The New Zealand Venture Investment Fund is likely to invest into a number of new venture capital funds, following the government’s announcement of a new $40 million underwrite commitment to NZVIF’s venture capital programme.
NZVIF chief executive Franceska Banga said the $40 million underwrite commitment will enable NZVIF to make new investment commitments to another two, or possibly three, venture capital funds, up to a total of $200 million of investment commitments.
“The government has already committed $160 million to our venture capital programme, and this capital is close to fully committed with six existing venture capital funds and two new funds in the pipeline.
“This $40 million underwrite commitment will enable NZVIF not only to make new fund commitments, but also enables us to reinvest the returns from our existing funds into new venture capital funds.
“It is a timely announcement. We have seen a significant rise in the level of angel investment into start-ups over the past few years. The most successful of those companies are now developing to the stage where they will require new investment to assist their growth, particularly as they start to look build presence in offshore markets. We hope that new venture capital funds can fill that funding gap for promising new companies. Then the companies can stay in New Zealand for longer, and local investors can reap a greater share of their success.
“NZVIF will now consider the best option for committing to new private sector venture capital funds. We expect to make an announcement within the next few weeks on our preferred pathway forward.”
The inimitable Bill Payne has written his final report to NZVIF and The ICEHOUSE on his findings about the entrepreneurial landscape in New Zealand, based on his six-month tenure on our shores, and it makes very interesting reading.
The good news:
Kiwi entrepreneurs and their ventures are on par with their US counterparts in terms of quality
The angel investment scene in NZ is very active and developing rapidly
Incubators are starting to show promising in commercialising laboratory-based innovation
The NZ Government’s commitment to start-up business is laudable.
The bad news:
Like their overseas counterparts, NZ entrepreneurs lack sufficient understanding of marketing, sales channels, capital source, governance, and competitive analysis
Too much incubator support of angel groups has led to “spoiled angels” who are not engaged enough in the entire deal-flow process or mentoring portfolio companies
The Valley of Death between $2m-$5m dollars looms larger than ever given the global financial climate
Current tax regimes discourage investment for trade sale exits.
Key suggestions:
Entrepreneurs should get a footing in local markets before attempting to sell offshore
Companies wanting to get funding should stop writing Investment Memoranda (IMs) and focus on succinct business plans instead
Angel groups should seek to more fully engage their members in all aspects of investment and post-investment activities, rather than relying on external sources
Angels should upskill themselves through better education programmes
NZVIF should not focus on creating more large conventional VC ($100m+) funds, but instead focus on creating 2-5 new smaller ($60-80m) funds
Companies that need more than $5m investment should become successful offshore, and then raise that investment in their target markets
Tax rules should be modified to clarify the tax ramifications of share options, as well as to better facilitate and encourage angel investment.
In all, the report provides a great, informed snapshot of where we are as a sector, as well as providing valuable food for thought for where we go from here.
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?