Action urged to lift VC market out of the trough

The government must give the New Zealand Venture Investment Fund room to grow if it is to survive, says the head of the national venture capital association.

The government must give the New Zealand Venture Investment Fund room to grow if it is to survive, says the head of the national venture capital association.

The New Zealand Private Equity and Venture Capital Association (NZVCA) has released a list of recommendations urging the government to amend policy to ensure the venture capital market survives in the short term and remains fit for purpose in the long term.

NZVCA chair Kerry McIntosh said investors were continually exploring new ways to fund projects and grow companies, but government requirements over the VIF programme meant NZVIF’s investment rules lacked flexibility and were unattractive for private investors.

"The rules need to match market realities. NZVIF needs to be given greater dexterity around matching ratios, fund size and flexibility for international investors.“

It's calling on the government to  consider tax incentives for investment in venture capital funds, ensure opportunities to invest in venture capital funds in New Zealand are presented and made accessible to potential migrants and guide NZ Super and KiwiSaver providers toward investing in local venture capital. 

Other priorities voiced in its report include:

•    Creating opportunities for venture capital specialists to provide policy input early in the development of the new Ministry of Science & Innovation’s initiatives to commercialise intellectual property from investment in public-good science
•   Funded internships for both new and existing venture capital fund managers to expand the domestic skill base.
•    Staging of investor forums in strategic locations and ongoing support with investor networks.

McIntosh urged greater effort to involve the private capital industry in policy design and building international connections.

He said a New Zealand venture capital market had developed over the last nine years but was still in an emergent state. 

“Venture capital funds are key capital providers to young innovative firms.  Venture capital helps these businesses grow through early stages until they are able to access more traditional debt or equity sources," he said.

“The primary engines of growth in developed economies involve innovation and its successful commercialisation.  Government and industry have invested in the New Zealand venture capital industry and we cannot afford to let the investment wither away.  If that happened, we foresee the government of the day once again trying to kick-start a venture capital market."

The NZVCA report argues the market is now at a critical stage, having absorbed the hit of the GFC.

"The resulting economic downturn has not only made it much more difficult for these young businesses to grow and move forward, it is also resulting in the original venture capital funds performing poorly to average, and thereby not having a strong record to point to when raising their next fund.

"This situation is exacerbated by the aversion to risk that the financial crisis has brought about on the part of investors, which has hit the venture capital sector worldwide very hard. This sector has always been very cyclical and it is currently in a deep trough."

The funding capacity of the seven existing local venture capital funds is largely committed, leaving firms needing funding of about $2–10 million in the cold.

According to the NZVCA, while companies like Atlantis Healthcare and LanzaTech have successfully secured venture funding from off-shore, these are best thought of as complements to local funds.

"From a NZ economic perspective greater benefits accrue locally from greater participation of local venture capital funds."

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