Closing the Gap
June 12, 2020

Closing the Gap

To most people the term “funding gap” doesn’t sound too scary. But, to kiwi entrepreneurs, it’s a different story. To many of them, an exciting private venture getting halted because it has run out of capital and is struggling to source more is an unfortunate, yet common reality. 

So, what is New Zealand’s funding gap?

New Zealand is known for being the nation of small businesses. Our small and medium sized businesses make up over 97% of all the businesses in New Zealand. [1] Many of these businesses are still in their early stages. Usually, these businesses hit a point where in order to grow more, they require more capital. Every year more and more of these startups need more and more capital. How much more capital? $3.15 billion in total. It’s estimated that this amount needs to be invested over the next 5 years to keep up with the capital demands and growth of early stage businesses in New Zealand. [2]

Why is capital so hard for these early stage businesses to source?

A few factors come into play here. Firstly, many investors and investment entities see investing in startups as risky. This is often because early stage businesses do not have an established track record, don’t have good governance, systems and processes etc – but, this may not always be the case.

Another possible reason why startups find it hard to source capital is that many entrepreneurs are not willing to accept an investors view of valuation or some of the rules that come with external investment around governance and shareholders agreements.

Thirdly investors approached may not believe in the story or the capability of management to execute on the plan.

So, is it all doom and gloom?

No, not necessarily. It’s safe to say that in New Zealand there is a healthy angel investment sector. An entrepreneur that has a solid idea or opportunity can often find backing. Healthy investment in the pre-seed and seed funding stages meant that last year, $80 million was invested in these stages! [For more information on investment series, see: The ABC’s of Investing]. This means that startups and early stage businesses in New Zealand with a good proposition are being supported.

Businesses that have matured into the growth stage are also less affected by the funding gap. This is because venture capital ad private equity firms are providing a steady flow of investment to such mature businesses. [3]

Where does the real problem lie?

The businesses most affected by the funding gap in New Zealand are mid-sized businesses in the early expansion stage. They are usually between $2 – 15 million in size and wanting to raise between $2 – 20 million. [4] Last year, only $20 million of domestic venture capital funding was invested into companies at this stage. This amount has stayed stagnant for some years now. With more and more new businesses entering this expansion stage, this funding gap is worsening every year.

Is it getting better?

Some events have given hope to those experiencing the effects of the funding gap. For example, the government Budget 2019 said that it would dedicate a new fund worth $300 million to try fill in this gap. Such funds are to be matched by capital from the private sector. Simplicity, another investment fund, also pledged to invest $100 million over the next 10 years to help reduce it. These, coupled with venture capitalists, angel groups, private equity funds and family and friends’ investment could lead to the funding gap shrinking significantly in the next 5 years. [5]

If the funding gap is shrinking, should I care?

Despite these recent and large contributions of investment, a funding gap still exists. Whilst it may shrink, it is unlikely to disappear entirely in the next 5 years. More importantly, in order to fully rid ourselves of this gap, the available investment and capital has to go to those businesses most affected by the gap – those in the early expansion stage.

Also, to keep up with the ever-increasing early stage sector, many different sources of capital is needed, not just the one single contribution by government along with the private sector match funding. This will help ensure that the availability of investment capital is sustained, and the gap does not widen later. [6]

Private investors should recognise the key role that SMEs play in economic growth. In New Zealand, these businesses contribute to nearly 1/3rd of our entire GDP. [7] They also provide for job creation, local development and employment. Having a strong early stage capital market will lead to a productive economy and healthier start up sector.

This has many benefits. Contributing to healthy early stage capital markets will mean startups can stay in New Zealand, be New Zealand owned and recycle their profits back into the economy. Rather than it going overseas, kiwis would get to reap the benefits of new employment opportunities, greater competition and innovation across many industries.

Also, as a private investor there is much to gain from investing in these private businesses, as that’s usually where the biggest returns are. [For more information on investing in private businesses, see: Alternative Investments: What are my Options].

If you’re still not convinced, see: Why Kiwis Should Invest in New Zealand.

What can private investors do to help?

There are many ways a private investor can do their bit to help close the funding gap. For starters, you can become an angel investor or invest via equity crowdfunding. If you’re interested in investing directly into private businesses, please get in touch!









Post Tags:

Capital | Finance | funding gap | invest | SMEs