We spoke with:
Answers have been edited for length and clarity.
Angus Blair, partner, Outset Ventures
Inflation is slowing. Does the prospect of fewer interest rate hikes going forward change venture capital investment and fundraising strategies in the coming quarters?
Domestic interest rates play an important role in the domestic appetite for capital investment, given that such a high proportion of capital is tied up in the real estate market. Although there will be fewer or no rate hikes over the next 6 months, we do not expect any significant rate cuts or interest rates to significantly impact fundraising in this fund’s life cycle.
As an upfront and seed investor, interest rates have a limited effect on our investments. On the margins we err on the higher end of the cap, looking for 24 months plus, rather than 18 months runway, given our outlook. We have seen limited impact on seed stage valuations and expect them to remain stable over the next 12 months.
Both the number and value of business deals fell in the third quarter. Do you expect the same trend to continue in Q4 2023 and 2024?
For pre-seed and seed deep technology deals, we expect the number of deals and valuations to remain flat in Q4 and 2024.
How does the slowing business cycle in the latter stages of Australia and New Zealand affect your investment strategy? For those investing primarily in seed and Series A, does this make the seed stage more crowded?
For New Zealand, we are seeing increased interest from off-shore funds (Australia, US and EU) which we anticipate will offset at a steady or increasing speed in Series B+ for New Zealand companies.
Competition for early-stage deals continues to increase, but this is largely driven by new capital entrants rather than early-stage multistages.
ClimateTech has been a huge driver of private investment in both Australia and New Zealand. Are any of these players ready to become world leaders? What kinds of incentives, laws or policies would be useful?
The obvious candidate for world leader in climate technology is OpenStar. The Wellington-based nuclear fusion company, which is building floating dipole reactors with a first spark scheduled for December this year, is already attracting global attention (and talent) from the physics and magnetics communities.
I think the world learned not to rely on the carbon economy to build sustainable businesses after the cleantech boom in the mid-2000s – VCs are looking for businesses to be both sustainable and economically based on their value. That said, companies based in the US or Europe often have significantly larger grant programs if they are working on critical technology of national importance. We offset this with many other advantages, including clearer regulatory frameworks, but to keep these companies here, we will eventually have to match some of these economic incentives as well.
Blackbird has opened a fund in New Zealand and many New Zealand investors are looking for new investments in Australia. What is the relationship between the two countries in terms of mutual funding? Does your company prefer to fund locally?
All founders are excited to have more Australian companies investing locally and so are most VCs. At present it is largely one direction, but this will change as relationships within the industry are built.
However, there are structural reasons why we are not seeing more investment. All major VC funds in New Zealand have New Zealand Capital Growth partners (a fund backed by the New Zealand government) as LPs which limits where capital can be used, particularly for early stage investments. Similarly, the Australian ESVCLP structure (typically used by companies with $250 million or less under management) means that in order to retain their capital gains tax-free status they are limited in how much investment they can make offshore. As and when this cap changes, we will see more Australian companies investing in New Zealand-based startups, which will be great for the market.
Funding in AI startups increased this year. What are the challenges facing AI start-ups in ANZ, particularly as they take on giants overseas?
The same challenges faced by VC-backed startups around the world that make AI such a challenging category for VC
No advantage in data and distribution means that the majority of value will be concentrated in the incumbents.
Truly diversified core models are too capital intensive to fund ventures, without capturing incumbents.
Less fragmented stack structurally means more value will be captured by incumbents (see: GPT from OpenAI this week eating thousands of startups).
