Without solid guidance, firms struggle to win backing, writes YOKE HAR LEE.
Budding New Zealand high-tech companies won't have a chance of finding seed capital unless they can prove to venture capitalists that they have management expertise.
And New Zealand's biggest skill deficiency is to be found at the management level, where would-be high-tech newcomers often lack the dedication to ensure the company can take research from the laboratory to the corporate boardroom, says Jerry Balter, former venture capitalist and now a partner of US investment bank Ulysses Group.
Ulysses is advising NeuronZ Ltd, a company formed in 1996 to discover drugs in the neuronal rescue field, on how to raise capital for development.
The neuronal rescue field is centred around finding ways to "rescue" cells before they die in response to an injury.
NeuronZ is part of Auckland UniServices, the commercial arm of the University of Auckland.
Mr Balter was one of three founders of Physiome Sciences Inc, a US-research company based on technology developed by Oxford University, University of Auckland and the Johns Hopkins University School of Medicine. Physiome is developing simulations of human organs to speed up the discovery of drugs.
He said short of New Zealand companies building management know-how, venture capitalists would prefer that research be transported out of New Zealand to wherever the capital was sourced from.
"It has become very clear to me that there is a lot of very good technology in New Zealand that is clearly totally disregarded by the rest of the world. It is a location issue and also an issue of there being very little experience in dealing with the NZ business and social environment," Mr Balter said.
"NeuronZ has world-class people and world-class technology. If it was started up in London, Boston or New York, investors would be pounding on their doors to invest. As it is, investors would say, we like it, why don't we just buy the technology and put it in London or San Francisco, or wherever the investors are from?" he said, adding that NeuronZ, also needed management skills before it could proceed.
For New Zealand, the stakes could be high, Mr Balter said. The difference is between having technology being licensed abroad or getting R&D companies to be based here, providing employment opportunities.
As an example, a typical start-up research company would need some $10 million to proceed for between two to three years. After five years, the company would be looking at between 125-150 people. "This is why governments around the world are looking and saying, if we can get a cluster of 10 or 20 of such companies in an area employing people earning about $100,000 per year, it would do wonders for the economy," Mr Balter said.
New Zealand's biggest task was focusing on recruiting key management, he added.
"At the same time, you also look at training locals, bringing them into second and third levels of management, so you create that entrepreneurial management class."
But it would still be a chicken and egg situation. Seed investors would be attracted only if there was management, but the human capital would flow in only once there was sufficient capital commitment to ensure the management could execute the strategic plans.
Mr Balter said typically, those investing in the start-up stage of a company were prepared to wait between three and five years for results. In drug development, for instance, clinical trials could take anywhere from three to 10 years.
While in New Zealand there appeared to be an aversion towards seed investing, global venture capitalists were already familiar with the risk or rewards.
"Seed investors understand the return on investments are substantial. They also understand that they don't all need to be winners. Part of the nature of seed investing is the realisation that several of your investments are not going to make it at all," said Mr Balter.
"Seed investment is only suitable for those who say 'the money I've put here can be lost, and I expect it to be lost. But if I can hit the next Microsoft-type of company, I could be rich well beyond my dreams'.
"Seed investing also means needing lots of chances. But if one's to form a fund here for seed investing, the first couple of investments would really have to be hand-picked to ensure reasonable success."
However, he said the middle class should not be investing their pensions in seed investing. Seed investing was best left to institutional investors with global portfolios or wealthy individuals.
Management know-how is vital for investment
AdvertisementAdvertise with NZME.