It's a capital idea for fledglings to raise funds right now

Fledgling technology companies now have more opportunity than ever to raise capital here.

The new Venture Capital Monitor Association - published by Ernst & Young and the New Zealand Venture Capital Association - shows an increasing number of equity funds are looking to partner and invest in local businesses.

The monitor found that $496 million in new capital was raised last year, bringing total committed capital to more than $2 billion - 28 per cent more than the year before.

Fund managers identified their committed capital balances as comprising of 60 per cent private equity, 13 per cent venture capital (VC) and the remaining 27 per cent as having elements of both.

Of the total $2 billion, about $768 was available for investment this year. About $175 million of that figure was specifically available for the companies at the VC end of the market.

Jon Hooper, an Ernst & Young director and association council member, said the first half of 2005 was characterised by a high level of capital raising with relatively low levels of investments.

However the second half had been sensational, with $185 million invested.

Of the $212 million which was invested throughout 2005, $148 million was by private equity funds and $64 million was by VC funds.

Of the 72 deals done last year, investment in mature or later stage businesses accounted for 50 per cent of capital committed - a decline on 2004.

Based on the number of deals done, those at the "seed" and "expansion" level accounted for 67 per cent. These numbers indicated a trend which was positive for the VC sector.

Association chairman Mark Dossor said the growth in the local market was providing owners of local businesses with an alternative to local or international markets for funding development plans.

Three sizeable new VC funds entered the local market last year: Pioneer Capital, BioPacificVentures and Finistere Partners. Between them, they have the potential to invest $350 million in companies.


Categories of venture capital

Venture capital and private equity can be categorised via the stage in the lifecycle of the company they have invested in.

* Seed stage
The company is still at the idea stage or in the process of being organised and needs finance for research and development. This is usually funded by the entrepreneur's own resources.

* Start-up/early stage
The company is in the process of being set up or has been in business for a short time. It has not yet sold the product commercially and has no track record. The company is seeking investment as it has completed the product development stage and needs funds to begin commercial manufacturing and sales.

* Expansion/development stage
The company is now established and requires capital for further growth and expansion. It may not have made a profit at this stage. This is a period of rapid growth and the company usually requires several rounds of capital injection as it achieves the milestones set in the business plan.

* Management buy-out (MBO)
These are funds provided to enable the management team and investors to acquire an existing product or business from a public or private company. This area is usually when private equity investment is applicable.

Management buy-in (MBI)
* These are funds provided to enable a manager or group of managers from outside the company to buy into the company. As with an MBO, private equity investment is usually applied. On the whole, early stage investments require less capital than an expansion or MBO stage. Venture capitalists spend the same time and effort assessing and assisting an early stage company as they do a later stage company. In fact, the earlier stage companies usually require greater assistance than later stage companies. Therefore, many VC firms prefer to invest in later stage deals that fit their investment criteria.