The Moxie Sessions: Faust-stage funding: is the devil in the dollars?

It’s almost 6pm but it’s hot in the upstairs kitchen at Auckland innovation hub GridAKL. Condensation beads on our beer bottles and sweat stains the t-shirts of the dozen or so tech types around the Moxie Sessions table. Outside, the monkeys scream and squabble, and as the ceiling fan strains to stir the syrupy air a bright green gecko stalks a spider in the highest corner of the room.

OK, I started lying from the monkeys onwards but it sure was hot.

Despite the warmth, we’d gathered in the fashionably-free-of-air-conditioning venue to point the Moxie ponder-gun in the direction of something equally hot – tech startup companies – and ask what happens when one first takes on funding. What are the downsides to the dollars? And is one dollar (or million) as good as any other?

To guide the discussion, we welcomed speakers with three perspectives on the issue. Franceska Banga heads* the New Zealand Venture Investment Fund, and has spent the last 15 years trying to turn tax dollars into tech startup success. Sean Simpson founded and leads Chicago-based LanzaTech and has raised over $200 million in the last 10 years. And representing the foot of the fundraising ladder was Avertana co-founder and LanzaTech alumnus Sean Molloy 

For the past 15 years, Ms Banga has headed a government-backed fund that’s put over $150 million into New Zealand companies, helping stimulate over $1.7 billion in fundraising. Not surprisingly she sees the supply of funds as being a key factor in turning ideas into successful companies and hates the often-heard comment that “there’s always enough money for good companies.”

She admits that getting that first $500k to $2m won’t usually be too much of a hurdle, but it’s that next round – typically between $1m and $10m – that has founders floundering. 

“One of the biggest mistakes a company can make is to underestimate both the time it takes and the amount of capital required to achieve its aspirations.”

As founder and chief scientist of LanzaTech, Sean Simpson knows a bit about raising funds. In the company’s 10-year history it has attracted north of $200m US in investment and in 2014 relocated from Auckland to Chicago – a move partly driven by US investors and local government tax incentives. 

For Simpson, the key is to have a clear path for growth that extends beyond the first round – and that means looking past local funding sources. The problem with that, he says, is that New Zealand founders are not well equipped to do that. “It’s difficult to be trained here in the disciplines you need to raise big dollars.” 

One way to get that training, of course, is to work alongside someone who’s done it. That’s exactly what LanzaTech alumnus Sean Molloy did (his company, Avertana, also specialises in extracting value from waste). For Molloy, the potential for world domination – and he’s only being slightly tongue in cheek – was a key measure when deciding which potential idea he and his partners would turn into a company. 

From local seed capital (including K1W1) in 2014, Avertana quickly headed offshore and 2015 saw it successfully pitching to US fund managers. A key to that success, Sean says, was telling the money side of their story as compellingly as the tech side. “Investors need to understand your capital plan.”

Understanding the US investor culture was also important. “As New Zealanders, we tend to talk ourselves down … but you need to remember that they’re expecting you to inflate your numbers and are probably working to half of whatever you project.” 

While their geographical focuses might differ, Ms Banga, Mr Molloy and Mr Simpson agree that seeing beyond the next funding round is key – avoiding that “oh shit we just landed a million bucks … what now?” dilemma (albeit one that many companies would be happy to have).

They’re also aligned on the value investors bring beyond their chequebooks. A top venture capitalist, they say, is “the greediest person in the world” but that Gordon Gekko perspective can deliver exactly the focus on growth that a tech or product-focussed startup needs. So, rather than seeing investment as a compromise between growth and ownership, the right money and the right investors can be a win-win. 

While an experienced, hands-on investor might not have the magic formula for making a company succeed, Mr Simpson says, they’re at least likely to know what failure looks like, and can help founders avoid some of the things that have killed other companies.

Knowing how to make widgets (or software, or great customer experiences) is great. But knowing how to make money is where many New Zealand founders fall short. And that, the discussion around the Moxie table suggested as the beer bottles emptied and the thermometer finally fell, is where finding the right investors can be the difference between local success and world domination. 

*Ms Banga has resigned as head of the fund since our session.

Every month, The Moxie Sessions brings together a small group of business thinkers to discuss ways New Zealand can take advantage of the internet to boost its national competitiveness. For more, see http://themoxiesessions.co.nz. 

Check out the standing invitation, the podcasts and the records of previous events at hemoxiesessions.co.nz, and follow @moxiesessionson Twitter.

Vaughn Davis is principal at social media and advertising agency The Goat Farm.

Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.