Hapara Solutions is a successful New Zealand tech company that you’re unlikely to have heard of, as their headquarters and customers are mainly in the US. I managed to catch the CEO, Jan Zawadzki, on a fleeting trip back to Auckland from their office in Palo Alto. It was interesting to hear Jan’s thoughts on capital raising in New Zealand compared to the US, and launching from an edtech accelerator programme in Silicon Valley.
Hapara is a platform which helps teachers monitor the progress of their students. In 2010 it was started as a hack between friends Jan and Tony Kong for Point England School, and it grew by word of mouth as the founders realised that teachers really wanted the product. Hapara’s dashboard product displays the class activity for each child and subject, so that teachers can see what their students are working on – effectively creating an exercise book that lives in the cloud.
To fund further growth and development, the founders initially tried to raise capital in New Zealand, but were met with local investors who didn’t really get the product or market opportunity (Jan shares some observations about the New Zealand investor community later on).
In the States, edtech is a hot sector for investment, and Hapara decided to apply for an education-focussed accelerator called Imagine K12. Nine companies were chosen out of 300 applicants, and Hapara was one of them. It entered the three month accelerator as a more mature company than most (being 2 years old, with 5 staff, and already profitable), alongside startups that were mostly run by young graduates.
On the accelerator’s Demo Day, Jan pitched to over 140 investors comprising the who’s who of Silicon Valley, including investment legends such as Mitch Kapor and Vinod Khosla. Since Hapara’s launch from the K12 accelerator in 2012, they have completed two US rounds, with the first being oversubscribed and the second round going only to insiders. Jan is keen to help other New Zealand companies, and shares 7 insights from Hapara’s capital raising experiences so far.
Jan thinks there is a certain degree of immaturity in the New Zealand investor community. When Hapara tried to raise money locally in 2011, they were faced with investors who weren’t familiar with early stage investing. Jan remembers having to educate the investors not only about Hapara’s product and market, but also Silicon Valley style investing itself. He gives an example of having to explain what a convertible note is to potential Kiwi investors.
In Jan’s experience, New Zealand investors are too focused on the size of their equity stake, rather than a return on investment. And don’t even mention the NZVIF terms – Jan thinks they are ridiculous and he is surprised that anyone would sign up to those terms. It is quite far behind the founder-friendly standard investment terms that Jan sees in the Valley.
If you do intend to raise locally first, Jan suggests you give careful thought to your capital structure as you take on money in New Zealand. US investors may pass on investing in your company if too much equity has already been given away in your earlier rounds. If by the time you come around to raising your Series A, the CEO has 15% and they are the only employee with stock – the investors may question how motivated and committed the team is to building a successful company.
Many New Zealand startups approach Jan for advice about the States, and he always prods them with the same set of questions: addressable market, growth, revenue, and potential exit. You should have a standard set of responses prepared for these questions, and be prepared to sell investors a story.
Jan finds that Kiwi founders are often unprepared on these basics, and also need to think bolder:
Don’t ask for permission. How are you going to grow to $100 million in recurring revenue? Kiwis need to think big, otherwise we are seen as the ‘family business’.
‘Silicon Valley’ is really about the 2,000 individuals who hold all the money. The fear of missing out drives Silicon Valley – investors love telling their friends about their latest deal and bragging about it over golf. Try to orchestrate contact with the investors you are interested in: make sure they’re hearing about you from their friends, their lawyers, and others they trust or respect.
Your chances are much better if you have an understanding of how the investment funds work – it is essentially a numbers game. Some of the funds have huge amounts of money to manage and invest, and it’s not uncommon for them to buy into deal flow on the cheap at seed rounds. In Jan’s opinion:
If you pitch to a Sandhill Road VC and can get through an entire hour without fucking it up, then you should be able to walk away with $50,000.
These funds also have limited staff capacity, so they’re looking for reasonable (and perhaps efficient) opportunities to put money in.
Do bear in mind the information signals you send if you publicise any ‘brand name’ funding. If an investor comes in on a seed round, but doesn’t come in later, then it can work against you. People may be wondering whether the firm has some negative inside information. Investors talk and it’s the same group of people shuffling money around.
Jan decided to move their headquarters to Palo Alto, but tries as much as possible to keep the development and creative side in New Zealand (they also have an Auckland office). Not only is it cheaper in terms of staff costs, but Jan is also committed to making sure the economic benefits of his company flow back to New Zealand.
As far as the legal entity goes, Jan found that most US investors won’t deal with anything that isn’t a Delaware Corporation (i.e. a US entity registered in the business-friendly state of Delaware). Hapara used the Lowenstein Sandler lawyers for their investment round, who are familiar with Kiwi founders that have to flip to a US company. Jan credits their lawyer Matt for introducing Hapara to many contacts, and getting them good investment terms (far better than the ‘standard’ NZVIF terms that you might see around town).
When seeking investors, Hapara wanted to find people who could add value. Interestingly, they specifically also wanted money from outside Silicon Valley to maintain some balance. Jan notes that the East Coast looks at the West Coast with derision. He didn’t want Hapara to be seen as only a Silicon Valley business, and they also brought on some non-US investors.
Jan says that their mission-focused company was helpful for bringing on investors and staff who liked the impact that Hapara was making on education. This mission enabled Hapara to attract high-calibre people who have had exits as early stage employees in successful companies previously.
As for the board, Hapara’s investors weren’t concerned about getting board seats. Jan says that they’re busy people who are trying to get off boards, rather than onto them. Similar to Carnival Mobile’s experience, Jan is grateful that he hasn’t experienced the micro-managing investor type.
Since receiving funding, the biggest challenge for Hapara now is execution, so that they can provide their investors with a decent return.
As much as the media and friends may celebrate your fund raising as a milestone, the real work starts the day after the money arrives in the bank. A closing thought from Jan:
The day after we closed, I’m standing at the ATM checking out my bank balance thinking, I have to add a 0 onto the end of that figure.
Next up in our series we talk to Paul Cameron, the founder of Booktrack, who has raised money from New Zealand, Asia, and the US.
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