The next wave: Sold on venture capital fund

Entrepreneurs say the Government-initiated project has come at the right time for New Zealand, reports KARYN SCHERER.

For thirtysomething entrepreneur Craig Meek, 1999 seems like a lifetime ago.

At that stage, he and cohort Ian Taylor toyed with the idea of setting up a company to produce animated graphics for the America's Cup.

"To be honest, I hadn't really thought about venture capital at that stage and as for angel [wealthy] investors - I didn't even know the words existed," Mr Meek recalled.

Now, he is something of a venture capital veteran.

Thanks to several investors prepared to take big risks in the hope of reaping handsome rewards, his company, Virtual Spectator, has matured from a wide-eyed infant to a brash young adolescent being courted by some of the sporting world's most powerful players.

In its short life, Virtual Spectator has hired more than 300 computer and arts graduates. It has also spawned several companies, at least one of which Mr Meek believes will eventually be bigger than Virtual Spectator.

One thing that does concern him is that today's "angels" are a little more cautious than they used to be, after having their fingers burned in the tech-wreck bonfire.

For that reason Mr Meek was delighted at this year's Budget centrepiece - a Government-initiated investment fund that, together with the private sector, is expected to dish out more than $250 million to fledgling local companies over the next few years.

The fund is based on an Israeli model and is similar to Australia's Innovation Investment Fund.

It will concentrate on companies that few investors are willing to back - those in the early stages of their development.

John Blackham, a director of software company Xsol who sits on Government boards and committees, is keen to see the fund become a national cause.

He agrees that the difficulties faced by companies such as Chris Jones' Telemedia do not bode well for New Zealand's long-term prosperity.

But he disagrees that the Government should leave the seed funding to the private sector.

"Telemedia is indicative of the fact that if companies in this part of the world cannot get follow-on funding, they end up being vulnerable and you end up losing the whole caboodle if you're not careful.

"It's going to be very tough to do it now, but if you do it now this will really put us in the driving seat when things straighten out."

Mr Blackham also disagrees with those who argue that there is not sufficient expertise to oversee so many investments.

"There are a lot of people who don't think the Government has any business putting any money into such investments.

"The people making the decisions are absolutely going to have to be the most qualified and skilled people we can lay our hands on, but they are out there and I'm sure they'll be willing to help."

Estimates of the size of New Zealand's venture capital industry depend on who is doing the counting and the definition used, but figures of between $750 million and $2 billion have been suggested.

Wendie Hall, a director of Caltech Capital Partners, an Auckland venture capital firm set up in 1996, agreed that it was difficult for companies turning over less than $2 million a year to interest investors.

She described the Government initiative as a "significant amount of money," but while confident there were enough experienced fund managers, she believed they faced a challenge matching money in the private sector.

"The major purpose of it is to try and bring more skills at the fund manager level and I applaud that," she said.

"It's exactly what's needed - more fund managers who can help the early stage companies. This should be a catalyst to help that happen."

The executive director of the Association of Crown Research Institutes, Sean Devine, was also delighted.

The Crown institutes have been forced to cough up half the money for the fund, and although some scientists were understandably miffed at this sleight of hand, Mr Devine was not about to admit it.

He was convinced the fund would ensure that fewer young scientists would flee the country for better prospects overseas.

"It's main impact will be on changing people's vision and behaviour and career path. It's stimulating the innovator in the science system to be a risk-taker."

Not that the initiative is without its critics. Ian McCrae, the head of Auckland software exporter Orion Systems, is one who believes that the money will ultimately be wasted.

Orion, which specialises in software for the health industry, has doubled in size in two years and employs more than 80 people.

Mr McCrae said he could see no reason why Orion could not be the next Nokia and claimed he had never had any difficulty laying his hands on money.

Most venture capitalists he knew complained about the lack of worthwhile prospects in New Zealand. He was also unsure that the goals of venture capitalists necessarily coincided with those of the companies in which they invested.

"The object is to drive up the price of that firm as fast as you possibly can and then get out. You can't sell New Zealand companies in New Zealand so what it means is venture capital is a great exporting strategy."

He said the Government was planting pine forests when it should be building sawmills, or setting up furniture factories.

"I don't see venture capital delivering New Zealand blockbuster successes in the international marketplace.

"There may be companies where it has happened or about to happen, but I haven't seen them."

The head of one of the country's oldest and biggest venture capital firms does not agree with this view.

Although he would not name names, Direct Capital head Ross George was willing to bet that New Zealand's richest man was the low-profile head of a local technology company.

Mr George said that of the 27 companies in which Direct Capital had invested, 14 had been sold and investors had received an average return of 48 per cent.

"We haven't had a Microsoft, that's true, but there are some quite extraordinary technology companies out there which no one's even heard of," he said.

He believed the Government's timing was superb.

With the tech collapse largely over, many of the more fanciful ideas had been weeded out.

His only reservation was that the fund was still too small, even though the Government had been persuaded to double its size.

He pointed out that it could backfire if just one of the multi-million dollar funds investing here decided to pull out.

Despite these reservations, he supported the initiative.

"Around the world seed hasn't been the best-performing sector, but it's the area there's the least money for so it's right the Government focuses on that part."

High-profile investor Stephen Tindall agrees.

The Warehouse founder has made it his mission in life to ensure that the considerable fortune he has amassed in retailing is invested back in the country, largely as venture capital.

Mr Tindall was one who encouraged the Government to follow Israel's example.

Despite his less-than-successful flutter in dotcom disaster eVentures, he was determined to stick to his "let's think positive" mantra.

He acknowledged the shortage of experienced people to help steer fledgling companies through the early stages of growth, but was confident there were enough talented fund managers to keep the ball rolling.

"There are some very credible people out there at the moment. If you look at the Yozma model in Israel where hand-picked people were chosen on the basis of trust and ability, then all the Government is really doing is helping stimulate the size of the market."

Asked to cite an example of a local success story with which he had been involved, he mentioned Hamilton's Deep Video Imaging.

The company has taken on the giants of the technology world in the race to develop a 3D computer screen and now counts the Singapore Government among its investors.

This year it struck a deal to provide its technology to Korea's LG Philips LCD, a joint venture between electronics manufacturers LG and Philips.

Although saying that he was not ready to sell his stake in the company, he estimated that it had increased in value substantially.

Unlike some, he was not concerned that the companies would eventually be snapped up by overseas buyers.

"Provided exits are taken and that money is reinvested back in New Zealand this thing can really work. It's far better to own 10 per cent of a billion-dollar company than 100 per cent of a $1 million company."

In this case, he believed the Government had got its maths right.

"It's probably a combination of two-thirds people and one-third money.

"Provided we get it right and put people in place now to help manage it, it should work."

SEED MONEY FOR GROWTH

* The New Zealand Venture Investment Fund is a parent fund that is expected to invest in about 10 individual funds over a two- or three-year period, starting this year.

* Each individual fund is expected to be $30 million-$50 million and will operate for seven to 10 years before it is terminated and the profits distributed among investors.

* The Government's capital is expected to be matched by private capital, generally on a two-for-one basis.

* An individual fund is likely to invest in 15-20 companies over its lifetime.

* No fund can invest more than 15 per cent of its capital in a single company.

* Funds will not be allowed to invest in property development, retailing, mining, hospitality, reinvesting or relending, or businesses linked with fund managers or other investors in the fund.