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5 straight-talking questions about the NZVIF report

At almost the same moment the NZVIF’s report was released on Monday, Economic Development Minister Steven Joyce announced that a review of the investment organisation’s structure was currently underway.  

Given the primary function of the fund is to support New Zealand’s start-up and venture ecosystem – rather than explicitly turn a profit – Joyce’s comments raised eyebrows. Just what do the numbers mean? How is the fund actually doing? And what’s the benefit to the taxpayer?

We called NZVIF chief executive Franceska Banga, Angel investment network ICE Angels’ manager Robbie Paul, and Punakaiki Fund director Lance Wiggs to find out.

Idealog: According to the report, the Seed Co-investment Fund had invested $38.2 million to date. The total value of the SCIF portfolio however, (including cash returned) is only $39.6 million. How would you describe that sort of performance?

Franceska Banga: I think we’re pretty happy with it so far. These are very early stage seed companies receiving seed investments around $250,000. The relevant thing that we’re heartened by is the revenue growth, which is around 55% on average, so the value overall has increased. When companies are very young you don’t expect to get returns. That’s why we’ve included that revenue growth number. We haven’t had a lot of exits yet, so we’re very comfortable with the holding value of that portfolio.

Robbie Paul: Most start-ups are 10 years old before they realize value. I understand the fund has been investing for a decade, but they didn’t invest in all these companies a decade ago. The whole ‘exit within three to five years’ idea is a cliché and couldn’t be further from the truth.

Lance Wiggs: They’re lousy investors. This report shows the value going down year on year with the New Zealand taxpayers’ dollars. It’s appalling. And the modelling for future performance – for 2026 – is a maximum of 4.1 % and minus 2.2% return, per annum. If I was going to tie my money up for ten years I would want a better return than that.

The commentary of the report says that “the investment performance to 30 June 2015 highlights both the volatility of early stage investing and the reliance on a few ‘outlier’ investments to generate the bulk of the returns…. While it is down on the previous year, this is due mainly to the volatility of listed portfolio companies, which now comprise over 40 percent of the value of NZVIF’s portfolio.  The volatility is illustrated in that – post the reporting period – the portfolio’s value rebounded from $156 million to over $181 million at 31 December.” Is that normal for a fund like this?
What we’re talking about here is a venture capital portfolio. A handful of companies have been listed on the New Zealand and Australian stock exchange. They can move around quite significantly. [That change] is driven by the value of those listed companies

RP: That’s volatile? I would say $180m to zero dollars would be volatile. This just sounds like the market. If I was them I wouldn’t be beating myself up about it.

LW: You’ve got to be careful that they’re comparing apples with apples. They’ve quoted some numbers [in the report] and left some numbers out. These are ‘headline’ numbers. Overall performance has been lousy. It continues to be lousy even in the last few years and the outlook they’ve provided has been spectacularly poor.

There’s talk in the report of the GFC and the run-on effect that it’s having on the fund’s performance. Given that that was a decade ago, how long will these investments continue to affect performance?

FB: We invested into some venture capital funds in 2002 and in 2003. At the time the GFC hit in 2007 and 2008, there was a number of companies held in those funds that really suffered – the value really dropped and it was hard to get exits. We’ve looked at what we’ve invested in since 2008 and it’s been very strong. You really can divide the fund into ‘before the GFC’ and ‘after the GFC’. That’s not something we can control and you can see the same thing in the market in general.

RP: You can’t deny that if you invested during that period you were affected. If a number of early investors were killed off, then the average age [of the companies invested in] would be younger and it would still be too early to talk. If they’d had a big wins everyone would be applauding and they’d be giving keynote speeches about how they did it. If that hasn’t happened then they need to explain why and GFC is part of that explanation.

LW: The original investments were deployed extraordinarily poorly and the GFC compounded that. Some have come through – like Martin Jetpack – and credit to them. But we haven’t even started to talk about their operating expenses. $4.4 million in 2013. That’s extraordinarily high. It’s almost like they’ve got their heads in the sand and they’re not seeing what’s happening in the greater community.

Marcel van den Assum has said, in defence of the report, that “without a thriving early stage eco system, New Zealand simply has no future”. Is there a case for balancing the expectations of investors and their ROI with the benefits of supporting NZ’s start-up ecosystem?

FB: He was responding to comments made by Steven Joyce and the future of the Government’s role in supporting this part of the market. The role the Government is playing here is important and if we didn’t have that investment we wouldn’t have the activity that we have today. It’s clearly creating a focal point for investor activity. There’s a real issue in supporting those companies in that ‘valley of death’ area between angel investments and when they scale.

RP: It comes down to the government’s policy on why they’re doing this and I can’t comment about that. What we see in ecosystems around the world is that a few thrive and people become inspired from them to get involved. This fund is giving investors a chance to give [that early-stage ecosystem] a push.

LW: Seven Joyce wants to maximise return on investment for the taxpayers. It [the NZVIF] was a worthy experiment, but there are players such as ourselves that are doing extraordinarily well and I think Steven Joyce is asking the right questions.   

So is it simply a case of ‘staying the course’ while we wait for these investments to bear fruit?

FB: Yes. For the venture portfolio, we’re definitely in the harvesting phase. In the next two to three years there will be fruit. And we’re making new investments every week. It’s still a very young portfolio.

RP: The fund has made a highly positive impact on the New Zealand start-up ecosystem, so I don’t think there’s really an option to cut it off.

LW: The money’s been placed so the best thing you can do is lower costs – preferably to zero – and hold for the long term. Just hold. Some of those investments will make money. We just don’t know which ones.

Click here to download the NZVIF Investment Report for the year to 30 June 2015

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