The report’s lead author, Harvard Business School Professor of Business Banking Josh Lerner, was interviewed on Radio NZ’s Nine to Noon programme:
Lerner urges government policy makers to focus on creating an environment that is conducive to venture investment, not on direct market intervention, and to be patient – developing a VC market is a long term prospect at the best of times, and “the global financial crisis will have undoubtedly added many years to the process of developing a sustainable venture capital market in New Zealand”.
The report concludes:
Venture capital has the potential to contribute very significantly to New Zealand’s economic growth, and to the level of innovation and efficiency of its young and emerging businesses, as it is an important complement to other aspects of New Zealand’s innovation and growth systems (e.g. to publicly and privately funded R&D, university and CRI research programmes, and so forth).
However, developing a viable venture capital industry is a long term task, and is not easy. It requires prolonged commitment from those involved directly and from policy makers. Over recent years the growth in New Zealand’s venture capital activity is encouraging but modest. The VIF Venture Capital Funds are growing slowly and at this stage their value is just under the amount invested. Few divestments have been made and none of the options to buy out the Crown’s stake in these Funds within the first five years have been exercised (these options have now lapsed for four of the six Funds).
…
In our view the government should maintain a steady and predictable policy with respect to the development of a venture capital market. The global financial crisis will have slowed the ability of the VIF Venture Capital Funds to grow and exit their investee businesses over the medium term. In reality, given that four of them are now more than half way through their 10 year terms and face these added difficulties, these Fund managers may find it challenging to raise further funds without government assistance. This suggests that government support is likely to be necessary for at least the next generation of funds. If this is accepted, it suggests the government should be viewing its involvement in this sector for at least another fifteen years (assuming each generation of fund is about ten years).
New Zealand startups have typically followed a high-growth strategy, but Tom McKaskill argues that in many cases a strategy to building for a strategic trade sale is more appropriate.
Tom suggests:
“If we plan the exit from the outset, the manner in which the business is developed continually keeps the exit in mind and this ensures that we don’t veer off track in terms of meeting our major objective. Some Angels and VC investors do this but they are in the minority.
Now lets get even more radical. Why don’t we change our investment criteria to only focus on investments where we have a high probability of a premium exit. In order to do this, we have to have a very good idea of what creates premium exit conditions, that is, what do we have to do to set up the conditions where a premium exit is highly likely, whether this be an IPO or a trade sale? What would we have to do to make this happen?
INVEST to EXIT is a highly pragmatic strategy for Angel and Venture Capital investors which focuses the investment, business development and harvest activities on strategic value. Investment decisions are targeted towards those ventures which can create a strategic buyer exit. The period of investment is often shorter, operational execution risks are lower and return on investment is higher.
What people are saying about the book:
“Tom McKaskill’s insights into the ‘art of the exit’ provide a great roadmap for all Angel and Venture Capital investors. In a misguided investment world that relies too heavily on IPOs, mega-exits and too much quantitative analysis, McKaskill has taken an enlightened and straightforward approach to a topic that should be foremost on startup investors’ minds.”
Joe Platnick, Pasadena Angels, USA
“For the professional Angel and Venture Capital investor, Invest to Exit is the first book to succinctly capture the importance of aligning the combined interests of inves- tor, management and shareholder when making the investment to produce an optimum result on exit regardless of underlying economic conditions. Commencing exit plan- ning much earlier in a company’s development, combined with planning and then flawless execution will always produce an outcome better than starting later and hop- ing a buyer “will be just around the corner”.
Dr. McKaskill has captured the essence of the issue, providing examples which clearly highlight the challenges and issues faced along the way.
This is compelling reading for investor and companies alike as they work collabora- tively to achieve a superior result when they sell.”
Greg Sitters, Sparkbox Investments Limited, New Zealand
Table of Contents
Preface
Acknowledgements
1 Begin with the end in mind
2 High growth – high risk
3 Spot the IPO
4 Financial vs strategic exits
5 Threats and opportunities
6 Identifying strategic value
7 Finding strategic buyers
8 Enabling the opportunity
9 Reducing risks to the buyer
10 Setting up the exit deal
11 Evaluating potential investments
12 Executing the exit strategy
13 Structuring the trade sale deal
14 Selecting professional advisors
15 Conclusion – impatient capital
Download it now – it may be the most valuable thing you’ve read in a long time.
Basho Technologies, a Massachusetts-based startup offering software to improve sales performance, has had an interesting ride obtaining funding from investors. The Wall Street Journal reports that after a year of trying to secure funding with VC’s, they gave up and were pleasantly surprised by the difference in attitude and approach of angels. They found that angels were much more engaged in meetings, and offered much greater diversity.
According to a University of New Hampshire study, “the number of [US] venture capital deals fell 10% to 2,550 in 2008, according to VentureSource, the number of angel investments dropped only 2.9% to 55,480 deals.”
Israel has one of the most successful Venture Capital industries in the world, and the speakers will discuss the Israeli experience in achieving that success.
Speakers
Ami Samuels
Senior Director, Private Equity at Poalim Capital Markets, a wholly owned subsidiary of Bank Hapoalim.
From 2004 to 2006, Mr. Samuels was a Partner at Star Ventures, an international venture capital fund. From 2001 to 2003, he served as Senior Vice President and Chief Financial Officer of Satlynx, a company specializing in two-way satellite broadband services. From 1998 to 2001, he was Vice President for broadband networks at Gilat Satellite Networks, and from 1989 to 1998, he worked as an investment banker at Lehman Brothers. He holds a BA degree from Haifa University and a MA degree in Management from Yale University.
Oren Monhite Yahav
Senior Vice President, Private Equity & Alternative Investments Hapoalim Securities, a wholly owned subsidiary of Bank Hapoalim.
Mr. Monhite Yahav has an impressive private equity and general business background. Prior to joining Hapoalim Securities, Mr. Monhite Yahav was a Vice President of Pacific Corporate Group (PCG), one of the world’s leading private equity investment advisors. At Pacific Corporate Group, he helped manage the relationships with and develops private equity strategies for the most sophisticated public pension plans in the world. While at PCG, Oren headed the Small/Middle US Corporate Finance (Buyouts) and Secondaries investment groups and led the identification, selection and due diligence of private equity investments. Previously, he was an attorney with Weksler, Bregman & Co., where he advised clients on mergers and acquisitions, private equity investments, and securities issues. Mr. Monhite Yahav is Chairman and Co-Founder of Dbursa Capital Ltd. Mr. Monhite Yahav holds an LL.B from the Radziner Law School in Israel. He received his MBA in Finance from the Yale School of Management.
Date and Times
Tuesday 24th March, Auckland from 5.30pm to 7.30pm, and
Thursday 26th March, Wellington from 5.30pm to 7.30pm
Both functions will be held at the offices of Chapman Tripp.
Cost
$25 (including GST) Members of NZVCA or INZ
$40 (including GST) Non-members
For more information, contact Linda Taylor, NZVCA on 09 309 1090 or support@nzvca.co.nz
In cased you missed her, Jenny Morel was talking about the local Venture Capital scene on Katheryn Ryan’s Nine to Noon programme on National Radio this morning.
Listen to or download the podcast from National Radio’s web site:
Key points:
High growth companies are more likely to be successful getting investment if they have:
The potential to be a large global business
Access to a very large market
A Sustainable advantage in that market, eg patented technology
Whatever we do in NZ, we’re slower to execute than in California. We just don’t have access to the same resource pool here.
Technology investment is great because it can lead to rapid returns for investors
Entrepreneurs with deep industry knowledge are most likely to succeed
There’s a huge shortage of money in NZ for taking businesses global; we always underfund them
Great businesses need great teams behind them, and that costs money
There’s a lack of people with a track record of success in high-growth industry – many of them end up overseas because of the lack of opportunity here
There’s a lack of large pension funds – the government’s super fund is the “gorilla in the room”
Idea behind VC is to actively manage risk in investments while retaining revenue and growth opportunities.
Now is a great time to start up a business because there will be fewer competitors starting.
Idealog Magazine this month provides an entrepreneur’s perspective on VC and angel investment, headlining with “New Zealand venture capital desperately needs a hit—an investment that pays back, big time. Without it, our venture capitalists struggle to fund creative Kiwi companies. Mike Booker discovers why we’re sadly used to hearing ‘no’”.
Um. Guys, we need more than one hit … otherwise we start looking like the NZ cricket team from the 1980’s – you know, Richard Hadlee and Everyone Else.
The article describes the bind that VC firms are in since the original NZVIF series A funds were fully committed, and the implications of the dearth of local institutional investment.
NZVCA’s Colin McKinnon is right on the money, when he asserts
… the most important ingredient for the future health of the VC industry in New Zealand will be its people. The industry needs funds managers who will inspire investor confidence through the quality of their investment choices and ability to nurture young companies through to a successful exit from their funds. These managers should be part of a vibrant network that includes capital markets, serial entrepreneurs, serial institutional investors and a financially literate public.
The industry is improving, albeit slowly, but that’s only natural given the level of resources at New Zealand’s disposal. Our investment ecosystem is developing, both in breadth and depth, as well as connectedness and transparency. So good on Idealog and its interviewees for being so open about the state of play.
The New Zealand Venture Capital Association will be running an Advanced Workshop in Private Equity Transactions – Structuring & Restructuring LBO’s in Auckland on 5 and 6 March 2009.
The workshop is an intensive, practical programme suitable for experienced practitioners involved in private equity, corporate finance and advisory services, lenders of senior, junior debt and entrepreneurs considering buy outs, and will be led by Michael Dance.
The programme will cover the critical aspects of the transaction cycle from structuring the deal to optimise value through to restructuring deals that have gone wrong; topics covered will include structuring the offer effectively, minimising execution risk and value leakage, creating a robust financial structure, negotiating the key commercial terms of the senior, mezzanine and inter-creditor agreements (from a borrower and lender perspective), addressing the critical issues involving the management team. In light of current market outlook the course will also focus on restructuring, including the restructuring route-map, the restructuring options, the position of directors, management and PE firms and lenders and technical issues such as moving cash around the group and inter-jurisdictional issues.
He argues that the VC model is broken, one of the main causes being that the focus is on ever-larger investments. (I believe it’s possible that with the current Great Deleverage happening before our eyes, that the trend could reverse.)
His bottom line:
This necessity for venture capital firms to invest more and more in each company has profound implications for entrepreneurs and angel investors.
For most startups it means that venture capital firms probably aren’t the best source of funding – or that they aren’t even a desirable source of funding.
Do you know many NZ startups (as opposed to early stage) that are delighted that are delighted with their VC experience?
The New Zealand Venture Investment Fund (NZVIF) published their 2008 Annual Report today. It’s an interesting read, and provides a good bird’s-eye view of the sector from the point if view of a publicly accountable organisation that has to “walk the talk”.
According to the numbers, the walk has been a relatively pleasant one amidst considerable turbulence, although the outlook is uncertain. The good news is that the aggregate value of their investments has increased by $3.42M, compared to the SOI forecast of $1.67M. Given that at the end of the day valuations are very subjective, this might or might not mean much, but it’s nice to see it written on paper. After all, this is the NZ Government speaking, not Enron.
Other items that leaped off the page:
With respect to VIF,
They haven’t invested in any new VIF funds in the last 12 months, and are now willing to talk to anyone about potential fund investment at any time without a rigorous EOI process.
VIF-backed funds made eight new investments in the last 12 months.
Most of the existing funds are now nearly fully invested; only two funds are seeking new invesment opportunities.
Software and biotech combined account for 50% of the invested capital.
To date, a total of $175M of combined NZVIF and private capital has been invested in 45 different portfolio companies.
SCIF has been an area of activity and growth, and this is really positive for the angel space:
There are now eight SCIF partners, compared to four at the beginning of the year
NZVIF’s focus for the next year is growing the number of angel investment partners and investments
SCIF invested $5M between 18 investments (that’s an average of $277K per investment by SCIF)
So, all up it’s quite a good story for the low-end, but shows signs of coming trouble at the top. Given current economic conditions, without NZVIF-backed funds sloshing more cash around in the VC-space, will there be enough expansion funding to get NZ companies offshore? It looks like we’ll have to rely increasingly on organic growth, outstanding value propositions, private equity, and overseas sourced capital. C’est la vie – let’s keep growing our Angel-backed businesses, so that when the market turns we’ll be ready for prime time.
The book is “… aimed at young, early stage New Zealand companies looking for funding to help them grow, and focuses on attracting ‘rocket fuel’ or angel and venture capital investment.”
Colin says that he hopes the book will prompt prospective investors to approach the venture capital association. He continues, “Angels are more informal, philanthropic and are more about being involved in a community of common interest. Venture capital is professional, about fund management and about having a good track record so it can attract more people to the fund.”
I can’t say I’ve ever met an angel investor who thought they were being philanthropic by investing! And we might even eventually forgive the Herald for showing a picture of Colin against a map of the world that excludes New Zealand, worthy of NZEDGE’s now-defunct collection.
I look forward to reading the book once it hits the shops, and will enjoy Colin’s take on the debate on “Why VC’s and Angels Must be Wed Locked” at the upcoming inaugural Angel Association summit. The love’s gotta flow in both directions, sweetie!