By DANIEL RIORDAN
The Government hopes to emulate Israel's success in high technology by paving the way for private investors.
Body1: The Government is considering offering tax incentives to private sector investors in its new venture capital funds, a move supported by Yigal Erlich, the Israeli venture capitalist advising on the proposal.
He told the Business Herald that the international venture capitalists the Government wants as co-investors would need incentives to invest here.
"Because of the distance, because they're not familiar with the market, the involvement of Government and some incentives can prove crucial, including tax breaks."
He supports the Government's plans to widen its investment mandate beyond the seed capital or ideas stage, to supporting established companies in the early stages of their development, even though that will see it competing with local venture capitalists.
These proposals are included in a discussion paper inviting industry feedback by March 28.
The Government plans to contribute $50 million to a total investment pool of between $150 and $200 million, freeing up funds held in Crown Research Institutes.
The scheme is being driven by Research, Science and Technology Minister Pete Hodgson, who is setting up a Crown Seed Capital Fund (CSCF) to invest alongside domestic and international investors in several "drop-down" funds focused on businesses in early stages of development.
The CSCF and the funds will be managed by private sector managers appointed by the Government, which will take a hands-off role once it has invested about $10 million in each fund.
Mr Erlich is acknowledged as the father of Israel's thriving venture capital industry, which was developed with initial support from the Government. He has been a key adviser to Mr Hodgson.
He met Mr Hodgson here and in Israel last year and returned to New Zealand last week for further advisory work.
Mr Erlich said initial reaction to the plans from venture capitalists and other investors he spoke to last week was positive.
"It's been much better than I thought. They can see it as competition in one way but also as an opportunity to participate.
"Whether the entrepreneurial spirit is the same or not, whether there will be enough projects for the money you want to support, these are questions that will be answered when you start.
"But someone has to break the chains, and here the Government is breaking them."
He believed that if the initiatives fostered a stronger environment of innovation and enterprise, younger people would be encouraged to stay in New Zealand and expatriates would return, as had happened in Israel.
The discussion paper suggests investments be directed at businesses at the seed, start-up and early expansion stages.
Focusing only on the seed stage was too risky for most venture capitalists and required too much management time.
He said because the Government wanted to launch its programme as soon as possible it made sense to target more than just seed capital.
Although investing in early stage businesses would bring it into competition with existing venture capitalists for deals, the Government believed it could avoid crowding out the private sector and expand the whole market.
Israel's Yozma funds, on which Mr Hodgson has based much of his programme, have invested more than $US170 million ($410 million) in 40 portfolio companies since their inception in 1993.
Some have gone public on US and European stock exchanges.
The Israeli Government has since withdrawn from its investments and the funds were now purely private sector efforts.
Mr Hodgson said he envisaged the Government investing in the "drop-down" funds with the private sector for about three years, before withdrawing.
Among the topics canvassed in the discussion paper is the possibility of excluding certain types of businesses from the scheme.
These might include retailing, property development, re-lending or re-investment and businesses directly associated with the "drop-down" fund managers or private sector investors in the funds.
Decisions on the number of funds, their size and the kinds of businesses they will invest in will be decided by cabinet after consultation with industry.
The cabinet will make its decisions on or about April 23, so funding provisions can be included in the Budget.
The plans will be implemented after further consultation.
Seed capital may earn tax breaks
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