Bevan Graham: New Zealand entrepreneurs hard to find

New Zealand prides itself on being an entrepreneurial economy, and international surveys back that perception.

Our view - from the vantage point of our involvement in the early-stage capital raising space - is that the major thing holding this country back is a shortage of truly business-savvy entrepreneurs. Think about it this way - at its most basic level, to commercialise a good idea needs three things: a good idea, capital (which may be debt and/or equity), and an entrepreneur. In New Zealand, we have an abundance of the first, sufficient of the second and are severely lacking in the third.

Let's get the controversy out of the way early. I think we are seriously short of true entrepreneurs. By entrepreneur I mean the person with enough commercial expertise to take the bright idea and turn it into a viable commercial enterprise.

This assertion runs against the conventional wisdom and a host of international surveys that constantly place New Zealand at the top of the world when it comes to entrepreneurship. But just having a bright idea doesn't makes one an entrepreneur.

I believe there are enough investors out there to fund our early-stage capital needs. Furthermore, investors are becoming more organised with a number of investor networks appearing. The low number of deals being done is often explained by a lack of capital, but I think it's more because of a dearth of talented entrepreneurs, and possibly a lack of pooling of investment risk among a few investors; that is, sharing the deal.

If there is anything lacking on the capital side it is a lack of appetite for risk. There is a saying in Silicon Valley that if you haven't failed four times, you probably haven't made it yet. Risk is what makes for a thriving entrepreneurial economy.

Those seeking capital aren't going to get off without comment, which brings me to a report released by the Ministry of Economic Development and Statistics New Zealand called "Business Finance in New Zealand".

It appears our business people and entrepreneurs would prefer to raise capital through debt rather than equity. The report identifies that out of businesses looking for finance last year, only 6 per cent sought solely equity finance; most of those were successful; and of those successes, 81 per cent of new equity was raised by existing shareholders and a further 11 per cent from friends and family.

I believe this, at least in part, reflects an aversion to equity financing. The ministry has signalled this result as an area for further study. Let me posit some thoughts about why this may be the case: lack of knowledge about raising equity finance, higher transactions costs and potential loss of control of the idea or business.

So why do we think we know something about New Zealand's early-stage capital raising market? Some background: EDANZ is the Economic Development Association of New Zealand. We are the umbrella membership organisation of around 70 local and regional Economic Development Agencies (EDAs).

We co-manage New Zealand Trade and Enterprises Escalator service with Deloitte, and work with a consortium of brokers (Deloitte, I Grow, Realize Innovations and Ignition Partner).

Escalator facilitates equity capital raising for start-up or high-growth companies. We bring together the bright idea with good potential or the existing business ready to scale up, with serious investors.

The intervention (the bit the tax-payer pays for) is for the time the broker spends assessing up to 300 entrepreneurs and businesses a year and preparing and taking around 45 businesses a year to private sector investors. Since inception, Escalator has raised $26 million for 39 companies and five strategic partnerships (non-equity deals). But just as importantly, for those that have not raised capital yet, it has put more than 600 companies through a process with one of our consortium partners that will have helped them identify (and hopefully start to rectify) issues that might make them a more viable proposition for investors and pointed them to other avenues for assistance.

Our experience with Escalator means we exercise our minds in this space daily. But the conclusions we reach are at odds with the conventional wisdom about early-stage capital raising, which poses some challenges when we think about what the Government should be doing.

It is not clear just what the Government should be doing, so we need to agree on what the problem is. To me, it is a lack of suitably skilled entrepreneurs, an aversion to risk by investors and an aversion to equity finance on the part of the entrepreneur/business owner.

ESCALATOR

* The Economic Development Association of New Zealand is the umbrella membership organisation of regional Economic Development Agencies.

* It co-manages New Zealand Trade and Enterprise's Escalator service.

* Escalator facilitates equity capital raising for start-up or high-growth companies.

* Escalator has raised $26 million for 39 companies and five strategic partnerships since it began last year.


* Bevan Graham is chief executive of EDANZ