Startup Investment Cooled In H2 2022 But Long-term Outlook Is Positive

After two years of record deal activity, Aotearoa New Zealand’s startup investment market is resetting to pre-pandemic levels, according to Young Company Finance deal data.

The data, which is analysed in more depth in the latest Startup Investment report - produced by PwC New Zealand, Angel Association New Zealand and New Zealand Growth Capital Partners (NZGCP) - shows that in the second half of 2022:

76 deals were funded by Early Stage Investors with over $112m of capital

An additional $117m of funding was provided by Venture Capital

Total transaction value was just under $230m

Software remains the most funded sector, receiving 45% of total funding, followed by Deeptech which attracted 34% of total funding.

Among Deeptech verticals, Cleantech received the most funding with 72%, followed by Healthtech 13% and Space Technology 12%.

Across the full calendar year, there was an 18% drop in deal volume and a 28% drop in capital when compared to 2021. However, 2021 was an exceptional year globally with abundant capital, record low interest rates and global quantitative easing. These conditions created significant liquidity and buoyant capital markets, leading to an influx of investment. As such, 2021 should be viewed as an outlier, but the data does show ongoing growth in deal volume and capital investment.

With economic turbulence set to continue throughout 2023, the authors of the Startup Investment report are optimistic about the resilience of the ecosystem to weather the conditions.

Joelle Grace, PwC Legal Partner, says that while the market may be experiencing a cooling compared to 2021, the long-term trend still shows clear growth, with a CAGR (2018 to 2022) of 12.4%.

"While unsettling, a slowing economy can actually be a good thing for some companies, as it forces businesses to focus on what is important. This means these startups will be built on strong foundations, with a focus on creating long-term value and will thrive in the long run."

Suse Reynolds, Angel Association NZ Executive Chair, says the record levels of investment in 2021 were always going to be a hard act to follow.

“As investors, we remain very optimistic about the future of startups and their potential to drive growth and innovation in our economy. Startup founders are by definition optimistic, and the best ones have deep reservoirs of resilience and tenacity. Even in challenging economic conditions, they remain defiantly ambitious for huge change and the value and impact they want to create.”

Jacques Richter, NZGCP Associate Investment Director, notes that challenging market conditions will likely continue to apply pressure to the early-stage ecosystem in the short to medium term, making it harder for young companies to grow and raise funding, but highlights the opportunities that may arise for the sector in times of uncertainty.

“Investors should support founders who have bold ideas that can transform industries globally. This is one of the key lessons from the 2008 Global Financial Crises and dot.com bust and we need to keep backing early-stage ventures to build our pipeline. Now is the time for investors to roll up their sleeves and help ambitious founders build a thriving ecosystem for the long term.”

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