By DANIEL RIORDAN venture capital writer
The founder of Israel's thriving venture capital industry has been hired to advise the Government on how to invest in new businesses.
Yigal Erlich, the brains behind Israel's pioneering Yozma fund, is arriving in two weeks.
Research, Science and Technology Minister Pete Hodgson yesterday announced the Government's new scheme. He said Yozma, which began as a Government-driven fund before being privatised, had kickstarted the Israeli venture capital industry from its inception in 1993.
Yozma's two funds have invested more than $US170 million ($395 million) in 40 portfolio companies, some of which have gone public on stock exchanges in the US and Europe.
Mr Hodgson's plan, approved by cabinet on Monday, will be fleshed out through consultation with the private sector. It involves setting up a Crown Seed Capital Fund (CSCF) to invest alongside domestic and international investors in several venture capital funds focused on businesses in the early stages of development.
The CSCF, or fund-of-funds, will be managed by private sector managers appointed by the Government. Investment criteria for these managers, who have yet to be chosen, will be drawn up over the next fortnight.
One criterion will be non-negotiable, however: that the investment be in the national interest.
The managers of the CSCF will gradually create several drop-down funds in which the Government will be a minority investor with about $10 million in each.
Mr Hodgson said there were no firm guidelines on the number of funds, their size, or the type of businesses they would target.
"If a fund wants to focus on environmental remediation, or Crown Research Institutes, or IT, or primary sector innovations, or links with the pharmaceutical industry, that's fine by us.
"If the managers of a fund want to take a portfolio approach, that's fine too."
The Government planned to invest in the funds over their first three years, then exit a few years after that, "once New Zealand's seed capital market is humming."
Mr Hodgson said it was important to involve international investors in the funds to take advantage of links to overseas markets and expertise.
As well as Mr Erlich, the Government was consulting with venture capitalists in the United States.
Questioned after he announced the plans at a conference on corporate venturing in Auckland, Mr Hodgson said a decision on how many funds would be set up would be made after consultation with the private sector, but he envisaged total Government investment of "tens of millions," and total capital under management much greater than that.
Asked about parallels with the Government's last major foray into venture investing, the failed Development Finance Corporation, Mr Hodgson said the DFC in its early days did well by New Zealand business.
It failed later by investing in inappropriate areas such as property.
"This is a much more private-sector aligned process. We won't tell fund managers what to do."
He could not guarantee the Government would not lose money in the new scheme: "If we could do that, we wouldn't be taking enough risks."
Mr Hodgson wants the private sector to contribute its ideas to a paper which the Government will distribute on March 12.
The results of further consultation will be put in a paper going to cabinet at the end of April.
Links
The Yozma Group
Hodgson unveils details of govt's venture fund
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