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Venture capital funding gap is real - David Parker

Thursday 24th October 2019

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Associate Finance Minister David Parker insists there's a funding gap in New Zealand to support new ventures, particularly technological ventures, and that his planned $300 million Venture Capital Fund will address that gap.

The bill establishing the fund, with the money coming from the New Zealand Superannuation Fund and the New Zealand Venture Investment Fund, passed its first reading in Parliament and is now with the finance and expenditure select committee.

The fund will target venture capital managers providing funding to new ventures of between $2 million and $20 million.

But a number of those operating in the sector question whether that gap exists when the number of both conventional and specialist fund managers providing venture capital is proliferating.

"The advice that I've got from government departments is that they think there's a funding gap – I think Treasury and MBIE (the Ministry of Business, Innovation and Employment) both agree with that and I do too," Parker told BusinessDesk.

In addition, New Zealand Trade and Enterprise, the government's economic development and trade promotion agency, has data on the number of companies that manage to raise what are known as series A and B funding, the first and second significant capital raisings by new ventures when they're ready to develop beyond the angel or seed capital phase.

The local conversion rate from angel to venture capital is lower than in other jurisdictions New Zealand compares itself with, Parker says.

The Venture Capital Association and prominent industry figures such as Franceska Banga, NZVIF's first chief executive, also agree that the funding gap is real and needs to be addressed, he says.

One of the consequences of the funding gap has been that too many are forced to seek funding overseas, Parker says.

While the government doesn't intend to prevent New Zealand ventures from seeking overseas funding, "they ought not to be prematurely forced down that route for lack of New Zealand capital resources."

The VCF bill proposes to allow offshore companies to apply for funding, but they will have to demonstrate a commitment to New Zealand and the government is working with the industry to develop policy to ensure that, Parker says. "We want to ensure that it's not dominated by that (overseas capital) because we want to build local capacity.

"We may call for that to be tightened – we do want some of the recipients to be NZ fund managers," he says. "We would be unduly limiting ourselves if we tried to limit it to NZ managers." 

Lance Wiggs, founder of the $50 million Punakaiki Fund, has said most of the new government funding is likely to go to overseas firms and suggested that rather than NZVIF choosing VC fund managers to support, managers should be able to qualify themselves by meeting predetermined criteria.

Parker says the government looked at a number of alternatives for supporting the sector before it arrived at the VCF concept, including the idea of self-selection, rather than having NZVIF acting as a fund of funds.

Parker's office later confirmed that: "Officials have discussed prequalification of fund managers as part of the policy process but consider this is an operational choice.

"Policy should set out the objectives and key investment parameters for the VCF but the Guardians (of the Super Fund) are in place to support a best-practice approach to investing," his office said. "It is the Guardians, through its contract with NZVIF, that are responsible for setting out investment processes."

Parker said that "we're reasonably confident that this fund-of-funds model is the right way to go."

He refused to talk about what the consequences might be if the assumptions underpinning the VCF's establishment turn out to be wrong.

"I disagree with the assumption so I'm not going to go down that line," he said.

A fundamental problem in New Zealand is that tax signals are weighted towards encouraging investment in property rather than in productive assets and that's something "that we've never been able to fix in NZ," he said.

In April this year, Prime Minister Jacinda Ardern abandoned implementing a capital gains tax, a concept the Labour Party had pushed for in the last three general elections, citing the lack of support from government support party NZ First.

Parker says the world is in the middle of a technological revolution that is throwing up many areas of opportunity from telecommunications to biotechnology and genetics, and disrupting many existing industries.

"All of that is a known fact" and the enormity of the changes and the size of the opportunities mean "it would be an unwise government" that sat back and didn't try to do anything to increase the country's ability to participate.

He cited the health of the local angel funding community that has developed since NZVIF was established by the previous Labour-led government in 2002 as proof that previous interventions in the sector have paid off.

The latest figures available show about $120 million of angel funding was invested in the last year.

"We want to maximise our prospects of getting as much as we can of those innovative opportunities born of this revolution."

Similarly, Parker dismissed the suggestion that if too much money was thrown at the sector, a risk could be that marginal ventures would be funded and subsequently fail.

The failure rate with venture capital is widely acknowledged to be high, with maybe one in 10 projects turning into the kind of success that companies such as A2 Milk and Xero have achieved.

"Given the size of the opportunity I've already talked about, I would say that's a high-quality problem compared to the status quo," Parker says.


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