Harder times for venture capital

By ROB O'NEILL

Listed venture capital companies could come under scrutiny as technology stocks are punished around the world.

John Blackham, a director of software development company Xsol, told a Trade New Zealand Maori technology seminar in Auckland on Friday that the public-listed model was fine as long as stock prices were going up.

But when the market turned to mush, they were vulnerable.

Silicon Valley venture capitalist Tom Perkins earlier this year predicted a rough ride for new ventures and venture capitalists alike. Speaking at the IT Investment Forum in Auckland in February, he predicted the bubble would burst and venture capital returns would decline from the dizzying heights.

Mr Blackham told the Business Herald that the long-term nature of venture investment, typically of three to five years, was at odds with the short-term pressures exerted by the stockmarket.

He said private funds could make long-term commitments as their money was sourced from high net-worth individuals. Companies they invested in could be sure they would have support in the future even if equity markets were volatile.

Further, he said it was important that a first-round investor carried on into second and subsequent funding rounds. If the first-round investor was not investing again, say due to an equity market turmoil, other investors would consider this odd.

"You need that consistency of investment," Mr Blackham said.

Keith Phillips, managing director of IT Capital, said the funding base of a listed venture capital company did not depend on what was happening to the stock price, unless the company was planning to raise more funds through an additional stock placement.

"If the venture capitalist already has the cash reserves it is operating just like a managed fund except that it can raise additional sources of capital from both the institutional and high net-worth private market as well as raising additional funding in the public market when the stock price is well valued."

He said the market was going through a cyclical swing based on over-excitement and a surplus of capital and deficit of quality investment stocks.

"I think we can move ahead with a bit more confidence now because we can acquire and fund assets in a situation where the vendor doesn't have an inflated opinion of their wealth. We'll be picking up a lot lower-cost companies now."

Phil Norman, chief executive of listed venture company Strathmore Group, said the market was clearly going through a substantial correction. He said that was inevitable and probably healthy.

The downturn in the market would not affect Strathmore's operations or investments.

Of the two New Zealand listed venture firms, Strathmore Group has been by far the busiest, making eight technology investments since it was reinvented out of a bloodstock shell last year. Earlier this month, after announcing the company's seventh investment, Mr Norman signalled most of its $18 million capital was committed and a further fund raising would be considered.

Yesterday Mr Norman said Strathmore was well cashed-up and had the ability to complete all transactions it was committed to and be left with cash in the bank. "We have a portfolio of companies that are successful businesses producing revenue and earnings before interest and tax.

We've been very conscious as we've been investing to make sure we are investing in sound businesses with good solid performance prospects."