Seduced by startups

Mention the word startup and visions of innovation and new technologies flood the mind – along with unicornsand fantasy wealth.

Startup founders want to literally change the world – and do it today, not tomorrow. They are driven to solve problems, generate new jobs and revenue streams, and make a difference. But being a startup director is not for the faint-hearted, says Angel Association New Zealand executive chair Suse Reynolds MInstD.

“They aspire to change the world, building products and markets and scaling fast. This generally means raising money from others and taking big – but calculated – risks to create outsized impact and value. This is not for the faint-hearted from an operations and governance perspective,” she says.

What New Zealand is lacking, but building pretty quickly, is an experienced pool of talent, those who have “learned by doing”, and have experienced success and learned from failure.

“It generally takes about 30 years to build a thriving, experienced startup ecosystem,” says Reynolds. “We are about halfway in and as such we don’t have a huge pool of experienced startup directors.

“That said, there is still a terrific community of experience in New Zealand and in offshore markets and we need to get much better at leveraging that community of experience and asking for help. In tough times, one New York-based investor I spoke to said in a recession there is ‘a flight to experience’.”

There are about 2,400 startups in New Zealand, according to global benchmarkers Startup Genome. There is no specific data on how many may have gone to the wall in these turbulent times. What is known is it’s a tough environment to raise follow-on investment.

“Management and investors may choose to hibernate an opportunity and sometimes a startup will look for an early strategic sale of the business, which can return investment or cents in the dollar but fails to maximise the bigger opportunity,” Reynolds says.

Despite the excitement generated by a startup, it has always been a tough world and it is particularly tough at the moment because the world needs these problem- solvers more than ever, says Reynolds. However, the large pools of capital that were available just a year or so ago are no longer there.

“The market context has changed. Investors are being far more careful and discerning when they are making choices about where to invest. And with interest rates rising, investors can now earn a return from less risky assets, such as term deposits and bonds.”

Reynolds says savvy investors are not pulling back from investing because it is well known that ‘recession vintages’ of startups generate better returns –valuations are more conservative, value- based investment decisions are being made as opposed to momentum-based decisions and there is a tighter focus on revenue generation.

“Early-stage investment decisions, while based on robust due diligence about the potential for the product or service to generate outsized value, are triggered by an emotional connection on the part of the investor to the problem the founders and startup is trying to solve,” she says.

While there are broad sectors where New Zealand startup investors are focusing, such as business-to-business software as a service, clean tech, aerospace, gaming and agtech, Reynolds says all kinds of startups are getting investment.

Directors need to understand the ever- changing nature and context of a startup and be quick to respond.

“The word ‘pivot’ didn’t come out of the startup world by accident,” Reynolds says. “Concepts like ‘agile’, ‘lean canvas’ and ‘product market fit’ are all about running experiments to find where value is and where it can be created as quickly as possible.”

Governing a startup is significantly different from other entities and organisations.

“Board members need to understand and appreciate how to leverage risk for reward, how to navigate uncertainty, anxiety and fear, and how to put in place and execute on a robust capital strategy. We can, and will, all improve if we worry less about blowing cover by asking for help,” Reynolds says.

Outset Ventures partner Mike Bignell says directors of startups need to understand far more about the capital journey and the business trajectory, than say other established entities.

“You need to be very focused on the things that really matter for the entity at that time, rather than getting overly concerned with the broader regulatory responsibilities inherent in larger organisations.

“The biggest risks are always in the first 12 months post raising capital. You must frame your board conversations around the things you need to do to build the business to obtain the next tranche of capital, not just mitigate ordinary day- to-day risks. You need to identify the business-critical steps forward and focus energy on achieving them.

“You also need to be able to adapt and cope with the inevitable landscape changes that occur. Like anything, if you leave your run too late with a capital raise, you will be in a difficult position.”

He believes more people are understanding governance in the startup world as the venture capital industry grows in experience and maturity.

“It’s improving. I’m involved in governance with a national sporting organisation [he is chair of Hockey New Zealand] and I’ve been involved with lots of larger organisations. There are certain things that cross over, but you have to be far more flexible with startups.”

Bignell says the sector is still full of people with great ideas and big dreams – and venture capitalists with money.

“We’ve got a very diverse startup ecosystem. It’s all about the right idea at the right time. Outset Ventures is focused on deep tech and we’re not seeing any shortage of companies coming through. Good companies and good ideas are still able to get money. The fundamentals haven’t changed but patience is needed.

“It’s exactly the same as always – ideas that catch on, ideas that don’t. That’s part of the startup world. There is always someone with the next idea.”

To better understand startup governance visit https://www.iod.org.nz/news/articles/its-a-startup-world/