'Waste capital' going to R&D: NZVCA
Call for flexibility around NZ Venture Investment Fund rules.
Tuesday, December 13 2011 || Investment || BY Maria Slade, Businessday.co.nz
NZVCA, the body representing venture capital and private equity investors, has produced a report on how government can tweak the regulatory environment to better support its fragile sector.
The venture capital business worldwide has suffered since the global financial crisis, and none more so than the fledgling New Zealand industry.
While there is a healthy angel investment community backing kiwi startup businesses and a private equity market investing in mid-stage companies, there is virtually nothing at the $2 million to $10 million in-between stage, NZVCA says.
Venture capital is part of the broader innovation ecosystem, it argues.
There was little point in investing in universities and crown research institutes if they produced spinoff businesses that could not raise any capital, NZVCA board member Tony Bishop said.
''We're concerned about the waste capital going into research and innovation.''
NZVCA suggests three key initiatives to encourage investment in venture capital:
- changes to the immigration rules to give those bringing money into the country more points if they invest in economic development;
- a clarification of the KiwiSaver rules to allow funds to invest in the sector;
- making the government-initiated New Zealand Venture Investment Fund's [NZVIF] rules more flexible.
At the moment wealthy migrants got the same points no matter what they put their money into, Bishop said. NZVCA would like to see more points allocated to those who made active investments.
No KiwiSaver funds were invested in venture capital partly because the rules were murky.
''The rules are unclear as to whether they are allowed to or not, and a conservative trustee would be very, very wary... unless it's absolutely clear that you can do it.''
Without the establishment of NZVIF 10 years ago there would be no venture capital industry in this country, and it had been set up well, NZVCA said.
Over this period the market had invested $500m in venture businesses with those firms now earning $250m in annual revenues, mostly from exports.
But the time had come for more flexibility in the rules, perhaps allowing smaller investment funds to be set up and upping the ratio of the government's contribution from 1:1 to 2:1 for a time.
A change in mindset was required to take the point of view of investors, execuctive director Colin McKinnon said.
''If you look at what investors want then you might offer them a different product, rather than looking at what the entrepreneurs want.''
The industry body will put the report to politicians this week.
It had started some dialogue with government three years ago and had received support in principle for its concerns, Bishop said.
''What we're trying to do now is increase awareness of the extent of the concern.''
Colin - thank you for your response. Good to have you participating.
I thought the role of the VC was to provide the next level of funding after the angel/friends and family investors. If they haven't been doing tjhat, what have they been doing?
The opinions expressed in the article about "waste capital" beggar belief and taken in conjunction with earlier complaints about deal flow and insufficient funding seem to show a sector that has nothing to offer but excuses.
Not many taxpayers would want to up their contribution from 1:1 to 2:1. I think that if the wider public was following developments on the VC scene they would be unenthusiastic about putting any more money into a failing system.
To restore investor confidence there has to be a thorough review of the VC sector and the relationships between NZVIF - which has invested hundreds of millions of public money - and the VC funds. How do the private investors who have put money into these funds feel .... and wil they be putting more in?
Posted by Anonymous Bosch at 18:51 on December 15, 2011
It is important to remember that the $500m represents VC investment over an 8 year period while the $250million is an annual figure. Cumulatively, VC backed companies have now generated over $1.0 billion of revenues and these revenues are growing steadily every year. The better comparator is that annual VC market investment of $50 - $100m is now generating $250m of annual revenue and those revenues will continue to grow over time.
Posted by Colin McKinnon, Executive Director, NZVCA at 02:26 on December 15, 2011
I agree with ANON2 that the foucs should be on the issues raised and how valid they are. Mark can you share your views on the following.
The performance of the NZVIF funds and whether or not you think institutional investors should be investing in VC funds in NZ as part of a sound investment strategy (ignore the heart strings of it being good for the country that is not their madate)?
Posted by Ralph Shale at 09:21 on December 15, 2011
Why? Are you saying they have no merit? The facts speak for themselves ie $500m to generate $250m in revenues.
As far as I can see people have been expressing these sorts of concerns about VIF on this site for months and I've never seen anyone respond which is pretty telling.
Posted by Anon2 at 03:02 on December 14, 2011
Your comments would carry far more weight if you put your names to them.
Posted by Mark Revington at 10:23 on December 14, 2011
Rather than looking at thingks like the global financial crisis they need to look in the mirror to understand the major problem. If they were delivering results for thier investors then funding would not be an issue.
Recently a high profile investor told an audience that if companies were having trouble raising money it is probably a reflection of their business models. Should that not also apply to VC Funds. If their model worked then investors would invest, the fact they are not is a reflection on the opportunity - it does not stack up.
Posted by Anonymous at 04:42 on December 13, 2011
''We're concerned about the waste capital going into research and innovation'' - what pearl of wisdom will these guys come up with next?
They should be more concerned about their track record of $500m invested for $250m annual revenues. Perhaps some of the $500m could have been invested in "mid stage companies".
How on earth can they have any credibility? Why is the rubbish they spout printed verbatim week after week and month after month?
Posted by Bored at 02:14 on December 13, 2011
With respect to Colin an investor should be focused on the return on investment not on revenues. There are plenty of examples of companies growing revenues but destroying shareholder value.
Posted by Ralph Shale at 03:50 on December 15, 2011
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