Capital Markets: Five strides rather than a giant leap

Franceska Banga, chief executive of the New Zealand Venture Investment Fund. Photo / Sarah Ivey

Venture capital and angel investment are a very small part of New Zealand capital markets, but increasingly important in supporting a healthy pipeline of young start-ups, some of which could become a future Fisher & Paykel Healthcare or Xero.

Last year $53 million was invested by angel investors into promising companies, the highest amount since 2006 when angel investment activity started to be measured.

If we are going to continue to build our venture capital and angel markets, there are a number of steps we need to take. Here are five:

1. Celebrate failure, persistence and moderate success too

You cannot have innovation without failure. The focus we have in New Zealand on the small handful of companies that have been spectacularly successful sometimes borders on obsession. It is great to have rock star entrepreneurs in our midst - they provide affirmation that NZ has what it takes to achieve global success. But we shouldn't measure all young companies' success against the rock stars' yardstick.

For most companies and entrepreneurs, it is going to take eight to 10 years, if not more, to build companies of substance, and yet we seem to write them off after two or three years. And we are ruthless about failure. We are not interested to know what was learnt in the process. Entrepreneurs who've failed, or achieved only small scale success, but then apply their learning to build bigger and more successful companies, are critical to building a deep ecosystem. Angel investors understand that, which is why they focus as much on the capability of the entrepreneur as the business idea.

2. Commit for the long haul

A lot has been achieved in NZ in the last 10 years, and the capability that has been built across the entire early stage capital markets is now much stronger. We must keep building on that. The temptation in NZ if something does not work straight away, is to throw it away and start again. But we end up throwing away the capability and learnings too. Improve yes, but take a longer term view - it took the United States 40 years to build their venture and angel ecosystem. We can do it in 25 years. This is not just about a handful of companies achieving stellar success. It is about continuing to strengthen the ecosystem we have in place (entrepreneurs, investors, research institutes and universities, incubators and accelerators, etc) that supports numerous young companies to achieve success.

3. Pull in the big money

We need new investment products which make it easier for institutional investors to get access to a wide portfolio of innovation-led companies demonstrating good growth. The amount of capital NZ institutional investors currently invest in private companies is dismal - about 0.6 per cent compared with between 3-5 per cent for countries like the US and Australia.

The low investment rate is partly historical and understandable - there hasn't been the right sort of investment structures, or sufficient evidence of investment track record, to make investing either easy or attractive. But that is changing - technology, and in particular software, has built a track record of success across a number of companies. NZVIF is looking to create new fund products to give large institutional investors (e.g. KiwiSaver funds) access to a diverse portfolio of technology opportunities.

4. Support new migrant angel investors

Create a new wealthy investor migrant category, focused on investing in angel and venture capital investment opportunities. This could sit alongside the government's existing wealthy migrant policy and would be easy to administer.

The concept is simple and an approach that has been used elsewhere - wealthy migrants pay between $200,000 and $500,000 into a fund which would be invested into a portfolio of start-up companies alongside qualified angel investor groups. We already have the investment apparatus in place (the Seed Co-investment Fund). We already have a wealthy migrant policy. It is a matter of joining the two together. This would have many direct and indirect benefits for NZ companies, in respect of building offshore networks.

5. Asia Pacific Innovation Forum

NZ is perfectly positioned to lead an Asia Pacific Innovation and Technology forum, which invites the best and brightest young entrepreneurs from around the Asia Pacific Region to come together in NZ and present their new business ideas, to an international audience of technology investors. No other country is as well placed as NZ to lead an ambitious event like this.

• Franceska Banga is Chief Executive of the New Zealand Venture Investment Fund