Tim McCready looks at financing trends for innovators and entrepreneurs.
What does it take to turn a dream into a reality? The answer inevitably involves money, and usually quite a lot of it.
Many New Zealand businesses choose to grow organically, either by bootstrapping, where revenue is reinvested into the business for growth, or through small amounts of funding obtained from the bank, family, or friends.
However, a business built on innovation nearly always requires a significant injection of capital from a third party, and traditionally through venture capital or angel investment.
Aside from money, these sources of investment can bring additional spillover benefits to advance a business.
Angels and venture capitalists will typically invest in opportunities where they can add value using their networks, bring knowledge and a new perspective, or impart first-hand experience. When it comes to innovation, you cannot have enough of any of these.
New Zealand's 'no. 8 wire' mantra is not just rhetoric. Over the last few years I've seen an increase in international funds and multinational organisations taking an interest in New Zealand.
They recognise us as a pool of largely untapped potential and are coming to see what we have to offer.
There is plenty of exciting innovation happening here, but it is probably fair to say that many businesses are not 'investment ready', and don't present themselves in the best light to make an attractive funding proposition. There is some truth that money is hard to get. Not just from New Zealand, but anywhere.
Venture capitalists and angel investors hear about opportunities to spend their money continuously - it's their job.
They want to see solid business opportunities and investment pitches that are professional, polished, and concise.
It is arguably for this latter point that many businesses unwittingly make the challenge more difficult than is necessary and struggle to get their foot in the door.
New Zealand Trade & Enterprise's Better by Capital programme addresses this by explaining the capital raising process, allowing a business to identify and access the investment required to expand and internationalise.
Better by Capital partner with private sector specialists who have capital raising experience to help businesses get 'investment ready' and prepare a capital plan. NZTE's capital team can then assist with their global investor networks to identify and access domestic and international sources of funding.
Callaghan Innovation, the government-backed innovation hub, provides more than $140 million in funding a year to businesses to use for their R&D projects to encourage innovation.
R&D Growth Grants provide 20 per cent public co-funding for R&D expenditure, capped at $5 million per annum. R&D Project Grants are targeted at businesses who are new to R&D where Callaghan provides funding for 30-50 per cent of R&D costs.
R&D Student Grants provide funding to cover the salary of a university student or graduate to work on an R&D project within a business for up to six months.
For early stage, high-growth businesses, Callaghan Innovation has an Incubator Support programme.
The incubators are privately owned businesses that can assist with all areas of innovation, including access to networks, market and technology validation, intellectual property assessment, access to capital, and advice on strategy and governance.
The introduction of this programme last year is the result of a push from the Government to get more innovation off the ground in high-tech sectors, which they rightly recognise as crucial to growing New Zealand's economy beyond commodities.
Aside from the time required for the application process, government grants have few drawbacks and are a useful way for a business to make their cash go further.
R&D grants from Callaghan are non-dilutive, meaning that they don't affect the ownership structure of the company. If your business is eligible, this funding should be at the top of your list.
Technology entrepreneur Sam Morgan has been known to criticise the government's overzealousness when awarding grants, however he concedes that "it would be irresponsible not to try to get some".
Not only does this help the balance sheet, but showing support from the New Zealand government and having access to extra cash for projects will undoubtedly help when talking to third parties about further investment.
It would be remiss to talk about capital raising and not mention crowdfunding. Equity crowdfunding is a relatively new method of raising capital, and is becoming an increasingly popular buzzword since a change in New Zealand's securities legislation last year allowed it.
The Financial Markets Conduct Act allows a business to efficiently crowdfund up to $2 million without having to put together a costly and time consuming prospectus, prompting the launch of equity funding from PledgeMe, Equitise, and Snowball Effect. Donors pledge their support online, where their investment level can be of almost any size.
Crowdfunding relies on an opportunity reaching a large audience, which means it tends to work best if the project is something the mass public can get behind exciting technology or niche healthcare innovations have done particularly well on these platforms internationally.
As crowdfunding becomes more mainstream, having an opportunity that stands out and entices investors will inevitably become more challenging.
Finding funding for innovation is notoriously difficult and takes a significant amount of time.
But like so many things in business, funding is about networks, and you can't do it alone. There are tools and services in place to help make it easier - you just need to know where to look.
•Tim McCready is Director of Business Development & Trade Correspondent for NZ INC. He has worked in the public and private sector in New Zealand and offshore growing businesses internationally.