Covid-19 has done little to dampen investment in New Zealand startups.
A report from the business advisory firm, PwC, shows angel investment in the six months to June was down by just 5 percent on the year earlier, with $33.6 million pumped into fledgling firms.
A total of 41 deals were completed over the period, compared with 43 last year, with most of money coming from offshore investors.
About a quarter of the money was directed toward “deep tech” companies, which develop new products based on scientific research, and firms that sell subscription software.
PwC partner Anand Reddy said startup investment had held up relatively well during the pandemic because most people took a long-term view of angel investment and the downturn in some sectors of the economy have made others much more attractive to investors.
“I think Covid has also highlighted that particular technologies, such as software, biotech, health technology … that many of these sectors are actually quite resilient to what we’re seeing as response to Covid, such as borders being closed, restricted travel, lockdowns.”
He said software-as-a-service companies, which sell products on subscription, have also been popular because their services can be sold remotely.
The report also found more than three-quarters of investors and startups chose to move away from ordinary share deals in favour of convertible notes to raise capital, whereby firms issue debt which could later be converted into shares at an agreed to time.
Reddy said US investors were partly responsible for bringing the practice to New Zealand, as it was an easy way to get money quickly through the door of startups.
However, he said they were not without their risks.
“If they’re not well understood, sometimes the interest that a convertible note can carry can convert into an amount of equity that the founders may not fully be expecting or budgeting for.
‘What that means in a practical sense is that the equity shareholders and particularly the founders can be diluted quite heavily through the conversion.
He said firms that issue convertible notes needed to be looking at the coupon rates that are being provided and the timeframe placed on them before they convert to shares.