Innovative dotcoms find venture capitalists too conservative

By PETER GRIFFIN technology writer

If the turmoil of the last few weeks is anything to go by, it's a bad time to be associated with the "new economy."

Certainly, the slide in tech stocks manifested itself locally. The likes of Advantage Group, Spectrum Resources, IT Capital and Strathmore Group have had their share prices slashed.

But New Zealand's unlisted high-tech entrepreneurs are weathering the storm well.

And while venture capitalists have learnt valuable and expensive lessons from the reality check that shaved billions from share prices globally, by all accounts there is a large amount of money awaiting New Zealand companies with good home-grown ideas.

But some dotcom companies claim the venture capitalists are too conservative and will invest only in sure winners.

The demise of some of the world's largest dotcoms hasn't fazed one of New Zealand's youngest internet entrepreneurs, Jenene Crossan.

The 22-year-old founder of the teenage magazine-style website nzgirl.co.nz knows she is part of a high-tech industry that has taken a beating of late.

But don't mention her name and "dotcom" in the same breath.

"For us, nzgirl is not a dotcom. In fact I hate that term," she says.

Nzgirl has continued to carve a niche for itself serving the young female market. Advice on relationships, careers, health and sex is offered on the site.

It has its own staff writers and posts content about fashion and makeup, everything you'd normally get in a coffee-table mag, but with a strictly New Zealand slant.

Mrs Crossan says the site now employs 15 people, is profitable and will this year spawn its own makeup range. Plans for a TV show are also being discussed with one of the networks. But nzgirl remains well aware of the fact that confidence in internet advertising, a major form of revenue, has bottomed out.

"In the past six months, the change in the economy has started to affect the type of clients we've got. Companies have stripped back their advertising. It's a hard time going out and saying we want their money."

But the site doesn't just rely on advertising. It also gathers valuable marketing information when users enter their details in online competitions and quizzes.

Last July, Mrs Crossan put the word out she needed cash to take nzgirl to the next level.

It wasn't long before she was contacted by Wellington merchant banker and infrastructure investor Lloyd Morrison, who took a 20 per cent stake.

"I don't think he sees it as an opportunity to make millions and millions of dollars," says Mrs Crossan.

Instead, she claims, it was the entrepreneurial nature of the company that attracted the money.

Similar success continues to follow another young entrepreneur, Adrien de Croy, the founder of software company Qbik.

Mr de Croy hit the jackpot in 1995 with Wingate, software he developed which allows computers to share a single internet connection.

The software took off, fuelled by the growth of the internet, and led to de Croy signing a multimillion-dollar licensing deal with computer giant Compaq in which Wingate was bundled with selected Compaq PCs.

The deal launched Wingate into the big league and moved Mr de Croy to consider listing on the Nasdaq.

"We went over to San Francisco in 1999 and spoke to a few merchant bankers, but decided it was all too hard for nebulous potential gains. It would have been very expensive and disruptive to list."

Mr de Croy has always been in a good position to weigh up his numerous options. His Wingate generated revenue from the start, allowing him to pay for expansion from cash flow and avoid grovelling to venture capitalists.

Qbik now has more than 5000 resellers, mostly in the US, and is building on existing deals with Compaq and Daimond Multimedia. His team of developers is working on an addition to Wingate, a virtual private network (VPN).

And venture capitalists are finding the more sensible market outlook is allowing them to gain a better idea of how much hi-tech companies are actually worth.

As the Nasdaq continued its headlong plunge to new lows last week, Geoff Shanahan, organiser of the IT Investment Forum held in Auckland, was showcasing a handful of local companies pitching for venture capital injections of around the $1 million to $1.5 million mark.

Mr Shanahan said the slide in tech stocks, peaking with recent profit warnings and staff cutbacks, had squeezed the "snake oil" from technology companies' pitches, allowing venture capitalists to make better judgment calls.

"It's brought more discipline to the market. People are more rational and there is less tolerance of poor fundamentals and poor corporate governance these days.

"There's talk a lot of venture capitalists are flush with money, but they are holding on to it to make sure the companies they invest in have liquidity."

Keith Philips, managing director of venture capital group IT Capital, says his company has about $17 million to invest in local start-ups and is looking at several companies

"We're in the fortunate position of not having invested in any dotbombs. There's technological innovation here. If you put a match to it, it would go like dry timber."

But the experiences of some local entrepreneurs seeking capital injections have been anything but easy. Take the example of Auckland software company OnTap Information.

The company has been working with the New Zealand Government developing software to web-enable services for the motor industry.

Its flagship product, the Vehicle Information Report (VIR) offers reports compiled from Government and private sources listing information useful to those working in the car industry, such as notification of expired licences and securities owed.

The company is also in the process of introducing MotorWeb, a system that allows car dealers to cut through the red tape associated with motor vehicle documentation.

Dealers, auction houses, garages, insurance and finance companies will be able to conduct e-government transactions, such as change of ownership, licensing and security registrations, online.

OnTap recently attracted the attention of an Asian government keen to set the company to work developing a registry system for the country's motor vehicle industry.

The contract could be worth $100 million, but it could slip from the grasp of OnTap.

The reason, says OnTap's chief executive officer and chairman of the Inventors Association, Patrick Costigan, is that the company cannot attract interest from local venture capitalists, whom he considers "too conservative."

"The venture capitalists will only get involved with businesses which have a fully developed product, existing positive cashflow and a fully proven management team, basically companies that they can immediately transplant to an overseas market. That's their level of risk, they're not interested in anything at an earlier stage than that," he says.

OnTap is now financing itself out of cashflow, but Mr Costigan estimates the company will need in the region of $1 million to court this major opportunity in Asia.

"At the moment we're just watching it sail by, waving from the shore."

Mr Costigan is loath to admit what he thinks is really holding back the venture capitalists - an underlying culture of conservatism.

"The whole ethos here is conservative, bordering on risk-adverse."

Mr Costigan cites e-Ventures, the struggling internet investment company which has $53 million of investment cash and recently announced a $4.5 million first year loss.

E-Ventures planned to make as many as eight investments, but so far has committed money to only two. The company claimed there was a lack of good ideas worth investment.

Mr Costigan disagrees. "It was a lack of ideas that met their stringent risk-adverse standards. The problem is that venture capitalists don't look at seed companies because of the perceived risk. If you start asking what my gross profit will be in the first six months, you're the wrong person to be investing in start-ups."

And despite his company's relationship with the Government, he believes it could be doing more to help start-up companies obtain the capital they need for expansion.

While the Government has announced plans to contribute $50 million to an investment pool of between $150 million and $200 million, Mr Costigan said its strategy of running the fund together with local venture capitalists is flawed.

"I agree with what [Research, Science and Technology Minister] Pete Hodgson is planning but venture capitalists aren't the right organisations to organise Government funds to put into early stage companies. They'll be way too conservative."

In contrast, says Mr Costigan, who emigrated to New Zealand from Canada 11 years ago, is the attitude among venture capitalists in the US.

"Investors in the US will crawl over broken glass to look at your idea. They're very aware that there could be another Netscape or Microsoft waiting to be discovered."

Despite frustrations in raising capital, Mr Costigan says OnTap is too far down the track with its Government-supported ventures to look for greener pastures.

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