The first thing to appreciate when considering the state of venture capital in New Zealand is that no venture capital-funded business has yet made a full exit.
That means a full listing on a major sharemarket such as Nasdaq, or a trade sale, which is the more common way early and mid-stage investors see a return.
High-profile exits at huge multiples are what drive markets. They create the buzz, and some of the capital, for the next round of investment.
What investors here can see is trade sales of technology companies which got to a certain size by angel funding, bootstrapping from revenues and sales of cornerstone stakes to foreign distributors or partners.
That sometimes leads to a complete takeover, as with Navman, or a merger, such as The Great Elk teaming up with its North American integrator to become Stayinfront.
The amount realised from such sales has ranged from under $1 million for the assets of Genie Systems, sold at a fire sale after it failed to secure second-stage funding, to the $100 million or so Brunswick eventually paid for Navman.
Right there is the equation venture funds look at. Given that not all the companies in a portfolio will succeed, funds want to get at least five or 10 times what they put in. They are therefore going to want a substantial chunk of the company for a total, over two or three rounds of funding, of at most $10 million or so. Even that sort of investment would strain most existing funds.
Entrepreneurs looking to build companies need to be aware of these limitations. It doesn't mean we can't build successful technology companies from New Zealand, but we have to be clever about what sort.
The question is always: what will the money be used for? By the time they get past the friends, family and fools stage and the mortgage or overdraft is unsustainable, companies probably need to have got their idea to the product stage.
They are then looking for cash to break into foreign markets, establish distribution channels, or build the next generation of a proven product. Path to profitability is what investors will want to see.
Most of our technology success has actually been in electronics. Firms like Tait, Navman, Rakon, Fisher & Paykel and TruTest carved out niches turning silicon into saleable items. They invested heavily in distribution networks and partnerships to protect their brands and get fair value for their products.
Software is in some ways harder to invest in. It has to fit somewhere - it is rarely a standalone item. It can be copied. It gets out of date. Your competitors can decide to give their product away and make money some other way. Hit the right market at the right price and you can make a lot of money. Price it wrong and it can be hard to sell, or you can't sell enough copies to get your investment back.
Software is one area where the flummery about the internet removing distance is not untrue. Ghost and MailMarshall got critical mass and attracted the attention of their eventual owners through internet downloads.
Those companies succeeded because they created products. A lot of software, especially high-priced enterprise software, is more services than technology, which requires a large investment to sell and support.
Despite the challenges, we do have a pioneering private venture capital sector and various Government and quasi-government initiatives aimed at supporting the growth of technology companies.
Most of the private firms are partnering with the Government's Venture Investment Fund, which has $100 million to invest in privately run seed funds on a $1 for $2 basis.
Chief executive Franceska Banga says it could be 10 years before there is a self-sustaining venture capital industry here, and some state support will be required until then.
Banga last month made her case to a select committee for more money to maintain the momentum, pointing out that the big foreign funds won't start investing here until they see it is possible to make big money.
VIF has so far allocated $65 million to five funds, of which $40 million is now invested in 17 businesses.
Banga says the investment time frame, especially for seed or early-stage investing, can be five to seven years.
In the United States, the companies which are achieving trade sales or IPO (initial public share offerings) are pre-tech-wreck, they are not new companies.
While the existing funds are probably several years from the sort of success which will fuel the market, Banga is disappointed at the failure of local institutions, with the exception of the Accident Compensation Corporation, to invest. Typically, she says, pension funds allocate a small portion of their portfolio to these long-term assets, which would typically have higher returns.
Banga says New Zealand venture capital investment as a proportion of GDP is a quarter that of Australia and well below most other developed countries.
Everyone involved accepts there is not enough risk capital around to create really big technology-based companies here - at some stage foreign capital will be needed.
That may come in through relationships with a VIF-backed fund manager, or through Investment New Zealand.
The danger is always that such activities could amount to flogging off the family silver, if not handled carefully.
A lot of the Government's activities centre on attempting to educate potential investors and investees. One lesson we may need to learn is forgiveness. A Silicon Valley truism is that failure can be as important as success, so people can rise phoenix-like after ventures go down in flames.
Despite its direct involvement in the field, the Government still hasn't got its collective head around the risk-reward equation.
Most countries recognise that high-risk capital is essential for the development of technological and industrial capacity, and they have tax structures which mitigate that risk to some extent.
Banga and fund managers say a key factor putting off investors, especially foreign investors, is the lack of a limited partnership structure which allows investors to split profits or liabilities based on the amount they put in.
There is money out there looking for high-risk investments. Hopefully there will be some help and encouragement in the Budget.
<EM>Adam Gifford:</EM> Financing the key to high-tech success
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