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Startup Investment New Zealand

The magazine for angel investors

 

Startup Investment Magazine October 2021

Welcome to the Autumn 2022 edition of Startup Investment magazine.

In this edition we look at the trend towards climate-based investing and how the startup ecosystem can help to solve globally important problems. We speak with startups focused on incentivising us to make more conscious investment decisions; we talk to founders and investors who are creating game changing solutions to some of our greatest climate issues; and we uncover some innovative approaches to repurposing waste.


Big ambitions in a world of uncertainty

The startup ecosystem in New Zealand continues to thrive and mature, with 2021 delivering a record level of deal activity. Early Stage Investors invested $257.5m in startups (a 63% increase compared to 2020) and for the first time the median deal size for follow-on capital reached $1m. This growth in the face of economic, social and environmental uncertainty is an incredible achievement. Continuation on this trajectory in a world of uncertainty and political instability requires unwavering focus on what makes the New Zealand startup ecosystem unique - its ability to deliver solutions to globally important problems. 

This focus is illustrated in the 2021 deal data, with $106m (41%) invested in deep tech startups that are solving problems presented by climate change, sustainability and in healthcare, compared to $17m (11%) in 2020.

In this edition, we explore the trend towards climate-based investing in more depth. We speak with Outset Ventures, Nuance Capital and CoGo on how we can be incentivised to make more conscious investment decisions that have a positive impact on the planet. We also look at startups that are creating game changing solutions to some of our greatest climate issues. This includes Carbonclick and Cropsy Technologies who are helping the agricultural sector reduce its carbon footprint and its impact on the environment, as well as deep tech startups Mint Innovation and Aquafortus that are ‘turning waste into gold’ through innovative approaches to repurposing waste. 

We only begin to scratch the surface of how our startups are engaging with the climate challenge. New Zealand, which has a reputation for efficiency and innovation, has the potential to be a leader in climate tech, and that requires a strong, focused, well-funded startup ecosystem.

We hope you enjoy this edition of Startup Investment.

Lisa Douglas
Director, PwC


Startup investment trends

Investing for good: climate solutions delivering positive impact

Arguably the greatest innovation challenge humankind has ever faced is staring us in the face. The world has ten years to halve global greenhouse gas emissions and until 2050 to reach net zero. In April 2022 the Intergovernmental Panel on Climate Change presented its latest report with a stark prediction -  the world is on track to increase global warming well beyond the target set by the 2015 Paris accord. On the report’s release, the United Nations said greenhouse gas emissions must be curbed by 45% this decade, but current climate pledges will lead to a 14% increase.

As such, climate solutions are critical to enable this transformation and are attracting growing investor interest. Outset Ventures co-founder and chief executive Imche Fourie says there’s a clear need for climate-based investments.

“The world has dug itself a hole that we now need to innovate our way out of,” Imche says. “We need to promote adaption and we need to build resilience, as well as reduce emissions.”

Nearly half of Outset Ventures’ investments are in climate tech companies, all over the last 18 months when what was then called LevelTwo switched from being a startup hub, support space and incubator to funding as well.

Imche says the team’s approach to climate tech investment is the same as any other. “We’re asking, is this a good team, does it have compelling technology, is there a market for it? I think that approach speaks to the fact that climate investments are good investments.”

But what else goes into that selection mix?

“We have a very clear picture of what we think the future should look like, so any technology that comes to us and builds towards that future is investable.”

For Outset Ventures, that future vision includes abundant clean energy and is less reliant on carbon-intensive industries. Companies that support that future also need to be equitable, Imche says. By this, she means a significant positive impact on people is required and not just the bottom line.

At Nuance Capital, investment manager Mitali Purohit believes there’s more wholesale acceptance and focus on the need for climate tech, which has become more apparent to investors and consumers over the last two years. She says the impact of Covid-induced lockdowns partly contributed to growing awareness.

“People saw changes when the planes weren’t flying and cars weren’t on the roads,” Mitali says. “Also, people spent more time in front of the TV and reading news and were noticing the acceleration of climate change-related natural disasters.”

She says the only way to fast-track emissions reduction is through innovation and technology which can scale quickly and be rolled out globally. They look for companies with passionate founders who are mission-driven, with good plans and disruptive ideas to take to the world.

“Part of our investment screening, internally, is asking this question: Are they missionaries, not mercenaries?”

Outset Ventures and Nuance Capital want to see bold visions in the companies they back that will lead to substantial support for the climate or sustainability and have a generational impact. 

Both point to Kiwi start-up EnergyBank as a great example of technology that supports other climate-based initiatives in electricity production – such as wind and solar – to better distribute electricity when needed.

James Powell- Dawn Aerospace

Imche Fourie, Co-Founder and Chief Executive, Outset Ventures

James Powell- Dawn Aerospace

Mitali Purohit, Nuance Capital Investment Manager

James Powell- Dawn Aerospace

Ben Gleisner, Cogo Founder and Serge van Dam, Cogo Investor and Chairman


Shifting the dial – what’s important for New Zealand Inc

The goal of net-zero emissions by 2050 requires across-the-board commitment, says Mitali. Greater government support with the right regulation, policies, non-equity funding and a more determined focus on research from universities will encourage further investment in climate and clean tech.

“In New Zealand, climate tech and clean tech are not separated, and that’s a problem because climate tech doesn’t get a specific focus, and it’s the least funded of the two,” she says. “We need investors coming together along with the policymakers to help with not just funds but the infrastructure to develop and trial these technologies and then, hopefully, scale them in New Zealand before we start exporting.”

The risk of this not happening, she says, is that talented people and their innovations will go elsewhere, or not bother at all. Mitali adds that investors are also important for mentoring founders, who are often first-time entrepreneurs who need governance support, access to local and global networks and other innovators.

Imche Fourie says several changes in thinking are required to shift the dial, which has a dual purpose of encouraging innovation and helping consumers understand how new ideas will change their lives. For example, she says people clearly understand the need to move from fossil fuels.

“But, we also need to shift our mindset from energy conservation to energy abundance, because to really increase quality of life, we will be using more power. A realistic thing to be targeting is how we create more energy, better.”


Finding opportunities

Alongside energy production, storage and distribution innovation, Imche believes New Zealand is well-positioned to develop future foods at scale and heavy industry should also have a focus to reduce its carbon footprint.

Increased investment, over time, will lead to improved export returns, reducing the economy’s reliance on companies like Fonterra and sectors like tourism. In addition, as founders and investors exit successful companies, more funding is available for fresh innovations.

Mitali says along with the need for innovators, policymakers and regulators to work together, New Zealand needs to be at a point where it specialises in just three to five vertical streams. She includes sustainable food production practices in her list, along with the clear need to improve farming emissions, and infrastructure development for improved mobility and energy technology.

Agriculture is important for New Zealand investors, Mitali says, because one of the biggest challenges faced by innovators in climate tech and clean tech is the journey from proof of concept to commercial scale.

“In agriculture we have farms and we have space to trial the products and test in our own home ground before we export. We’ve also got early adopters here.”

Returns to New Zealand Inc are tangible too, Mitali believes, with the retention of talent and the growth in reputation as specialists in the deep tech space.


Encouraging behaviour change in consumers

Wellington-based Cogo has developed a way to inspire consumers and small businesses to be more conscious of how they’re contributing to the problem as individuals by tracking emissions linked to their spending activity. 

The solution is at the crossroad between financial technology and climate tech, providing analytical software that drills into transactional data to extract the carbon cost of consumer spending.

Cogo investor and chairman Serge van Dam says that while many might think the nature of capitalism has led to the world’s climate crisis, it’s actually capitalism providing the solutions for it.

“There’s a misnomer that capitalism is the cause of all our troubles. But it’s not actually that, it’s human nature. Hacking capitalism for good is the only way out of these problems. Cogo is a perfect manifestation of that. We are building a profitable business that scales globally, but also trying to create a bottom-up change.”

Cogo founder Ben Gleisner says people are wrong to assume that climate or sustainability investments attract a lower return.

“Society demands companies like ours. You can create positive environmental and social good and make money, and there are lots of reasons why,” Ben says. These include the relative ease of hiring and retaining staff and a growing consumer desire to “do the right thing”.

Serge says the nexus of a company, along with the talent and passion of the founders behind it are what he looks for as a key part of his decision before making any investment.

“The second question I ask is, is the problem worth solving? And the answer is pretty obvious in this case. Should we try and have more sustainability in the way businesses and consumers spend their money?”

Ben grew up with environmental-minded parents which ultimately led to his views on fighting for a more just and sustainable world. Cogo was the result after an earlier, charitable, iteration focused on waste management.

Serge explains that he has a similar set of values. That, coupled with his experience in investing made for a marriage, of sorts, that leverages Ben’s technical approach and Serge’s ability to drive growth, further investment and good governance.

Climate tech companies are becoming more attractive, Serge says, not just because of the returns, but because investors are starting to crave being part of the solution.

“Software as a service and technology generally, are going to be bigger than tourism and agriculture put together for New Zealand in 10 years and we want to be part of that wave building our own very large company.”

Cogo is in five markets currently, including the UK, and is looking to expand into North America and Asia. The company is also working to apply its analytics beyond banking – supermarkets and general retail are on the list.

“We want to be able to measure in real-time the impact we’re having and over the next year, we want to show the actual change in behaviour we’re contributing to. We want to be a role model by doing that,” Ben says.

Serge cautions success rarely happens overnight, “unless people get lucky”, which does occur.

“Investors shouldn’t be hoping for luck. It’s really about long-term resilience and a company needs to have people who are prepared to get punched in the face a few times. Success will follow.”

Sustainability focused startups

Kiwi startup Carbonclick’s roots were very local, with a couple of its co-founders working with a large New Zealand company to help offset its emissions with a bespoke platform they’d developed.

After five years refining their system, they realised a more significant impact and uptake was possible if they built more transparency, traceability and trust into the platform.

The result is a solution that offers businesses a deep understanding of their sustainability journey and provides consumers with an opportunity to offset the carbon emissions related to their purchase. Funds collected from consumers are invested in both carbon-neutralising projects, such as tree planting close to the source of production, and activities that contribute to sustainability and emissions reduction in other ways, such as clean energy.

“That really resonated with me and I offered to back them in their friends, family and fools round. We gelled really well and they asked me to come on as a co-founder as well and be the CEO,” recalls chief executive Dave Rouse.

“That was an opportunity I couldn’t say no to. It was in a space that I was deeply concerned about, so I thought, right, hold my beer, let’s do this properly. I saw the opportunity to do a really simple and small thing with massive global potential.”

Two-and-a-half years later, following friends and family and seed rounds, the team has launched a series A round which is going well.

Dave says a lot of investors want to have some ESG elements in their portfolio alongside more traditional e-commerce companies. And because of that, Dave says a lot of those investors have the right connections to support Carbonclick’s plans. 

That’s not to say the investment journey has been easy, but Dave explains that Carbonclick is ticking boxes in a noisy space where there are lots of startups emerging.

“Investors are looking for a point of difference – the one, two or three leading horses in this race. Carbonclick has an approach where we already network with what I call leading horses with the idea that there could very well be a roll-up in this space down the track. I think we’re well-positioned to be one of those leaders from day one.”

Dave says having a “bootstrap culture” is attractive to investors too.

“We get things done on a lower budget and we’re very creative with their cash. They see New Zealand as being quite a lot safer with their money compared with other attitudes around the world. I think that’s inherent in most Kiwis.”

The latest fundraising round will position Carbonclick for further global growth. Already 80% of its customers are offshore. It’s now looking to engage a large sales team in the United States to directly target some of the world’s largest enterprises – “the Nikes of the world” as Dave explains.

“And this all helps to put New Zealand on the map.”

Kirsty Reynolds

Dave Rouse, Chief Executive, Carbonclick

Brough Johnson

Leila Deljkovic, Co-Founder, Cropsy Technologies

Candice Pardy

Tracy Atkin, Lead Investor, Angel Investors Malborough


Gaining insights

Companies that impact the visibility and understanding of New Zealand’s deep tech capability will likely benefit other startups in the future.

A new one is Cropsy Technologies, founded by four University of Auckland engineering and science graduates. They’re now considering what an exit plan might eventually look like and already have a list of enterprises they hope will line up to court them.

Co-founder Leila Deljkovic says the journey began when fellow co-founder Ali Alomari was thinking about pain points experienced by hydroponic growers in the horticulture industry, and what sort of automation could be developed to reduce them.

Ultimately, the idea morphed into a vehicle-mounted device that monitors grapevines to provide insights on crop performance, measurements and ailments. 

The technology combines a unique imaging device for continuous and GPS-tracked image capture and AI-enabled software to analyse the crops right down to leaf level. This empowers growers to understand the precise state of their crop, optimise every crop management decision, and utilise the land to its fullest potential. A happy side effect is an uptick in sustainability for growers because resources can be allocated exactly when they’re needed.

Leila says the technology was developed by focusing on what a grower needed and fitting in with how they worked. “We discovered there wasn’t a lot of technology readiness in the sector.” She says other solutions didn’t consider the needs of the grower, how they did their work and the existing tools, like vehicles, they used. “That’s when we thought maybe there’s something here that we can make.”

A self-funded prototype was developed to prove the idea, and contacts provided by an early mentor introduced the fledgling company to investors and others who offered advice. “This was a good process because we learned about things we weren’t thinking about like IP protection, which was the biggest thing for us.”

Leila also explains that the team needed to learn how to best communicate with investors. “It's been a long journey for us to secure investment. We tried actively raising three times. But in hindsight, I do think that was a really important process for us to go through because we grew a lot as a team and as a company during that time.”

Also, through the interaction with potential investors and networking, the team started to understand the scope of the technology was bigger than they thought. “We realised that we have a lot of data and that there was more we could do to help growers solve more of their problems and actually provide a vertically integrated solution for managing the crop, rather than just targeted treatment. “That actually blew our minds to be honest.”

Cropsy was already receiving early attention with R&D funding from Callaghan Innovation and the Agricultural and Marketing Research and Development Trust. It was also winning awards – including two out of four Fieldays innovation awards in 2021 – and gained acceptance into two accelerator programmes.

Trial partners include global heavy hitters Pernod Ricard Winemakers and Indevin, along with Marisco Vineyards in Marlborough.

Angel Investors Marlborough lead investor Tracy Atkin helped the company raise $1.5 million in its first round, which was oversubscribed to $1.8 million in commitments, earmarked to help the company commercialise.

“They were looking for strategic investors and being based in Marlborough, NZ’s wine capital, they approached us at Angel Investors Marlborough.”

Also on board is NZGCP’s Aspire NZ Seed Fund, K1W1, Icehouse Ventures, Angel HQ, Enterprise Angels and Impact Enterprise Fund, which invests in sustainable startups. This provides a mix and depth with strong links to horticulture and viticulture.

“I see angel investing as a bit of a team sport. This is a huge advantage with deep tech because you need a team, not just the expertise of one person. The saying, ‘it takes a village’, is really relevant to investing in startups because you need to have the ecosystem approach,” says Tracy.

This has also led to the creation of a governance board to fill the experience and expertise gaps to take the company on its path to commercialisation. 

Sustainability considerations are far more important for investors now than ever before. Whether they’re working to avoid investing in certain types of companies with links to perceived negative impact or activity, or actively searching for companies with positive ESG impact that are doing good things.

“Ten years ago, the word sustainability was pretty much a niche I think. But now if you haven’t thought about the sustainability impact of a company, you’re not thinking about viability because no company is going to survive without a sustainable approach.”

“That’s what I love about Cropsy. They’re solving real-world problems and helping growers.”

Tracy explains that the impact of companies like Cropsy for investors is important, because they’re providing a solution for growers who are part of a global industry where consumers are becoming ever more sensitive and aware of the impact their choices have on the world.

The idea is that growers who use tools like Cropsy will be well placed, with better practices and data, to back up good sustainable credentials and be part of the rapidly increasing demand for greener products.

AIM also led the seed round funding for Carbonclick. Tracy says through its carbon offset work, Carbonclick had strong links with the wine industry and approached AIM as a potential strategic investor.

“We liked them so much we didn’t just invest, we led the whole round for them.”

Turning waste into gold

Humans are messy. Even tidy people contribute to building landfill mountains, produce climate-warming emissions – or buy stuff from companies that do – and dirty up waterways.

The human circle of life is quite different from what Disney suggests in the Lion King, because every generation makes it a little bit worse for those who follow.

But now humans have cottoned on to the idea that we’ve not been prioritising well. 

While news headlines scratch the surface by pointing out the general problems that plague the planet, it’s entrepreneurs who lead the charge for change; developing ideas and turning them into real-world solutions that chip away at the damage that’s been done, reducing more of it occurring.

Icehouse Ventures chief executive Robbie Paul says entrepreneurs will ultimately fix the world. It’s not going to happen just because people choose to recycle or take an electric bus to the office.

“It’s staring everybody in the eye. None of us is unaffected by the changes that are happening and the risks that lie ahead. If you’re an entrepreneur, your purpose is to find big problems and create real solutions,” Robbie says.

However, it takes more than just a great idea to change the world and effect real change. Investors have to be on board to help make it happen.

And, Robbie says, it’s not just about people who want to save the world as part of a philanthropic approach. Many of the ideas flowing from the minds of entrepreneurs have real consumer-focused outcomes with huge markets.

One of those that Icehouse backed is Mint Innovation, which has developed a process using microbes to extract valuable metals from various waste streams – such as e-waste – so they can be used again. This mostly automated process recovers metals like gold, palladium, copper, cobalt and lithium. The plant can be built close to the source of waste which removes the need to export the problem somewhere else, where a range of negative human and environmental outcomes result.

“If anything, there’s a better business case investing in companies that are solving real-world problems, that are mission-driven.”

And there’s a simple reason.

“The people that you need to align with your mission – investors, founders, employees and government supporters – more of those people are likely to align to companies that have missions that are bigger than money.”

“From an investment point of view, we still look at the pedigree of the team, the quality of the tech and the robustness of the plan. Assuming those things check out, it’s easier to invest in companies like Mint that are addressing a problem and creating a better impact in New Zealand and the world, than just a bit of money.

“There’s a tidal wave of capital and human capital heading for companies that can create an impact. Investors will be directing more of their resources and energy towards companies like Mint which can both become magnificently large as companies and very impactful with the problem they’re solving.”

Robbie says while there’s no ubiquitous focus on sustainability-focused companies he’s seen, over the last five years there have been magnitude changes in the amount of capital that is being directed towards high-impact companies – such as those addressing waste streams.

As more companies commercialise, more positive outcomes will happen.

“Entrepreneurs define the future. They’re the ones thinking day and night, challenging the status quo, and inventing new ideas and perspectives. They open the eyes of others to possibilities and when that happens, people’s perceptions and behaviours change.”

And from an investment perspective, outside of market variables and demand, few limits constrain companies operating in this space compared with more traditional investments.

“For example, there’s no finite ability to create software.”

And, in the case of Mint, Robbie says it could become the biggest gold producer in the world, as he wonders whether there’s more gold now above ground than below it.

Mark McCaughan

Robbie Paul, Chief Executive, Icehouse Ventures

Jessica Lam, Chief Operating Officer, Aquafortus


Creating value responsibly

Mint is an example of a company that solves a problem and produces valuable and usable products at the end of the line. Not all waste-busting ideas have something shiny to sell at the end of the process, but create significant value in other ways.

Aquafortus tackles problems created with wastewater. While there are many companies with high water use that take their responsibilities seriously, it often comes with significant costs and huge energy consumption. Aquafortus’ technology treats high salinity wastewater that, up until now, could only be processed using thermal evaporation methods, which uses a huge amount of energy. 

Instead of heat, Aquafortus has a non-thermal recovery and crystalisation process with a two-stage solvent exchange process and a proprietary absorbent as the transfer medium for water. A regenerant ensures the absorbent can be continually reused. The result is clean water, costing about 60% less to produce and saving about 90% of prior energy use.

The applications for the technology are vast, and include mining and petrochemical operations, industrial manufacturing and desalination.

Chief operating officer Jessica Lam says the journey towards cleaning the world’s water and attracting investment hasn’t been easy. Initial funding came from developing good networks and attracting high net worth investors.

“But given that we’re a deep tech company means that we’re very capital intensive. That meant the level of funding required to commercialise was beyond what was available in New Zealand. We needed to look overseas and that was difficult because New Zealand is so far away and when you’re at an early stage a lot of investors want to see what you’re doing. So it was only when we were further ahead that we could attract the overseas investors.”

Chief executive Darryl Briggs says attracting investors was like running a marathon.

“We just had to keep chipping at it. Momentum is incredibly important and we also had to go to the US and set up as a US company to attract a US investor. That was no simple task – a New Zealand company becoming a US company is challenging.”

Jessica says the strength of networks was key.

“We really tapped into our networks to get a US investor, DCVC (which led series A investment). We talked to maybe 30 or 40 investors and, like Darryl said, it’s an endurance race. Due diligence can take anywhere from three months to almost a year, so it’s a very long process, especially when we had to give them comfort because we’re so far away and the technology isn’t fully commercialised yet.”

Darryl says the challenge every startup will face is identifying the lead investor. “That’s what you’re going through the due diligence for because once a VC becomes the lead investor, everyone else will just fall behind them.”

He says touchpoints between early investors and later ones were extremely helpful, including NZGCP, K1W1 and Burnt Island Investors. “That interconnection really helped. It’s very much about networking. Once you’ve got that snowball rolling, it will grow. You’ll get better connections which just improves it. Our next round will probably be going through connections to DCVC.”

Aquafortus is about to seek bridge funding of about $15 million before opening a series B round about March next year to raise a further $100 million for commercialisation. The team is putting the finishing touches on a small pilot plant as proof of concept and later in the year a bigger plant processing 100 cubic metres of water a day will be deployed in the United States, focused on oil and gas operations. “This will give our customers the ability to touch and feel it and throw whatever wastewater they like at it,” Jessica says.

Over the next three to five years, Aquafortus wants a number of plants in the field and is in full expansion mode. Customers are being targeted  in the United States, the Middle East and, eventually, Asia and South America, with Australia clearly in their sights as well.


We appreciate the following investors who contributed their 2021 data: Angel HQ, Angel Investors Marlborough, Arc Angels, Blackbird Ventures, Brandon Capital, Canterbury Angels, Cure Kids Ventures, Enterprise Angels, Finistere Ventures, Flying Kiwi Angels, GD1 Fund, Hillfarrance VC, Icehouse Ventures, Impact Enterprise Fund, Launch Taranaki, Maker Partners, Mainland Angels, Matu Fund, MIG Angels, Movac, Nelson Angels, NZGCP, Nuance Capital, NZVC, Otago Angels, Outset Ventures, Pacific Channel, Punakaiki Fund, Quidnet Ventures, Snowball Effect, UniServices and WNT Ventures.

 


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By PwC New Zealand and the Angel Association of New Zealand.

Contact venture@nzgcp.co.nz to contribute data in future editions.

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Anand Reddy

Anand Reddy

Private Business Leader , PwC New Zealand

Tel: +64 27 592 1394

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Lisa Douglas

Director, PwC New Zealand

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