Fund turns the money tap on in 2001

The Government has wisely adopted a hands-off policy on its investment fund and progress should soon be apparent, writes DANIEL RIORDAN.

One day, every Kiwi entrepreneur with a bright idea will attract investors the way flames draw moths, nobody will blame the failure of "the next big thing" on a lack of venture capital, and New Zealand will lead the world in biotechnology.

Maybe.

Still, venture capital, identified by all and sundry as a key driver of a knowledge-based economy, got a huge fillip last year in the form of the Government's decision to set up the Venture Investment Fund.

Although venture capital in its loosest definition - incorporating most stages of private-equity investment - has been available to the right kind of companies for many years, the Government hopes to help plug gaps at the seed and early-stage levels.

Full marks to Research, Science and Technology Minister Pete Hodgson, who consulted widely with local industry as well as tapping international venture capitalists, most notably Israel's Dr Yigal Erlich, who created a similar set of state/private investment funds for the Israeli Government 10 years ago.

The minister won approval from his cabinet colleagues by offering to provide half of the Government's $100 million contribution from the profits of crown research institutes.

That money will be invested over the next three years in seed and start-up businesses. Private partners are expected to provide about $200 million. Investments will be held for seven to 10 years, a fairly standard venture capital timeframe.

Last November, the Government "shortlisted" 16 from the 44 private parties - mainly fund managers and venture capitalists - who had expressed interest in co-investing and making the investment decisions.

That undisclosed shortlist includes investors from Australia, Asia, the US and Israel who intend to set up local operations should their bids be successful.

No decision has been made on how many of the 16 would be chosen to manage the half-dozen or so "drop-down" funds of between $30 million and $50 million, but the potential for partnerships and joint ventures among them is said to be high.

A seven-strong advisory board headed by Australian venture capital expert John Grant expects to choose the successful applicants by around April.

The Government's approach to the Venture Investment Fund reflects a welcome underlying philosophy that the people best qualified to make the right investment decisions are industry professionals rather than bureaucrats.

There's nothing new in entrepreneurs complaining about a lack of venture capital in New Zealand. There's also nothing new about venture capitalists complaining about a lack of suitable investment opportunities. Last year was no different, and certainly no one believes the fund will solve all funding problems.

Trade NZ's inwards investment manager, Gary Langford, said last month that during the past few months, a shortage of capital in the mid to late stages of developing ideas had become apparent.

Mr Langford believed this shortage of investment capital was now widespread. Several companies now found it difficult to get the backing needed to "go to the next stage".

The background to all of this was last year's Global Entrepreneurship Monitor (Gem) report which ranked New Zealand as one of the world's most entrepreneurial countries but with the fourth-lowest level of venture capital of the 24 countries surveyed - only 0.7 per cent of its annual economic output, compared with 1.2 per cent in Australia, just over 10 per cent in the United States and a high of 12 per cent in Israel.

Admittedly, New Zealand's figures were based solely on the 14 New Zealand venture capital companies that belong to the Australian Venture Capital Association.



Depending on who you talk to, as many as 40 companies are active in the New Zealand venture-capital industry, with investments totalling $1.3 billion and with a further $1.7 billion available.

The amount invested represents 1.2 per cent of national income - equivalent to the figure in Australia.

Moreover, venture capital has been growing dramatically in all these countries.

The previous Gem survey listed Australia's venture capital at the same 0.7 per cent last year's survey gives to New Zealand. In the US, the figure was then just at 5.3 per cent and in Israel, only 4.3 per cent.

One industry that will benefit more than most from an activet venture capital industry is biotechnology.

Industry umbrella group Biotenz released a development strategy that talked of the industry contributing as much to the economy as tourism by 2010. Biotenz, which represents 66 organisations including companies, crown research institutes, universities, primary producer bodies and intellectual property law firms, believes New Zealand can be ranked among the top five of the OECD biotechnology indicator table.

But it acknowledged the wide gap between this vision and the current underdeveloped state of the industry, which it attributes to the lack of venture capital, a small industry base, non-recognition by policymakers and the widespread, but erroneous belief, that biotechnology equates to genetic modification.

Most biotech firms are not involved in GM, but those that are received good news in July when the Royal Commission on GM gave cautious approval to genetic research and development, providing what Mr Hodgson called "a very solid launching pad" for biotechnology development.

Biotenz' strategy praised Government moves on taxation of research and development - allowing immediate tax deductions on R&D spending from April - and its setting up of the Venture Investment Fund.



Statistics NZ, which in April issued its first report on biotechnology, estimated the industry generated income of $475 million in 1999.

One of the major debates is how to make best use of the intellectual property within Crown research institutes.

The commercialising of basic scientific research - as shown by Blis (Otago University) and Genesis (Auckland Medical School) - is all too rare, but many crown research institutes and universities are gearing up to develop and commercialise their intellectual property.

Most are also being required to contribute to the Government's share of the investment fund.

The number of publicly listed biotech firms swelled, thanks to Howard Paterson, the Dunedin entrepreneur with the golden touch.

Blis Technologies moved from the Stock Exchange's unlisted market to the main board in July. By the end of the year, two more companies Mr Paterson is involved with - Botry-Zen and Pharma-Zen - had appeared on the unlisted market, and upgrades to the main board are expected this year.

Meanwhile, A2 Corporation, another Paterson production, remains on the unlisted market. Johnny-come-lately investors scrambled for pieces of Mr Paterson's pie, but the biggest winners - with almost indecent returns - were the original investors.

How much the four stablemates deliver on their commercial promises remains to be seen.

The country's biggest biotech firm, Genesis Research & Development, had a year on the main board it would probably prefer to forget.

Its share price dropped 57 per cent over the 12 months, from $6.70 to $2.89, as investors turned against biotech stocks and the company reported mixed trial results with its psoriasis drug PVAC.

But Genesis continues to make progress on several fronts, and at least one broking firm predicts it will deliver for investors this year.

DF Mainland predicts a global biotech sector re-rating this year.

It notes that Genesis has $47 million in the bank, and an excellent research and development product pipeline.

Many of its smaller counterparts, and fledgling enterprises in other sectors needing generous doses of capital to grow, will be pinning their hopes on a revitalised venture-capital industry.

2001 – The year in review