Some ideas can risk 'gazump' from overseas

By Yoke Har Lee

Companies seeking money for new ideas may be setting up their investors for failure if they do not understand the international risks.

David Caselli, managing director of venture capital firm I Grow New Zealand, described this as the "international gazumping" factor.

"You may think you have got the world's greatest idea, but somebody else may have raised the venture capital two years ago in Australia, or four years ago in San Francisco," he said.

"All you are setting your investors up for is failure to compete in a market where you are a real minnow.

"It is a big world out there. If we think we are running fast, Australia raised $800 million worth of venture capital last year.

"That's not only money raised but money being spent. Their technology and new venture capability is $800 million ahead of New Zealand.

"It is hard for people with ideas to accept that some of their ideas are just too risky."

He highlighted the importance of having properly structured deals.

"With small businesses, often it is not a single risk. And investors generally don't cope well when they have to deal with pricing multiple risks.

"If we can help structure some of these businesses to eliminate the risks so they become a pure investment risk, then what we are saying is we would channel you to the best place to seek your capital - be it though a brokerage with the New Capital Market [being set up by the stock exchange], through a corporate or private placement, or to the venture capital scheme."

The proliferation of investment brokers seeking to match investors with businesses has its dangers.

"There is a risk that deals are not vetted enough. The strength of these deals is important. We spend a bit of time understanding the business, helping them get strategic partners," said Mr Caselli.

"Small companies do not have the infrastructural capability. Raise them $1-2 million and that is setting them up for growth failure.

"There is a need to get a right balance of parties coming to the table."

Having the money is not a universal panacea.

"There is a reasonably large pool of private investors looking for technology investments. It is a fairly good time for small businesses to be seeking capital.

"But for many of these small businesses, money isn't the only solution they need. The best solution is the money as well as someone with a client base.

"So if you can get a few million dollars out of a corporate with a client base of, say, 100,000 customers, all of a sudden these small companies have the capacity to quadruple their turnover in a year and the value of their business is more than quadrupled."

I Grow joins the list of growing venture capital-type companies seeking to link investors with companies. The others include Morel & Co's No 8 Ventures, Caltech Capital Partners, IT Capital and the New Zealand Seed Fund.

I Grow is set up specifically to meet the market for companies raising less than $5 million.

Mr Caselli was formerly with broking house Garlick and Co. His five partners all have a background in investment or broking.