Franceska Banga: Angels on our shoulders

Franceska Banga, General Manager of NZ Venture Investment Fund. Photo / NZH

Innovation companies need to have a global focus, writes Franceska Banga

New Zealand has no problem generating innovation. Hardly a day goes past without a story in the media about some new technology or a smart idea being turned into a business by an entrepreneur. Where we can do much better is in turning ideas and fledgling businesses into investable products - growth companies that can contribute to New Zealand's bottom line.

Considerable progress has been made over the past decade. The annual TIN100 Index reports that technology companies are now earning annual export revenues of $5.2 billion. We have a growing pipeline of young companies - Lanzatech, Xero, Orion Health, SLI Systems, to name a few - which are showing considerable potential.

The infrastructure to support innovation is also improving. The government has just established Callaghan Innovation - the new agency charged with increasing commercialisation from research by improving the links between science and the business community.

Business incubators and commercialisation agencies have emerged in many centres and around the universities. Early stage investment sources have increased with active venture capital funds and a growing number of angel investors. The introduction of limited partnership legislation was also important.

But alongside the progress of the past decade have come some lessons. Perhaps the most important lesson - and the greatest challenge - is the need for innovation companies to have an international focus. Our domestic market is simply too small. Fast-growth New Zealand businesses, therefore, need early access to world markets. One steel mill in Glenbrook was never going to be sufficient for Lanzatech's technology.

Having identified the challenge, we now need to find solutions. Our angel investors are increasingly professional and systematic in providing the seed investment to kick-start the commercialisation of innovation. It is refreshing to see the growing number of New Zealand investors willing to risk their money on early stage companies. Two angel groups - Sparkbox Ventures and Ice Angels - have picked up the importance of an international focus with their Global From Day One Fund.

What we need much more of is not only follow-on capital, but investors with links and networks into overseas markets. We agonise over promising companies being bought by offshore investors - but the reality of our remoteness is that we need investors who also bring expertise with major markets. The presence of foreign capital reduces the barriers to international markets for our young technology companies and can increase their speed of growth - a critical factor for many innovative companies.

The New Zealand Venture Investment Fund is engaging with offshore investment funds interested in New Zealand opportunities. Last October, for example, we entered into a co-fund partnership with a Taiwan sovereign wealth fund, the National Development Fund, of up to $200 million. This partnership is aimed at stimulating more venture capital activity and also opening up access to networks and markets in Taiwan and its Asian neighbours for fund managers and the high-growth companies they invest in.

Some see downsides in foreign investment in young innovation companies. But the reality is companies face a complex interplay of market demand, availability of capital, and sector-specific drivers. For some companies with an international focus, the ultimate intention is to attract a global buyer, particularly where there are obvious synergies in terms of access to networks, markets, and research and development capability.

Innovation companies will go to those markets and buyers where they get the best return for their investors. When New Zealand investors and entrepreneurs have been successful in these ventures, often times they want to bring their expertise and capital back into new ventures in New Zealand, as we have seen with the likes of Stephen Tindall, Derek Handley, Sam Morgan, Rod Drury, and Geoff Ross.

Another associated benefit from the presence of international investors in our venture capital sector (Peter Thiel is another) is that it demonstrates to local institutional investors that they can have confidence in the structure of our venture capital market and investing into our young companies.

Institutional investor portfolio allocations to the New Zealand venture capital and private equity markets are exceedingly low by international standards, at around 0.6 per cent.

There are a few notable exceptions, but the general lack of institutional investment makes it very difficult for new growth funds to raise capital. Though some innovation companies suit offshore investment, there are also innovation companies which want to be New Zealand-based, aspiring to grow into significant companies and, perhaps, end up listing on the NZX. We need more local investment capital so we can support those companies.

The opportunity, therefore, is to continue to grow our angel and venture capital markets so New Zealanders are investing in these companies, sharing in the gains, and then repeating the process to continue the development of innovation companies.

We need more local capital, particularly from our missing-in-action institutions. And the lesson is that we should welcome our investors partnering with offshore investors. An international focus is one of the keys to a more innovative economy.

Franceska Banga is chief executive of the New Zealand Venture Investment Fund