The volume of early-stage venture funding in New Zealand declined in the second half of 2023 but the number of deals funded remained relatively stable.

According to the New Zealand Startup Investment Report, released 9 May, start-up funding in the second half of 2023 totaled $NZ163 million compared with $NZ182 million over the same period a year earlier.

Despite the reduced funding, the number of deals completed remained relatively unchanged, 144 compared with 142 in 2022.

The volume of investment contrasted with the first half of the year, which had shown impressive resilience in the face of global economic headwinds. This, however, changed in the second half resulting in a 12% reduction in funding for the entire year compared with 2022.

Associate director at New Zealand Growth Capital Partners, Jacques Richer, said the more defensive posture of investors was understandable in current economic conditions but he continued: “However, this environment could jeopardise the future pipeline of new companies and hinder their growth opportunities. We need to do a lot more to build a healthy pipeline of new innovative companies that are well-resourced to maximise their chances of making an outsized positive impact.”

In 2023, the number of new deals completed (as distinct from follow-on funding rounds) decreased to 40, from 46 in 2022 and 61 in 2021, indicating a narrowing pipeline of new start-ups.

Partner at PwC New Zealand, Anand Reddy said New Zealand founders faced challenges of global competition, high inflation, skills shortages and reduced corporate and government procurement spending.

“Insufficient funding hinders their ability to overcome these obstacles,” he said. “It is crucial that we take action to build a robust pipeline of innovative companies that are well-equipped with resources to maximise their potential to make a significant positive impact.”  

Chair emeritus of the Angel Association of New Zealand, Suse Reynolds, supported that view and pointed to the pivotal role that start-up businesses played in a nation’s economy over the long-term.

“We have been diligently building a start-up ecosystem for fifteen years but it will take twenty to thirty years to realise substantial returns, both financially and more broadly for society,” she said. “It is critical that we do not lose momentum and take our pedal of the metal.”

Over the first half of 2023 the more defensive stance of investors became clear as more transactions, and funding, were allocated to existing investments rather than new opportunities. Previously this distribution had remained relatively steady with around a third of transactions being new deals and two-thirds being follow-on deals.  

In the first half of 2023, however, this distribution shifted to one quarter for new deals and three-quarters for follow-on investments and this trend continued throughout the year.

Over 2023, the average size of early-stage funding rounds declined by 22% from $NZ1.6 million in 2022 to $NZ1.2 million in 2023.

Drilling down to investment sectors, the report finds that deeptech continues to be favoured by early-stage investors, accounting for 38% of total funding in 2023. Software was the second preference, securing 30% of total funding. Among the deeptech sub-sectors, healthtech attracted the lion’s share of funding, 45%, followed by cleantech, 23%.

The report notes that in Aotearoa the technology sector already ranks as the second-largest generator of export revenue and offers high-paying employment opportunities. Maintaining a thriving start-up ecosystem is essential to bridge the productivity gap between Aotearoa other comparable economies.

The New Zealand Startup Investment Report is published by PwC New Zealand, the Angel Association of New Zealand and New Zealand Growth Capital Partners which is financed by the New Zealand government.

Image: New Zealand’s subdued economic environment could jeopardise the future pipeline of new companies.