Be careful what you wish for. The coming flood of VC cash and its unintended consequences.

A thought for the day (mainly because I'm home alone and a message from the awesome Lovina McMurchy got me thinking...)

This week I'm speaking at an event in Dunedin alongside Oliviah Theyers-Collins, Ryan Baker from Timely, and Mark Vivian. The subject of the panel is around capital raising and, in advance of that, I thought I'd jot down some thoughts. Sorry if I sound negative, I'm just saying it how I see it...

For the past decade or two in New Zealand, we have heard ad infinitum about the constraint that start-up companies are under. Generally, this was all about capital and founders bemoaned the fact that there was little or no capital (beyond the obvious mortgaging of their own home) to fund their business.

Since then, we've seen massive growth in the angel investing space and hats off to Suse Reynolds and Bridget Unsworth at Angel Association New Zealand for the awesome Mahi they do to ensure the increasing numbers of angel investors are behaving well. While I have been (and, sorry, still am) a bit critical about the behaviour of some individuals and Angel groups, the angel space more generally is in very good heart and there is way more opportunity for early-stage companies to get funded now.

Which takes us to institutional money. The cash that a business needs as it moves out of the angel orbit and into the real world. Until recently, Venture Capital (VC) funding in New Zealand was extremely limited. In the next months and years, however, we will see a massive influx in capital focused on later-stage investing - we've already seen this with Movac, Punakaiki Fund, Global From Day One (GD1) Fund locally and our Aussie mates Blackbird and AirTree.

While more capital is nominally a good thing, this influx is going to have some impacts here that are perhaps sub-optimal:

1. The talent wars. Already the big corporates are sucking up talent at a great rate of knots. More funding for our local startups means that they'll be desperate to spend that cash and much of it will be earmarked for talent. We've already got a shortage of good people and this is only going to make that situation more acute. My prognosis: a veritable shit-fight for talent and people jumping from gig to gig to the detriment of businesses and the ecosystem as a whole.
2. More funding of businesses that really shouldn't be. I can hear the howls of protest already but the great thing about capital constraints is that it means that only the really good companies get investment. All of this cash trying to find a home is going to mean that stuff that, frankly, is a bit crap, will pick up cash. My prognosis: Expect our success rate to diminish over time as crappy propositions that should never have been funded fail slowly.
3. Valuations are gonna get cray cray. We've already seen some really insane stuff around valuations for startups. While at face value having your pre-revenue startup valued at $10 million is an awesome thing, it also introduces massive downstream problems as your metrics don't justify those valuations. Expect to see an increase of down rounds at Series B and C etc.

I'm all for a vibrant capital market in this country, but that should happen organically. Given where global interest rates are, and the attention New Zealand is getting for its handling of Covid, its attractiveness as a destination generally, and its emerging tech scene, and growth of funding is going to be anything but organic.

So, what to do?

Founders: Consider whom you take money from deeply but, even more importantly, consider how much you want to raise and how you structure that deal. While a lofty valuation and cash from a big-name VC might be a great ego-boost, make sure you consider any downsides. Raising a big chunk of cash might be a great defensive strategy, but don't be naive about what VC's are all about (no disrespect to my VC buddies, but I'm sure you'd agree that founders should be wide-eyed about this stuff.)

Angels: Yup, you're going to be squeezed out - both in terms of baseline valuations but also as all those VC funds move into earlier stage deals as well. If you're an angel for the right reasons (ie supporting startups and wanting to see the ecosystem grow) you'll be OK with this. I nearly invested in one of the companies mentioned in this article and if I had done so at that early stage, my nominal value would have risen stratospherically. While I'm a bit sad not to be on that particular journey, the right thing for the business was to take funding for a single investor, and I just have to enjoy their success vicariously.

VCs: Play the long game. Try and avoid the Sand Hill Road feeding frenzy. Build the ecosystem by considering both breadth and depth. Maybe even put some of your cash towards more impact-driven initiatives. Basically be good citizens, please.

Disclosure: I'm buddies with many of the individuals and entities mentioned here. I'm an investor in the Punakaiki Fund and I'm on the investment committee (and was previously on the GP board) of the Impact Enterprise Fund, an investment fund focused on organizations driving positive social and environmental impacts and a joint venture between The Akina Foundation (of which I chair the board), New Ground Capital and Impact Ventures. I've also been an angel investor for the past decade with investments in New Zealand, Australia, Israel, the US and UK.