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NZVIF aims to carry firms across 'Valley of Death'

Thursday 12th August 2010 2 Comments

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The New Zealand Venture Investment Fund aims to help fledgling companies get across the so-called ‘Valley of Death' gap between start-up capital and the levels of funding private equity investors are typically comfortable in making.

The NZVIF will use a $40 million top-up to provide development funds of between $2 million-to-$5 million, a level of backing new companies struggle to attract. It wants to match dollar for dollar with private sector investors, sharing investment opportunities and risks in rapidly growing, globally-aspiring companies.

This size of investment is usually beyond the capability of original friends and family investment, as well as the angel investor who is unlikely to put in any more than half a million dollars, studies show.

"This funding is to address that gap," said Franceska Banga, chief executive of NZVIF, a state-owned entity with some $200 million of government funds for investments.

"It's for companies who are probably beyond a prototype, have tested with some customers, and want to scale opportunities and presence to other markets. Even at that $2-to-$5 million level, there's uncertainty and risk. This $40 million is to woo private capital that might prefer to wait."

NZVIF will soon invite proposals from venture capital companies and choose the best two or three of these proposals. Banga said selection as a NZVIF partner will be based on the VC company's investment capital position and track record, its ability to convince others to put funding in, whether it had a genuine appetite for the investments and the capability of its team.

The government's extra $40 million announced last week by Economic Development Minister Gerry Brownlee is also an acknowledgement that even during recessionary times, the young, growth-oriented companies tend to be big employers

"It's about managing or reducing the risk of venture capital investment, and encouraging more private investment in those growth companies," Banga said.

"Really, you have to invest in lots of these. Many will fail, some will succeed, you don't know which is which."

Like many venture capital investors, seven-year-old NZVIF's payback has been slower and more difficult than initially envisaged. Along with its VC partners, to the end of July NZVIF had invested in 49 companies through six funds.

The extra $40 million follows a report by US angel investor, Bill Payne, whose research helped reinforce the 'Valley of Death' funding shortfall exists for companies looking to ramp up the next stage of their growth.

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Comments from our readers

On 13 August 2010 at 8:09 am Kathryn Jones said:
I think they will struggle to find a VC company with a good track record. I cannot recall a single successful company bought through from VCs in recent history let alone a successful portfolio of them. The only money making going on is from the managers fees. The VC model is effectively dead world wide and here is NZ shoving good money after bad.
On 13 August 2010 at 11:31 am Mark Eaton said:
Ok. You bring two partners into your technology business. One wants to create and grow value within NZ, the other wants to sell out to whoever will give them top dollar. And with this fundamental disconnect you expect the management to concentrate on their technology development and successfully grow the business?
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