KEY POINTS:
Jenny Morel doesn't mince words when describing the state of New Zealand's venture capital industry.
"It's dire", she exclaims during a rare quiet moment at her annual shindig for some of this country's best and brightest entrepreneurs. In fact, to call it an industry at all is probably an overstatement.
Since she founded her own venture capital firm, No 8 Ventures, back in 1999, Morel has ploughed more than $60 million of investors' money into people with Big Hairy Audacious Goals.
But despite the Government launching its own $160 million Venture Investment Fund (VIF) in 2001, in the hope of stimulating an economic transformation, the results to date have been mixed.
So far, VIF has spent around half its nest-egg by partnering six private-sector fund managers, resulting in a total of about $180 million being spread among 45 fledgling businesses.
That might sound reasonably impressive, but it's not quite so flash when you consider that Australia has more than seven funds, each worth at least that amount.
"It's the lack of institutional investors in the New Zealand market," Morel grumps. "We just haven't got the critical mass we need to partner with offshore VCs."
She might sound glum, but Morel is also capable of being remarkably upbeat. After all, you have to be an optimist to enjoy this business.
Like her husband, Reserve Bank Governor Alan Bollard, Morel originally trained as an economist, but decided to dabble in venture capital after founding her own investment bank specialising in technology.
It's a career that can be all-consuming. Five weeks ago, when Christchurch inventor Glenn Martin unveiled the world's first practical jetpack to an enthralled audience in the United States, Morel was working the crowds, selling T-shirts and hustling potential buyers.
The local VC industry has been stunned to learn that her firm has been secretly funding the Martin Jetpack for four years - during which she has personally hired many of Martin's staff and often acted as his right-hand woman.
No 8 initially gave Martin just a few hundred thousand dollars to prove that his concept could work, but tipped in a few million more when it became clear that he just might be on to something.
Whether the Martin Jetpack becomes the Nokia that New Zealand is so desperately seeking, or just another clever curiosity, remains to be seen. But if it flops, others involved in this risky business are confident something else will prove to be our saviour.
Morel concedes that part of the problem is the lack of spectacular sales New Zealand venture capital firms can point to as evidence of their expertise. But it's only a matter of time, she insists.
By world standards, New Zealand's VC industry is barely a teenager. Europe's venture capitalists are already adults, and America's are hitting middle age.
VC fund managers receive an annual management fee - around 2.5 per cent of the money committed by the fund - but like other investors, make most of their money when they exit the investment, usually through a trade sale, or sometimes through a stock exchange listing.
The biggest local deal by far has been the sale of Trade Me to Australian media company Fairfax for $700 million. Its original investors made a fortune but ironically, none of the major players in the VC industry was involved.
Morel admits her first fund, which launched at the time of the dotcom boom, was disappointing. "We thought we were being clever. We knew it was a bubble and we thought we could navigate past it, but we weren't as clever as we thought, and we got caught too."
She says her second fund, which has invested in nine companies, including cancer treatment company Proacta, 3D graphics company Right Hemisphere, telco software company OpenCloud, and data device-maker Surveylab, as well as the Martin Jetpack, is doing much better.
"But we're not going to sell up companies that we've only been in for three years just so that somebody can say: 'Oh, show me an exit'. We're absolutely hellbent on getting fantastic returns."
In fact, she would love to launch another fund, and is already discussing the issue with No 8 partner Andy Lark - a Kiwi who is currently head of marketing for Dell - but is reluctant to do so unless they can raise $100 million.
Given that one of the golden rules of the VC industry is to diversify your investments so the successes outweigh the disasters, anything less than that simply won't do justice to a really great idea, she believes.
Putting together the financing for OpenCloud is a case in point, she says. Typically, such companies need between US$30 million ($43.7 million) and US$60 million in funding just to get set up. No 8 partnered with Advent Ventures in Britain and Motorola, but was embarrassed when it had to admit it couldn't afford even US$4 million in the first funding round.
If she and Lark fail to get the next fund off the ground, then Morel fears for the current generation of clever Kiwis.
"Out of the original VIF funds, I think four of us are now all fully invested or pretty much all tapped out.
"Since then there's only been BioPacific, who are doing their last two deals right now, and then you have Pioneer, who had a small amount of money last I knew.
"Only Endeavour and ourselves have decided we'd like to go again. I don't know how long Endeavour would wait, but I know from my own point of view, if we can't attract a couple of cornerstone investors pretty much by the end of this calendar year, then I need to work out what I'm going to do for a career.
"Because I'm not ready to retire."
While fund managers admit they have struggled to keep particularly talented staff, as they tend to be lured overseas where they can earn even bigger money, it seems to be a catch-22 situation. The institutions are reluctant to invest because New Zealand is so small, and the deals are so risky. But the industry is unlikely to get much bigger, and more stable, if the institutions don't join in.
Part of the problem is that New Zealand doesn't have many large institutional investors, such as pension funds and community trusts, in the first place.
And according to some VCs, the few big institutions we do have are scared off by advisers such as Mercer and Russell.
Privately, advisers deny that is the case. It is their clients who don't want to take the risks, or pay for expensive due diligence, they say. And some have trust deeds that don't allow them to concentrate their funds in a particular geographic location, or in one very small sector of the capital markets.
In Australia, pension funds - fuelled by a compulsory savings regime - are the main investors in venture capital. But with KiwiSaver funds expected to take another few years before they're big enough to make meaningful investments - if indeed any Kiwis bother to back adventurous funds - it is to the New Zealand Super Fund that most in the VC industry are now looking.
"ACC has been a great investor, but the Super Fund haven't done anything yet," says Morel. "We're trying to push them quite hard to get those processes ready, because if they get to decide they'd like to invest in the sector by the end of next year, well the sector might have disappeared by then."
For those looking for money, there is always Warehouse founder Stephen Tindall, who for the past decade has almost single-handedly funded New Zealand's future business stars by reinvesting the dividends he receives from his family's personal stake in the Red and Blue Sheds. He has also contributed to several of the VIF funds.
"At the moment, [Tindall's fund] feel like they're the only ones left standing," says Morel.
"Everybody's going to Stephen for money. He's been the hero of the sector. But it's too much weight on one party. He can't do it all on his own."
Tindall's investment manager, Brian Mayo-Smith, admits even the $150 million or so that Tindall's fund, known as K1W1, has invested so far is "a bit of a drop in the bucket" compared with what's needed.
While he is pleased the Government has recently introduced limited partnerships, which should make overseas VCs more comfortable about investing here, there are still a couple of tax wrinkles to be ironed out.
If New Zealand really wants to make a difference, it has to attract overseas investors, he says. But locals also have to get more comfortable with the risks involved. "What would help is obviously some good exits. But that's a difficult one to crack."
While IT and biotech are no longer as popular as they once were with overseas VCs, now that "cleantech" - otherwise known as renewable energy - is the latest hot thing, Mayo-Smith says he is still confident that K1W1's IT and biotech investments will eventually pay off.
"My view on cleantech is we're certainly investing in that space. We invested in [waste-to-fuel company] LanzaTech before anyone had even coined that phrase. But I think we've also got to be a little bit careful that some of the valuations in cleantech don't get silly.
"You've still got to look at their fundamentals and don't go overboard like happened in the dotcom boom."
That said, he concedes that K1W1 is also slowing down.
"With the economy the way it is at the moment, it does mean we have to concentrate on supporting our existing investments, because we know it will make it harder for them. We're having to do that, rather than supporting a whole lot of new ones."
The real test will be in five years' time, he believes. "The [economic downturn] is making it a little bit harder, but if the company is still performing well, there are still buyers out there from a trade sale point of view."
Franceska Banga, who oversees the NZ Venture Investment Fund, is also determined to be optimistic.
One option for VIF funds is to pay back the government funding plus a return equal to the five-year government bond rate within their first five years. If that doesn't happen, the Government is entitled to claim its share in each fund once they are wound up - generally between 10 and 12 years.
The fact that none have yet exercised the first option would seem to indicate they are resigned to having to wait at least a decade to get a decent return.
Banga notes that four of the funds are only halfway through. "And we're pretty comfortable with how they're tracking, given the state of markets globally."
VIF still has capital available for investment and is still keen to support new funds coming into the market, she says. Perversely, tough times are good times to establish new funds because valuations tend to be lower, she argues.
"The biggest issue is people keeping their hands in their pockets. That will change, and if we can ride out the next 12 to 18 months, I think we'll be all right.
"The message from the Australian market to our institutions is: 'Just get started. Stop mucking around and just start." Because until they actually bite the bullet and get engaged, they won't know what they don't know. It's just conservatism at the moment."
And she would certainly like to see the NZ Super Fund playing its part. "Our view is they should be very active participants in the local market and we'd like to see them more involved. And not just them, but the other pension-type schemes too."
But in this case, quantity does matter as much as quality.
"All of these things come down to a scale issue. When we look at OECD comparisons, we think we're about a quarter of the size we should be. If this is going to be part of our economic future - and if you don't have high-growth companies you don't have an economic future - then this needs to be about four times bigger than it is."
"What are we going to do in New Zealand if we don't step up to this stuff? It's a big challenge but it's certainly not insurmountable. We've got most of the building blocks there."
It would certainly be a shame to lose some of the blocks at the bottom. As Jenny Morel points out, the entire structure might not fall down if her firm shuts its doors, but it would mean a lot of unnecessary hard work to regain the enormous amount of experience that has been acquired in the meantime.
