By Yoke Har Lee
Momentum is building to bring high-tech companies in contact with the previously hard-to-attain private capital market.
Most people associated with raising money in New Zealand know that nascent high-tech industries will die prematurely or be stunted because of problems associated with reaching investors.
Pat Costigan, an inventor who has been developing an Internet-based product, says that in the US, investors are willing to crawl over broken glass to hear good ideas. No such luck in New Zealand.
Mr Costigan represents one spectrum of entrepreneurs looking for capital.
Auckland UniServices, the commercial arm of the University of Auckland, represents the other. Its subsidiary NeuronZ has world-class science and technology but is still knocking on doors to find funds to further develop its science into drugs for treating brain injury.
New Zealand needs a venture capital industry. On top of that, it needs a class of managers who can help companies nurture ideas to products, and later take them to the markets in the world.
Tentative steps are being taken by the industry to fill this gap. Investment banker Morel & Co, based in Wellington, is gathering $20 million for a larger venture capital vehicle to finance technology companies.
Caltech Capital Partners, the other investment company with a fund invested in technology-based companies, is on the verge of expanding its investment pool.
IT Capital, which is reborn from investment company Iddison, is another addition to the market for companies seeking money for high-tech venture.
A few other investment vehicles are being mooted. The New Zealand Stock Exchange is also working on plans to set up a marketplace for startup companies to access capital.
John Blackham, a software entrepreneur, has over the past year or more been studying the viability of bringing a Swedish model, called the Innovation Market, to help high-tech companies raise money here.
Mr Blackham is also keen to explore other channels for New Zealand to develop a multitiered capital market to serve the needs of companies undergoing various stages of development.
Other initiatives being put in place include a plan by the Minister for Enterprise and Commerce, Max Bradford, to change legislation to allow companies to raise private capital without incurring high compliance cost.
If all those plans go ahead, New Zealand would start to see a broader capital market and a new era for a venture capital market after the Greenstone Fund reached maturity.
Venture capitalists in their purest form are multi-portfolio in nature. In the US, venture capitalists invest in ideas or technology before the product is actually being made. In New Zealand, this would be rare.
What New Zealand private equity has focused on so far is the developmental capital - that is, money going to companies that already have a proven market and a proven product, but are seeking to expand further.
Minimal private capital is at present invested in pre-startup, prototype or seed capital stage. Seed capital generally refers to money going into a company with a technology that can be developed into a product.
Mark Hutton, a director at Direct Capital Management, a company providing investment management, says private equity has been focused on developmental-stage businesses because of a lack of record of the risk versus returns for early stage companies.
"From an investment point of view, it is also difficult to go into small transactions because of the costs," he said. A lack of financial and management skills was their most immediate problems. This implies a need for management help, indicating that management fees could be high, often a deterrent for investors.
Companies with proven products, proven markets and proven management were better investments for private institutional capital seeking returns without wanting to be involved in management.
Pure New Zealand, a listed company controlled by the Tong family, is one of a small number of New Zealand companies investing in early or startup stages, or even prototype stage of a technology.
Its managing director, Chris Holmes, who has been involved in investment management for more than 20 years, said the absence of a vibrant capital market for startup or even pre-startup stage, reflected the fact that New Zealand had not been a nation of risk takers.
Compare that with the US, which has been developing its venture capital market since the 1960s. Mr Holmes said, however, that it would be wrong to think that creating a pool of capital was the only answer. The development of technology-based industries involved a complex set of factors.
"A substantial issue is the fact that New Zealand companies have been slow to spend money on research and development. How do you create an environment where people are prepared to spend on R&D? If you don't spend on R&D, your processes and product development start to decline, then the company declines and the value of the company also declines," he said.
For others, some of the issues that need to be addressed include:
* The need to bridge the gap between ideas/technology and creating a product.
* The need to link products to markets.
* The need to develop management for these companies.
Caltech Capital Partners director John Cunningham said that in the US, an immense amount of time was spent by venture capital companies' managers looking to match technology and the marketplace.
"They do a lot of analysis of where the technology is going, where the market is going before they actually get to the investment stage," he said.
The other management issues are related to how to create an environment conducive to attracting investors to such high-tech investments, be they in the form of venture capital funds, public or private capital market.
One issue that needed clarifying for those managing venture capital funds was the issue of capital gains tax, where investors who quit those investments did not get taxed for being "traders," Mr Cunningham said.
Another basic need to create a viable market for investors is liquidity - a means for investors to cash out of their initial investments. The US has Nasdaq and Australia has Computershare, which has made an offer for the Sydney Futures Exchange, its aim to turn it into a Nasdaq-style stock market for high-tech stocks.
Wanted: a venture capital industry
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