NZ Investor Focus

Following MORGO, the New Zealand media has carried several features on the state of the NZ Venture Capital and NZ Angel Investor sectors. The conclusions are interesting.

All the evidence is that the Angel Investor community is growing strongly. There are increasing numbers of high net worth individuals prepared to work in concert and consider start up and early stage business investments.

The VC sector is, by contrast, in 'dire straights'. At least that's the view of Jenny Morrell of No 8 Ventures, on of New Zealand's most active. According to Friday's New Zealand Herald, No 8 Ventures are looking to raise $NZ100 million, but that outcome is by no means certain.

A strong local capital market is essential if New Zealand companies are to grow on the global stage. As we approach the upcoming General Election, it will be interesting to see if any of the major parties identify this as a key economic objective. At the moment, that jury is out.

LLP - NZ Curious

I have talked about engaging professionals to advice on global structures. Welcome then to the recently established Limited Partnership (LLP).

According to the NZ Companies Office website, 'the Limited Partnerships Act 2008 came into force on 2 May 2008 enabling registration of Limited Partnerships and Overseas Limited Partnerships. A searchable register of Limited Partnerships and Overseas Limited Partnerships is also now available.

The primary objective of the introduction of the Limited Partnerships regime is to facilitate sustainable growth in New Zealand's venture capital and private equity industries'.

It's about time. (That's my observation, not the NZ Companies House one).

One of the consistent issues I have faced over the past few weeks is New Zealand's attraction, or otherwise, to offshore investors. It is a real question. It has been a serious problem. I believe it is one that the Limited Partnership structure seeks to address.

It is a structure that VC's and private equity in the US and UK / Europe understand. The NZ model appears (and I have only skimmed it in the past 48 hours) to be pretty consistent with international standards. It does what the legislators intended. It creates a level playing field for NZ business to attract international VC and private equity.

I guess this is going to be a focus position of mine in the near term which means you are going to read more about it from my perspective. Anything that assists NZ business in general is great. Anything that assists Pingar is 'actually marvelous'.

Dating 'eligible persons'

It's time to get personal.

Recent postings will show that I am on a funding round. It's part and parcel of the 'going global' strategy. And I am learning fast.

It's one thing to find a potential investor in NZ. It is another to identify if they are 'eligible'. The rules determining this are laid down by the Securities Act 1978. To participate and be 'eligible', investors need to be either:

a) persons who can provide certification by an independent chartered accountant that they have net assets of at least NZ$2 million or had a gross income for each of the last two financial years of at least NZ$200K per year, or

b) persons who can provide certification by an independent financial service provider that, as a result of having experience of investing money, they are able to assess the merits and certain other matters in respect of investment such as etc. etc.

The rules make sense. They do provide some level of investor and investee (not sure this is actually a word) protection. However, a quirk in New Zealand's taxation system arises. Because individuals and trusts are taxed at different rates, my own guess is that some potential investors under Category a) will be asset rich (via a trust) and cash poor. That's how tax planning sometimes works. So we are digging deeper into this.

In the Great Depression of the 1920's, the signs said, 'Can you spare a dime?'. I'm working on the 2008 equivalent. The Securities Act 1978 adds a whole new dimension.

Crossing the Divide - (Update)

The extract below is lifted entirely from Claire McEntee's excellent article in this morning's Dominion Post. I apologise Claire for the plagiarism. It does answer (sort of) my previous posting. Timing as they say, is everything.

'The economic downturn is dampening venture capital investment in New Zealand, according to industry figures.

Mark Robotham, general manager of New Zealand Trade and Enterprise's Escalator Service - which helps young companies raise funding, says more firms are struggling to raise capital as a result of the downturn.

Government-backed Venture Investment Fund chief executive Franceska Banga says companies looking to expand beyond New Zealand may struggle to raise the required capital.

"For those companies that received initial rounds of investment in the New Zealand market now looking for the next $10 or $15 million to grow into global companies, the global market is quite challenging in the short term."

The majority of the investment occurred in the first half of 2007, with just $99 million invested in the second half as the international credit crunch took hold.

Venture capital firm No 8 Ventures director Jenny Morel says the downturn will have an impact on start-ups' ability to raise funds. "People are taking a wait-and-see attitude and there's been a flight to cash and fixed interest investments."

But New Zealand Venture Capital Association executive director Colin McKinnon believes the slowdown in venture capital investment is due to the fact that most of the six venture capital funds that receive co-investment from VIF are no longer investing in new companies.

Those funds have passed the five-year mark after which they can no longer make new investments. "We are not affected by economic cycles as much as we are affected by the evolution of the industry in New Zealand."

Angel Association chairman Andrew Hamilton says angel investment tends to be less affected by market conditions as it is longer-term investment, but funding figures are slightly down because the market has become more cautious and deals are taking longer to work out.

There were 14 angel investment deals in the first half of this year, compared with 19 in the first half of last year, he says.'

Crossing that Divide

Last week, I received an email advertising the $Unlimited Investment Challenge 2008. This is an event jointly organised by UK Trade & Investment and Unlimited Magazine.

Last year, Pingar was shortlisted. The experience we gained was substantial. It focused us on a number of issues around our own investment readiness. I would recommend any New Zealand business looking to raise investor funds to take part.

Over the past few weeks, I have been at the sharp end of a number of investor presentations. Certain parameters have emerged and these have been consistent.

According to the professionals, despite the global 'credit crunch', there is a lot of liquidity in the NZ investor marketplace at present. There are also a number of good investment opportunities. That's all positive. On the flip side, the number of deals actually being completed is very small. That's not so positive. It's all a bit tad confusing.

NZ investors have never been big on risk. The recent fall in property prices and the ongoing collapse of confidence in the finance company sector appears to have increased the aversion to risk. 'De-risking' an opportunity is now 'de rigour'. The problem is this can also devalue the potential upside. Bland is not always good.

It would be interesting to get a better take on the deals that have actually been completed this year in the ICT sector. Do they have any themes in common? The problem at present is not just a lack of data in this space. I guess the lack of actual deals does not help.

Securing investor funds is no easy task. The lessons learnt at the upcoming $Unlimited Investment Challenge 2008 can only help.

Six Million Thoughts

It is now several months since the effective conclusion of the NZ$6 Million Investment Challenge, organised jointly by UK Trade & Invest and Unlimited Magazine.

I do not know the outcome for some of the other companies that took part and believe lessons can be learnt from this first format.

For Pingar however, the Challenge achieved its objective. It has certainly made the company more 'investment-ready' and this is paying off. Not perhaps though as the organisers intended.

A number of NZ-based angel and VC investors were lined up to assess the finalists' business plans. It would be unfair to identify them in this blog. Harsh call perhaps, but I wonder just how 'investment ready' some of these funds are, or were? Given my experience of similar UK players, there appeared to be a much more 'domestic' approach to 'global' thinking. It was almost as though global aspirations were outside the scope of the funding available.

I guess this view has been reinforced by my recent visits to the UK. The UK Technology, Innovation & Growth Forum in March supported the theory. Investor engagement was much more familiar to me and the outcomes more positive. More about that later. Those lips remain zipped!

What also struck me, particularly on this last visit, was the presence of other NZ ICT businesses in London seeking to raise finance. Their take on the current NZ investment environment mapped mine. I met them through different channels.

NZ innovation compares with the best in the world. Unless more significant opportunities to raise capital locally are put in place however, the exodus of companies seeking offshore investment can only increase. Time I think for the other side of the NZ$6 million Investment Challenge coin to look at their own 'investment readiness'. The expected 2008 version of the Challenge can only benefit.

NDA Galore

Is that Steve?

There is soooooo much I want to say after last week's meetings, but I am so NDA'd, I would have to shoot myself if I did.

We are now at the 'business end' of this UK visit. I say 'this', because I can already sense a return visit happening anytime soon. That is the way my meetings in London are turning out.

I guess it is all about 'opportunity'. I have discussed this before in previous postings, but there are opportunities I can identify here that do not exist in New Zealand. It is both a number's game and a legacy one. There is a scale here that would simply not justify similar investment in time, resource and cost back home.

I had hoped to catch up with a number of in-bound NZ companies this coming week. Unfortunately however, the planned UK Market Visit for the $NZ6 Million Investment Challenge, organised by UK Trade & Invest and Unlimited Magazine was cancelled earlier last week.

No matter. This is the last week of this trip. A number of significant meetings are scheduled which will really determine where Pingar is headed over the next few months. Behind all this, Jacqui and I still need to firm up our route back home. Hong Kong or LAX? That is the question.

Investment Options

This week began with a couple of important meetings. One was with a Corporate Finance house and the other was with a Bank. Welcome to 2008!

Both related to the establishment and development of Pingar in the UK market and both reflected some of the 'opportunities' I identified in the previous blog. The timing is interesting.

I was reading Rod Drury's excellent blog from New Zealand a couple of days ago and he has written a series of 3 - 4 articles on establishing a successful IT business in NZ. He has chosen to identify some of the key issues particularly impacting on the funding of the said businesses.

Heresy I know at home, but with 12,000 miles between us, I can say that I do not agree with every point made, but Rod's post on the 5th January does make one sobering point.

'You only need to look at the very few angel or venture capital deals done in New Zealand during 2007........'

Being exposed to the angel and venture capital industry here in only a few short weeks has emphasised Rod's point. Whilst I have slightly taken his quote out of context, the limited number of deals closed in New Zealand says as much about the state of the 'risk-adverse' NZ capital markets as it does by the paucity of great investment opportunities in the country. Taking a global view of opportunity, I do sometimes wonder whether some of the limited NZ investment sources really do 'get it'.

Securing NZ Funding

Micro-Entrepreneurs - NZ's Start-up Profile?

Brian Gaynor wrote an interesting article in yesterday's Weekend Herald.

Essentially, Gaynor was saying that risk and return are two of the biggest issues faced by investors, particularly in relation to IPO's. His article also highlighted the big difference between the individual and the institutional investor approach to this risk / return ratio in NZ.

Few institutional investors participated in the 42 Below IPO. The same applied to Xero Live. Both companies were effectively start-ups and though both had charismatic entrepreneurs leading them, institutional investors were unmoved. It does pose interesting an interesting question. Is there an investment market for start-ups in New Zealand?

For me, the jury is out.

What both 42 Below and Xero Live had in common was a desire to become global businesses. That costs money, particularly if you are looking at global markets such as the UK or the US. To prove yourself at an NZ level means little. The domestic market is so small, yet it still costs resource to penetrate. The return is unlikely to be sufficient to fund global expansion, so recourse to institutional investors, in whatever form that might be, is still probably inevitable. If resources are limited and the focus is truly global, why not bypass the NZ market entry - other than for perhaps testing the business model - and go straight to the chosen global market. And if that becomes the preferred strategy, why engage with NZ investors nervous about global expansion?

There are exceptions to this analysis, but they are few and far between. It is significant that Investment NZ has representatives in key global regions whose task is to attract local investors to invest in NZ businesses. I have personal experience of this. They play a key, if somewhat discreet role, in New Zealand Government's program of attracting inward investment. I believe they frequently offer more potential to truly globally orientated start-ups than the domestic NZ investment community does.

New Zealand companies desire for offshore capital is often criticised as being a negative for the economy. Without it, and with NZ's weak capital market for start-ups, many could not expand at all. For me, offshore investment remains an important and sometimes an essential option for start-ups in NZ to execute their global plans. Brian Gaynor's article reinforced that view.

Pingar and The Investment Challenge

The $NZ6 Million Investment Challenge has been organised by UK Trade & Investment and Unlimited Magazine. It offers New Zealand companies an opportunity to expand their business into the UK with the chance to secure $6 million in investment capital.

For more details about the Investment Challenge, you should check it out here.

The $6 Million Investment Challenge Update

The $NZ6 million Investment Challenge is being organised by UK Trade & Investment and Unlimited Magazine. Applications closed two weeks ago.

Together with other applicants, I have been invited to an Investment Challenge forum in Auckland on Monday. I have received the agenda and it sets out the first steps towards a road map for the Challenge.

I am not too sure what is public, and what is not, at present. So in the best interests of confidentiality (and safety!), I will now wait until next Monday's meeting before revealing more.