Government's start-up fund picks up the pace

By ADAM GIFFORD

The Government's high-tech Venture Investment Fund (VIF) is picking up speed and all its four fund managers have now made at least one investment.

Last to join the party was iGlobe Treasury management, which has announced it will help fund Auckland start-up Xegen's attempt to develop a new form of business intelligence software.

VIF manager Franceska Banga said there were eight investments so far, including the investment by IO Management in visualisation software developer Compudigm, although soon after that deal, IO decided to keep the opportunity to itself and pulled out of the scheme, paying back VIF.

"We still count it because we will be counting how many make it through over the 10-year life of the programme," Banga said.

"There will be some companies which do well and exit, but there will be others, which because of the nature of venture capital investment, don't succeed."

VIF was set up to provide seed, start-up and early expansion funding.

Participating fund managers, had to raise a minimum of $20 million to qualify for a $1 for $2 VIF contribution and all funds closed by the December deadline, iGlobe with $30 million to invest, Endeavour i-Cap, a joint venture between Neville Jordan's Endeavour Capital and i-Cap, with about $39 million.

Number 8 Ventures is sitting on a $35 million fund and TMT Ventures, a telecommunications-oriented fund run by Direct Capital Private Equity and US-based Advent International, has committed $45 million of its $100 million war chest to New Zealand ventures.

Banga said she expected the funds to each make two or three investments a year.

"What I hear back from the fund managers is there is good quality deal flow out there," she said.

The capital returned by IO had been redirected towards a biotech investment fund, most likely the $100 million Life Science Ventures fund announced this month by AgResearch subsidiary Celentis and Auckland's Direct Capital.

"We have indicated we'll back them subject to their getting the backing capital," she said.

Once that money is committed, she will look at where the remaining $25 million of VIF capital should go.

While VIF was taking shape, there was criticism in the market that the prospect of easy Government money and uncertainly over how VIF would work had slowed other venture capital investment.

However, Venture Capital Association executive director Chris Twiss said that in retrospect that criticism seemed unfounded.

Twiss said that while VIF was only a small part of the $1.1 billion New Zealand venture capital industry, it was important because of its start-up focus.

"About 3 to 5 per cent of early stage investment typically comes from the professional venture capital market. The rest comes from other channels like angel investors."

Technology Investment Network head Greg Shanahan said the appetite for investing was coming back.

"What is exciting people now is the buoyancy of the sharemarket, so people can see a window for exit."

He said many deals were done privately away from the funds.

"There are a lot of people out there with money, and because there is less structure to relationships, deals can be made easier and quicker.

"It is interesting to see where the venture capital community sees itself. A lot of large technology companies in New Zealand have not received local capital because the rate of return expected was not beneficial to the long-term growth of those companies," Shanahan said.

Ideally, companies needed investors who understood the market they were in and were aligned with the direction of the business.

"If you can get people to invest in your company who understand the vertical, the time spent explaining the proposition is less, there is less due diligence because they can look for the key points in the business for success or failure."

Shanahan said many funding applications were immature.

"A lot of companies develop in New Zealand by servicing local customers, so they get an iterative advantage, but their technology is not disruptive.

"They will survive on the strength of their management and their ability to win customers.

"They are more in the service business than the technology business."

Shanahan said the venture funds needed to offer not only money but board or management experience that had a vision for creating big companies.

"Most New Zealand entrepreneurs want to get the car, the boat, the bach and then bail out."

THE VIF'S PROGRESS

May 2004 - iGlobe Treasury Management issues unspecified amount of "bridge funding" to business intelligence software developer Xegen.

May 2004 - Endeavour i-Cap and TMT Ventures invest $1.5 million in Albany mapping company GeoSmart to fund development of its new SmartMaps mobile devices, car navigation and fleet management systems.

April 2004 - Endeavour i-Cap paid $500,000 for a 30 per cent stake in HTS-110, a Wellington start-up making high-temperature superconducting products, including current leads, magnets and coils for scientific equipment. Other shareholders are crown research institute Industrial Research and HTS wire maker American Superconductor Corporation (AMSC).

March 2004 - No 8 Ventures puts $2.85 million into electronic commerce technology developer EDIS International to fund product development and global expansion.

December 2002 - TMT invests $5 million in EMS-Global, an Auckland firm providing secure internet connectivity services. The other major outside shareholder is British venture capital investor 3i.

July 2002 - TMT shares in a $5 million capital raising for Esphion, an Auckland firm which makes technology which analyses internet protocol traffic carried over telecommunications networks. Applications include network protection, more efficient bandwidth use and billing. Other investors include the New Zealand Seed Fund and Stephen Tindall.