By SIMON COLLINS
Surging demand for private sector research and development grants has convinced Science Minister Pete Hodgson that the Government should re-enter the venture capital market with its first big investment since the late 1980s.
Just back from Israel and Silicon Valley, Mr Hodgson said that the $11.8 million budget for the new R&D grants was "wrong by a factor of 10."
"There is more innovation taking place in New Zealand than is being measured," he said.
"I believe that, although venture capital funds have expanded strongly in the last two years, the level of venture capital funding in New Zealand is really very modest indeed compared with many other nations - not just Silicon Valley and Israel but Britain and Germany and Australia - and there is a role for the Government."
He has asked officials to prepare a cabinet paper in the first quarter of next year on investing "tens of millions" of dollars in a new fund, in which the Government would take a minority stake alongside private venture capitalists.
The Government would not take a management role, and would withdraw its capital at a set date or when the fund returned an agreed capital gain.
The Government's investment would come from increased borrowing by some state-owned entities to release capital.
"The Government needs to explore its equity shareholdings it has in various assets," said Mr Hodgson.
"Some of that equity can be used for the nation in being redeployed to accelerate the development of seed capital."
HortResearch, for example, one of nine crown research institutes for which Mr Hodgson is responsible, carries a debt of only 16 per cent of its assets, and Industrial Research 38 per cent.
Mr Hodgson declined to be drawn on which entities might be used to raise debt. He said the amount of capital required had not yet been decided, but "it would have to be tens of millions for it to be worthwhile."
A study by Infometrics for the Treasury in July found "no clear evidence that there is either a lack of venture capital available for businesses nor a shortage of good quality business propositions to invest in."
But Mr Hodgson said the Treasury believed "that we should explore active involvement in the seed capital end of the venture capital spectrum."
He said the fact that 1000 businesses had already registered interest in the R&D grants since they were launched on September 11 showed that the original estimate of 1000 registrations within the first 12 months was well out.
"If you have too many ideas chasing too little money, then the ideas become under-valued," he said.
"New Zealand innovation is hampered by the fact that the intellectual property does not receive subsequent value, and New Zealanders don't see themselves as technological innovators.
"If that were to change, then the value of innovation would increase because there would be more money chasing the same number of ideas."
Meanwhile, Mr Hodgson will meet officials on Thursday to revive Government plans to support "incubators" for new businesses - a programme which has been stalled since its budget ran out early this year.
"I have some views on how we might provide incubator support.
"They will not be classical Israeli or North American ways of doing it. We are constrained by money," he said.
"I am hoping to have the incubator support policy up within two months."
The head of the Ministry of Research, Science and Technology, Dr James Buwalda, will lead the officials team preparing the cabinet paper on the proposed venture capital fund.
Dr Buwalda accompanied Mr Hodgson to Israel and Silicon Valley, along with Murray Wright, the Crown Company Monitoring Advisory Unit official responsible for ownership aspects of crown research institutes.
They were joined in Israel by the chief executive of University of Auckland Development, Bridget Wickham, and Massey University's director of research policy and strategy, Dr Chris Kirk.
Minister champions R&D
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