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Where's all the VC gone?

Where's all the VC gone?
Private equity's booming again. So where's the venture capital?

Everyone's crying poor, but ever so quietly private investors are digging deep again.

Private equity deals jumped a massive 89 percent in 2010, reaching a total investment value of $294.4 million, according to the recently-published New Zealand Private Equity and Venture Capital Monitor.

That’s the highest level of private investor activity since 2003 and includes a near tripling of the venture capital spend.
Hooray for that.

What’s more, earlier this year the Young Company Finance Index showed angel investing jumped from 76 deals in 2009 to 103 in 2010. Super!

By the Numbers

•Early-stage and VC investment grew from $34 million in 2009 to $94.4 million in 2010
•Just two deals were responsible for $45 million of this
•There’s a gap in the $2-to-$20 million investment market

But the top-line results belie a weird gap in the Kiwi investment scene. Most of the growth results from the mid-market; that is, in the $30 million-plus category. The number of mid- market deals grew from $59 million to $130 million. And the tripling of the VC spend, while it looks good, was mostly down to just two deals: a $20 million investment in Atlantis Healthcare by White Cloud Capital, a UK-based fund, and a $25 million investment in Lanzatech by Chinese funds Qiming Ventures and Softbank China Venture Capital. Strip these out and early-stage and venture investments look, as the Monitor so nicely puts it, subdued.

So whatever happened to the much-celebrated VC industry? “There’s a startling gap,” says Colin McKinnon, director of the New Zealand Private Equity and Venture Capital Association. “The gap is between the angels, who typically invest up to $2 million, and private equity, which starts at $20 million.”

That gap was partially filled this week with the announcement of a successful fundraising by MOVAC,  the investment company founded by former TradeMe investors. MOVAC revealed it had successfully raised $30 million for its third VC fund.

But one swallow does not a summer make. What gives? Are there no companies to invest in? Are there insufficient investors? The gap is especially troubling given the amount of effort put in by investors and government to kick start the VC industry. The government’s Venture Investment Fund, which matches private investors dollar for dollar has so far invested $160 million in venture companies.

McKinnon urges patience. He says the gap in VC reflects the size of the Kiwi investment scene. Most of the individual funds raised for VC so far have maxed out at $50 million. That doesn’t allow much to go around. Typically a fund manager will spread the fund across ten companies, reducing the possibility of one big investment.Nor have the funds had time to prove themselves. All the investments have yet to reach maturity, with only a handful of companies securing further rounds of investment, publicly listing or going on to larger overseas deals.

If it’s any consolation, the Aussies have a similar problem. A decade older than ours, the Australian VC industry recorded zero growth in new funds in 2010. “We need to record some spectacular final exits to really ignite interest from the larger institutional investors like superannuation funds,” says McKinnon. Once the institutions come in, we’ll know we’ve reached maturity.

Meanwhile, it's one slow step at a time.