For an industry that invests in innovation and disruption for a living, the venture capital ecosystem has been pretty resistant to disruption itself. There have been attempts around the edges such as rolling funds, equity crowdfunding and better CRM systems, but the core process of raising capital from investors and deploying capital into companies has remained the same since the early days of VC.
Every year we take a look back at the year that was in our Startup Year in Review - a video that documents and celebrates the startups that have reached major milestones throughout the year.
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Last month we held the 5th annual Icehouse Ventures First Cut Challenge - our nationwide search for New Zealand’s most promising young founders.
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Introducing the IVX Fund
Today we announced the launch of IVX (as in Icehouse Ventures Expansion), a late-stage venture fund that will invest in 20-30 of NZ’s leading tech companies.
We have already raised over $50m to date from Simplicity, an Iwi, Hobson Wealth, Sir Stephen Tindall, and over 100 individual investors and are moving towards a $75m final close. The fund is now open for investment from new investors.
What is "late-stage venture capital?
IVX is a late-stage fund. What does that mean? Most of the capital will be deployed into companies with established and growing teams, well-developed products & services, evidence of competitive wins, five or more years in market, revenue & proven business models, and strong governance. And the most critical feature: potential for significant global growth. Example companies already in the IVX portfolio include Shuttlerock who are generating $10m+ revenue, Dawn Aerospace who have their technology commercially operating on multiple satellites in space, and Sir John Kirwan's Mentemia whose tech is used by The Warehouse, Sky, Eroad, and others.
How does IVX compare to other VC funds?
IVX leverages our unique relationships, information, and follow-on rights we have as a result of being among New Zealand’s most active early-stage investors. Our pipeline includes our 250+ startup investments, a subset of which thrive and become sought after. This simply cannot be reverse engineered. (Note IVX can also invest in startups outside of our family.)
This is not a novel model. YCombinator, a Silicon Valley-based accelerator that got its start making $20k pre-seed investments, subsequently raised a $1b “continuity” fund to invest further in its top performers like Airbnb and Dropbox. Having long-duration relationships with founders and longitudinal data on their performance is a real advantage.
Icehouse Ventures has launched its second index-style fund, “IV100 II”, offering unprecedented access to 100 brave New Zealand startups.
With plans to raise $10m, IV100 II will invest into 100 startups over the next three to four years. The first $5m has already been raised (the fund was initially launched in September) and ten startups have already been backed including Organic Initiative, Remotely, Refund Club, and HeartLab.
IV100 II opens up access to a portfolio of companies across a wide variety of industries and stages of their capital raising journey, from pre-seed funding to Series B expansion capital.
The new fund follows the success of the first IV100 raised in 2017, which backed its 100th company, Revolution Fibres, in March this year. It specifically co-invests in well-funded startups backed by one of its other active funds such as Tuhua Ventures or the newly launched Level Two Ventures deep tech fund.
Unique insights on the backed startups are presented to the fund’s contributors via a new Icehouse Ventures Investor Portal. Launched in July, the portal offers a simple way for investors to observe, learn and compare the progress of more than 100 companies across a variety of founders, business models, industries, growth stages, and missions.
Investors can use these insights to pick and choose the individual startups they like the most, identify opportunities where they can help the startups grow faster, and then invest further in their subsequent rounds.
CEO Robbie Paul says the IV100 funds are new territory for New Zealand: “Our second IV100 fund is enabling a magnitude step-change in diversification at an investment quantum previously reserved for individual company investments. In many ways, it is democratising the ability for Kiwis to get exposure to venture investing, an asset class where they have traditionally been left out, priced out, and jargoned out."
“In an asset class defined by one-in-one-hundred outliers, missing one outlier can be the difference between success and failure. Local investors in 2008 did not know they would be defined by wireless power or accounting software.”
He says the type of diversification offered by IV100 has been historically limited to ETFs and other listed funds. Of the startups that are part of the IV100 funds, 23 are led by female founders, 22 were started by entrepreneurs who were under 30, 21 are deep tech companies, and 18 are ‘impact” ventures striving to create tangible positive environmental or societal outcomes.
IV100 taps into Icehouse Ventures’ unique deal flow as one of the most active investors in New Zealand. The group is on track to invest more than $30m into 75 companies in 2020.
The fund is currently open for investments from eligible investors and there is an Information Pack available to interested parties.
I believe in the old adage, “If you want to be great, learn from the things that great people do.” As investors, observing 100s if not 1000s of entrepreneurs, we are at an advantage to observe what the best founders do, how they think and how they act.
As we spot these trends of what the best founders do, we can then help other founders copy those habits of success. I share these insights with founders often 1:1. But I thought it would be worthwhile to share 1: many for a wider group of founders to benefit from our learnings.
The acquisition of Biomatters by US company GraphPad announced today is exciting news on many fronts. We are super pleased for the Biomatters team and this milestone.
Biomatters was among the first startups to present to the Ice Angels investment network after it was formed by its five founding members in December 2003. The Ice Angels and a handful of others provided seed funding in 2004, and we’ve invested multiple times in the company as they evolved and grew over the years. One of the members has remained a Board member since day one.
The founders of Biomatters set out with a vision of “uncorking bottlenecks in the disease-research and drug-discovery processes.” This absolutely aligned to our desire to back ambitious startups that could add significantly to the future of New Zealand.
Their tenacity, commitment, and world-leading team has flown under the radar for more than a decade. The acquisition offers Biomatters the firepower they deserve to help them shine on the global stage. It is an exciting next step for the company and the team as they join forces to create a life sciences software platform with technology and data analysis at the core of scientific research around the world.
It is also good news for New Zealand’s fast-growing entrepreneurial sector. As we have seen with other investor returns of this magnitude, the capital, confidence, and expertise is often recycled into the startup ecosystem. Good ideas breed other good ideas; company founders breed founders; confidence breeds confidence, and capital breeds capital. It is very virtuous.
Ice Angels invests in startups knowing their journeys are risky and can be long. It’s fantastic to have the risk and patience rewarded in this case.
As we power up the new company next week, Icehouse Ventures (which includes Ice Angels), with our first official day being 1 May, we look forward to meeting more entrepreneurs with the potential to make their mark on the world stage like the Biomatters team.
Congratulations to Brett and the Biomatters team. Thanks for your hard work and contribution to the future of New Zealand.
- Robbie Paul
CEO of Icehouse Ventures
I joined The Icehouse ten years ago. The first thing that inspired me was the calibre of the people involved. 100s of entrepreneurs, investors, and business leaders lined up to contribute to our mission of creating a high performing New Zealand economy where ideas and businesses thrive.
Our opportunity (& challenge) has always been to truly harness the expertise and resources of our network. We have leveraged many tools to do so. We incentivise them, inspire them, provide them an identity, and simply beg them.
As an investor in >80 startups, I have seen ample evidence that the most effective tool to harness the firepower and willpower of others is to align them with equity. That has not been an option for us. Until now.
Today we announce the establishment of Icehouse Ventures. As the investment arm of The Icehouse, the Icehouse Ventures group includes the Ice Angels and ArcAngels investor networks, Tuhua Ventures, Eden Ventures, First Cut Ventures, a variety of passive funds, and the Flux Accelerator. We have collectively invested >$100m into 165 Kiwi startups.
Icehouse Ventures is launching with $3m in investment from Simplicity Kiwisaver, FNZC, and Sir Stephen Tindall’s K1W1. I cannot imagine a more iconic and aligned set of lead investors. We will raise an additional $1m from the amazing angel investors within our community.
The investment is about enabling us to significantly increase the support we provide to startups. This capital will afford more resources and templates, a larger and more relevant global network, increasing investment for startups by growing our community of active investors and our managed funds, and more high pedigree team members and fund Partners to provide hands-on support.
However, this capital raise is not just about financial capital. It’s about intellectual capital. Financial capital keeps the lights on. Intellectual capital underpins bold missions. Financial capital seeks an ROI. Intellectual capital creates an ROI. Financial capital is finite. Intellectual capital is infinite.
I have always admired the virtuousness that founders benefit from when they raise capital: they start with a bold vision and through the process of convincing investors and team members to believe it they become more emboldened. As a result, they are better able to harness the intellectual capital of their investors and team members. This has absolutely been our experience launching Icehouse Ventures. We are better off having simply gone through the process.
This is an exciting new chapter for us.
It was inspired by watching founders establish and pursue massive visions. It was enabled because founders gave us the chance to support and invest in their journeys. It was funded because Simplicity, FNZC, and K1W1 recognise the amazing impact founders can make on New Zealand’s future. Thanks to you all.
Ten years into this journey with The Icehouse I can conclude this: patience and persistence is highly rewarded in the startup ecosystem. It takes a ridiculously long time to build anything of meaning.
The support of Simplicity, FNZC, and K1W1 provides us the ability to remain patient and persistent. It positions us to build an institution that thrives by investing in and adding value to New Zealand’s leading startups over the coming decades. I feel super privileged to be a part of this mission.
Robbie Paul
CEO of Icehouse Ventures
Co-founder splits are seldom discussed but happen maybe more than you think. I wanted to take the opportunity to write a bit about something we have experienced a number of times with our startup portfolio and provide some insights into how to prepare for the worst (while still expecting the best).
The fact is — of 100 companies that the Icehouse has funded through our various investment entities since 2012, 35% of them have had a founder leave the company.
Most of those have left within the first two years of our investment. Some of these have been very messy, some have been more civil, but in all cases, they have cost time and money: the two most precious resources for any startup. Add to that the emotional stress and you have a recipe to rock even the most resilient founders, and in some cases — almost be a lethal blow to the business.
I wanted to write a post to cover off a few things:
Firstly, to bring to light the frequency of start up founding relationships not working out over the short / medium term.
Secondly, for founders to recognise the importance of having the conversation about what would happen in a break up early on.
Thirdly, to talk about how you should set up your vesting and shareholders agreement to prepare for the worst case scenario.
1. Partnership breakups: It happens for different reasons
From talking to many founders in writing this article, I have learned that no two stories are the same, but there are common themes.
Founder relationships are hard. The stress of being in a startup is often heavy, there are disagreements about strategy, there are personality and communication challenges and sometimes the skills that the business needs from the founders change. A founding relationship is like being in a marriage, but many founders’ relationships come together much more quickly than a marriage, with less dating time involved. Sometimes things don’t work out and a co-founder needs to leave.
This shouldn’t be seen as a black mark on the company’s history, in many cases it’s a natural progression of the company’s growth. So, it’s important to have a conversation about what would happen if things weren’t to work out and set up the mechanisms for someone to exit if needed without it killing the company.
2. Plan and talk about it early, even if it’s an awkward conversation
Founders leaving companies is common but something that few founders discuss, thinking of it as “something that won’t happen to us, because we have a great relationship”.
It’s something that should be understood as a risk going in and discussed with care upfront. Many founders defer the conversation, because its hard and sometimes awkward. Things are going well, they have just raised money, they are growing. In most cases, leaving the company is the last thing on anyone’s mind. But it’s much easier to have the conversations upfront than have the conversation when it’s crunch time and someone needs to go. The conversation is 10x more awkward by the time you get to this point!
Some of the things we recommend having a frank conversation about are:
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What are the roles that each co-founder will have in the organisation, how are those expected to change over time?
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What are the deliverables or measures of accountability with each founders’ role?
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How big a company do we want to build?
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How much dilution are you prepared to have along the way?
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Are we both committing to this journey full time, when will that change?
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Is it our life’s work or does one founder consider it to be more of a project?
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How long would you be happy to be in the business for, what’s our time horizon?
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Is there a time at which, if X milestone hadn’t been reached a founder would give up, or are we both committed to the bitter/sweet end?
Once this conversation has been had it’s good to document this understanding in a formal way and clearly outline the steps that would be taken if a founder wants to leave. What is the mediation process, the meetings, the board discussion etc. How is this decision finally made? Having a simple understanding of how this will work can avoid a lot of distraction and dysfunction if the situation does arise.
3. What next? The pragmatic steps to take
The challenging thing is that because most founders don’t talk about vesting until they raise capital, it is seen as an “investors vs. founders” discussion. We see founders stress over the perception that it is a tool the investors might use to “screw them out of their company”. The truth is — good vesting agreements protect everyone from disputes down the line, investors and founders alike. But as a founder it should be very important to you. Founders will be the people who will be committing to spending the next 5+ years with the stress of a startup, working 60+ hours a week, and earning below market salary who feel “screwed” if their co-founder walks out, takes a comfortable corporate job, and gets all the same reward simply because they were there in the early days.
So, the best practice in our experience is to document a vesting in a shareholder’s agreement that outlines the plan. Here is a great Simmonds Stewart Document Maker that can be used to set this out. Generally, we would advise a vesting period of 3–4 years. It takes a long time to create value in a company in most cases. If the vesting schedule is too short, or too much is vested on close of financing and a co-founder leaves the business, they could leave with 20–30% of the company. This is an awkward situation for the company and does not bode well for the next financing round if a large portion of the cap table is sitting with a now ex-employee that will no longer contribute to the future success of the company.
Some exiting co-founders recognise that if they leave the business holding a large portion of equity this could be a burden on the company, perhaps stop them from raising further capital and ultimately affect the value of their own shareholding. In some cases, we have seen founders leaving, sell back, or forfeit shares in light of this. Having said that, it’s still a tough conversation to have. The best-case scenario is having a vesting schedule that would mean at any time a founder could leave without it killing the cap table. Impossible? Maybe. But it’s something to aspire toward. If you have got into business with reasonable and rational people to begin with, this conversation is easier (choose your co-founders wisely! Preferably people you have already known for a long time).
Another way to think about vesting is from the point of view of an investor. When raising venture or angel investment, valuation is based on the future value you will build in the company, not on its ability to generate free cash flows today. With that in mind, founders’ equity should be earned over time, in proportion with the value they create as they grow the company. This also keeps the founders motivated to work and build value in the business for X number of years.
So to sum up; What can you do to avoid a founder break up?
In some cases you can’t, the founders skills don’t suit the job any more, there is no job for them, views on the future change and aren’t aligned any more, or stress gets the better of someone.
But there are a few things you can do to mitigate the risk. The three bits of advice I would have are to:
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Set up your vesting schedule with the worst in mind.
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Focus on internal communication and getting comfortable with strategy among the team.
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Let people know if you are feeling overwhelmed in the business and talk about it to avoid a total blow up!
In all cases — an exiting founder is a stressful and all-consuming process. But if you have the guard rails setup from which to operate within, it can make the process a lot easier.
Hope this helps with anyone setting up a new company or going through this process currently.