The next wave: Bigger cash pool helps ideas take wing

By DANIEL RIORDAN

Two years ago, money for entrepreneurs with bright ideas was scarce.

Today, there are more doors to knock on. The level of "formal" private equity available for growing companies is estimated at around $500 million, and is expected to double in the next five years. A report by consulting group Infometrics for the Treasury found "no clear evidence" of any shortage of capital for good projects.

But that doesn't mean the businesses that need money the most are finding it easier to obtain.

The likeliest source of money for the high-tech start-up in the garage or spare room is still a mortgage.

Few venture capital firms are interested in investments of less than $1 million, because assessing and monitoring them takes more time than they are worth.

Banks? They lend money against concrete assets, such as buildings, rather than bright ideas.

The big financial institutions that power our sharemarket? There are severe limits on how much money they can put into higher-risk investments, especially anything that is not public. But that is changing.

AMP was one of the first to establish a private capital arm, based on a successful Australian counterpart, and other big players are starting to relax some of their investment criteria to accommodate smaller, high-risk investments.

The private capital arm of investment bank Deutsche Bank has spent more than $50 million on more than 10 investments in Australia and New Zealand, the most recent a co-investment, with Direct Capital Private Equity and an American venture capitalist, in Auckland software developer Greenwood Technology.

And half a dozen institutions climbed aboard Genesis Research and Development's share register, although most waited until the six-year-old biotechnology company got within shouting distance of its September listing.

In IT Capital and Strathmore Group, New Zealand has a couple of listed venture capitalists (although they prefer the term "venture catalysts") focused on e-commerce.

Investors such as Caltech Capital Partners, Direct Capital, the NZ Seed Fund and Morel's No. 8 Ventures, are also on the lookout for high-tech investments.

But while many investments are considered, few are chosen.

No. 8 Ventures has fielded about 250 proposals, but has made only five investments in its 18 months, committing just over half its $27 million.

Direct Capital, once Direct Capital Partners, has invested about $135 million in 22 unlisted companies over six years.

Strathmore made nine investments in the year to July 31.

IT Capital looked at more than 300 business plans in its first 18 months, but made only seven investments.

The company's typically stringent investment criteria help explain why the presence of such investors in our market offers no gravy train for fledgling firms, no matter how good their product or idea.

Investee companies (except pure start-ups) must have proven revenue streams, entrepreneurial leaders with successful track records in other businesses, protected intellectual property, high-revenue growth rates and gross margins (in practice, projected revenues of $50 million to $100 million within five years) and a clear, achievable exit strategy (either through acquisition, later stage capital providers or a path to a share market listing or rights offerings).

With venture catalysts reluctant to take really big punts, wealthy individuals or "angel" investors have proved a godsend for many start-ups. Investment facilitators can also tap into informal networks of investors, many of them made up of moneyed professionals.

"There's been an improvement in the appetite of angel investors towards early stage investments," notes Caltech's managing partner, Wendie Hall.

The angels include Warehouse founder Stephen Tindall, who has put money into more than 20 companies from different sectors, often in conjunction with other investors.

His investments include Deep Video Imaging, a maker of 3-D display screens, which is making inroads into the lucrative US market.

The story behind Deep Video Imaging's funding is a leading example of the partnership approach to high-tech investment.

The seed for the company had sprung from the fertile mind of Peter Witehira, founder of Power Beat International and the man behind the never-go-flat car battery.

Mr Witehira and managing director Gabriel Engel, who are listed as joint inventors of the technology, believed they were on to a winner; the problem was getting finance.

Two years ago they approached Mr Tindall, who was just beginning to invest in bright ideas that held the promise of boosting New Zealand's economic performance. Mr Tindall liked what he saw and took a 40 per cent stake, at an undisclosed price.

Keith Phillips, now managing director of IT Capital but then at a loose end, having sold out of his previous company, sat on the board as Mr Tindall's representative. In April, now with IT Capital, Mr Phillips engineered that company's 34.6 per cent stake in Deep Video Imaging, later raising it to 40 per cent. Mr Engel owns 10 per cent and an undisclosed trustee, 10 per cent.

What of public sector funding?

Technology New Zealand, an offshoot of the Foundation for Research, Science and Technology, will this year distribute $24.7 million to technology developers in 50:50 funded arrangements. Backing rarely exceeds $500,000 (Deep Video Imaging was a recipient in July).

Jim Anderton's "jobs machine" Industry NZ has $330 million to spend over the next three years on a raft of regional development and industry assistance packages. Some of the money will find its way to high-tech and e-commerce projects, but the maximum grant is just $10,000.

Calls to follow the lead of high-tech success story Israel and launch substantial Government-backed venture capital funds have become more strident in recent months.

Auckland University dean of medicine Dr Peter Gluckman last month likened New Zealand's attitude towards funding to getting into a cold swimming pool.

"There are two ways to get into a cold swimming pool - one is to jump, and the other is to creep down the ladder," he said. "Israel jumped, and we're creeping, using a very small amount of money."