All about control for New Zealand Venture Capital 2.0?

Monday 31 August, 2020

One of the great things about my role is the brilliant, inspirational and courageous entrepreneurs I get to meet.

Recently, I was talking to one such person about their vision, and how the time had now arrived to push the boat out and follow the dream. I was inspired by his passion, self-belief and clarity of thinking.

An interesting perspective he had though was while he knew he could lead and drive the vision, he appreciated he could not do it on his own. He already has a successful and highly profitable business. But his dream is big. He was prepared to take a smaller piece of a bigger pie in order to realise the dream. “Control” of his company did not come into it.

Contrast this with a common approach New Zealand founders take to capital raising where the focus of negotiations is usually on control, and founders being very concerned about losing it.  This approach to control is a particular New Zealand perspective, and is relatively absent in US West Coast capital raising negotiations.

More years ago than I care to remember, I can still vividly remember the lesson I received on what to look for in shareholder agreements. The lesson was by one of the first lawyers in New Zealand to specialise in corporate law and chairman at the time of many significant corporates. Because he was a particularly shrewd and clever person and there were so few other corporate law specialists when he was at the peak of his career, he had a huge presence in the New Zealand corporate market.

He told me when reviewing the shareholders agreement to focus on the levers of control such as levels of shareholding and board votes, and how that control could be lost for example by way of share issues. That was the key thing to be cautious about in shareholder agreements.

Since then I have had clients say they will only invest in companies if they have 51% or more control. Not 50% or less. We have also seen this with the Government float of the gentailers, where the Government has retained 51%.

To my surprise, very recently I had a young associate at a top corporate law firm defend the approach he had taken for a founder in a capital raise by reciting to me the very same lesson I had received all those years ago, where he explained how he had focused on the control issues as (he assumed) I would have expected him to. This was even though the next raise was expected within 18 months which would have certainly resulted in the founder becoming a minority shareholder.

While I am mindful of some founders in the New Zealand market feeling pretty bruised about how, from their perspective, venture capital investors had taken their companies from them, I wonder whether we in New Zealand, focus too much on control in shareholder agreements.

Should the focus instead be on investor “fit”, and collaborating with an investor that genuinely and authentically believes in a founders vision and dream, and can help the founder achieve that? Have we developed enough emotional intelligence and self-awareness to appreciate the “soft metrics” matter more, and to be able to measure that in an investor?

I wonder whether there is something embedded in our advisory culture in New Zealand which means we have encouraged founders to focus on control and whether that should change to ensure the best opportunities and collaborations are not lost. Perhaps instead the focus for New Zealand venture capital generation 2.0 should be on investor due diligence, interviewing other founders the investor has worked with, and the investor’s track record on successful exits?