised by a greater number of smaller deals on average, 2019 and 2020 saw the number of transactions relatively stable (45 and 36 respectively) with average transaction sizes of $930k and $1 million.

But I would argue that the growth stage data shows this is where interest has increased. The number of deals in 2018 - 2020 (an average of c.40 deals per year) is nearly double that of 2016 -2017 (21 and 22 deals), and, while the average deal size in 2018 - 2019 was lower, the average deal size in 2020 ($5.8 million) was the highest in the sample set. Simply put, growth-stage companies are accessing more capital, more often than ever before.

As I get out seeing local tech companies I’m also seeing this - more companies want capital raising assistance, but, more importantly, there are more investors - especially for growth stage opportunities.

We also looked through the data to see whether there were any discernible trends by sector - looking especially at AgriTech, EdTech, AI, and SaaS, all of which have been focus areas both for New Zealand and for our firm. SaaS has been a consistently active sector, accounting for between 25% and 50% of all capital raised each year, with a bias towards growth capital. AI has become increasingly important, with between 10% and 15% of capital raising now purportedly in this space. EdTech has been “lumpy”, with raisings by Crimson Education changing the general picture of minimal raisings, and AgriTech has seen similarly low levels of activity.

Capital raising is then flowing into M&A activity – typically the way in which the companies are achieving liquidity/exits. You can see this in the chart below:

Chart 2: NZ Tech M&A Activity

It’s a bit harder to tell a story with this data – or rather, any story you tell could be contradicted by another.  Recent months have certainly seen a significant increase in activity, as illustrated by the Vend, Seequent and Ninja Kiwi examples which the media have picked up on[2].

The recent data should make people optimistic about the future of NZ tech. Companies that are in the growth phase now have every right to expect exits/liquidity events in the future.  There’s often a local refrain we hear in NZ “they’re selling our good tech companies offshore!” This is a part of life, and a great outcome  – the capital flowing back into NZ tends to get recycled into building out the tech ecosystem, helping to fund the next generation of start-ups and growth phase deals. The increasing professionalism of the investor base (more VCs as well as PE firms funding growth tech) means that capital recycling is even more likely[3].

As I said earlier, it’s unfortunate for the NZ tech sector that the NZ IPO route does not show the same level of activity, although there were three deals in 2020. This data, however, does not show the ASX listing route, which several NZ tech companies have taken and which, at least for some companies with the right business focus and in sectors where Australia has expertise (eg in HealthTech, where both Volpara and Aroa Biosurgery have had positive ASX experiences).

NZX is trying to improve the capital-raising environment, with, for example, the creation of an easier “direct listing” route for companies. But there remain significant regulatory and industry headwinds that make the listing of smaller companies (not just tech companies) harder and, even when listed, mean that liquidity is often limited. This is very much an area that needs focus if we are to maximise opportunities for tech companies in NZ in the future.

Conclusion

The range of NZ companies in the tech space is impressive and the things they are doing, often on the global stage, are exciting. The capital markets (especially on the private side) are catching up and are getting behind the financing of start-ups and, increasingly, growth-stage companies, an area where we really focus. We are seeing this bear fruit as successful companies are subject to M&A activity – and we expect strategic acquisitions (and financial / PE-led acquisitions) to be active in the coming years.

John Moore - Partner - North Ridge Partners

Auckland, April 2021

[1] As a former Equity Capital Markets guy, I wish I could also include “IPOs” as a separate category of analysis, but almost empty graphs aren’t that interesting! See further below on this point.

[2] And the 2017 data includes the sale of Vodafone NZ which, you could say, is not the sort of thing we are interested in here;  without that transaction, there were about $110 million of M&A deals completed in 2017.

[3] The NZ Government hasn’t always been as good at making sure its capital is able to be recycled – but the issue of grant money effectively flowing offshore, instead of coming back as the proceeds of a sale or repayment of a debt, is a topic for another day!