UK VC Funding

One blog I have permanently bookmarked is TechCrunch. It's my 2009 version of 'First Tuesday'. With a touch of The Valley.

Hands up those of you who remember 'First Tuesday' then. It is an iconic reminder of all that was exciting about the Dot Com era. Entrepreneurs, VC's and wet behind the ears investment bankers turned entrepreneurs met to plan the 'next big thing'. Well according to TechCruch today, things are not quite as rosy in post credit crunch UK.

I have lifted these three following paragraphs from TechCrunch. All rights recognised etc. etc.

'You think you have it bad, Mr.-Silicon-Valley-entrepreneur-trolling-Sand-Hilll-Road-for-cash? Try life on the other side of the pond. Out of 39 firms that were active investors in British start-ups over the last five years, only thirteen venture firms have £5 million or more left in their coffers to invest, according to NESTA, the UK agency that advocates for start-ups and also sponsored the recent Traveling Geeks blogger tour.

That’s right: All but thirteen firms in the United Kingdom are either completely tapped out or have committed the rest of their funds for follow-on investments in existing portfolio companies. In total, NESTA estimates there’s about £400 million left that’s uncommitted among the thirteen, with only half of that available for brand-new series A deals. To put that into perspective, there’s roughly the same amount of money in the fund Marc Andreessen just closed than there is for new companies in the entire United Kingdom right now.

This is coinciding with a precipitous drop in UK firms closing on new funds thanks to the global credit crunch. In 2008, only seven firms closed new funds, and NESTA expects fundraising to be even weaker in 2009'.

In March last year, I was invited to attend the 2008 UK Technology, Growth & Innovation Forum in London. This was an annual meeting of entrepreneurs and VC / Angel funds. The prognosis then was not great. It has clearly become a lot worse. GBP 200 million for UK start-ups is abysmal. And according to NESTA, it might deteriorate even further.

This news contrasts with what I view as being 'green shots' in the New Zealand VC sector. (Calling it anything more than a sector amounts to exaggeration. There are so few active funds at present). The view on the street however is that three or four funds here might announce quite significant new funds through 2009.

For now though, I am digesting the news from the UK.

Ouch.

Tauranga - The Week Ahead

It's amazing how the in tray piles up when you are away from the office. I am currently working my way through correspondence of all sorts. This is not unimportant.

On Wednesday, I am traveling to Wellington for the NZ SharePoint Users Conference. Before then, there are a stack of engagements I need to set up around NZ. That's part of the joy of offshore market visits. They set up a whole new set of files and folders. Hong Kong already has its own set of drop-downs in place.

Several stories have surfaced whilst I was away. One very positive one is the news that Sparkbox founders Andrew Duff and Henry Tait are fundraising for a new $50 million venture capital fund to invest in early stage New Zealand technology companies. It has received a $20 million funding commitment from the New Zealand Venture Investment Fund.

The fund is called the '2 Ignite' fund and it will apparently target technology-based investments in areas such as information and communications, the medical and bio-tech sector, and the Internet.

Last year, I spoke to Greg Sitters of Sparkbox and he identified a hole in current NZ capital markets for emerging technology companies. I very much hope that 2 Ignite is one way to begin to address and fill that hole.

VC - Do you need it?

I am now back in NZ.

The events of the past few days are fresh in the memory. So the experience of Palo Alto is highly relevant to an article I read this morning.

'With cloud computing and rentable hardware driving down the costs of starting up a Web company, venture capital is becoming less important for online entrepreneurs, according to a paper by Santa Clara University business Professor Robert Hendershott. Additionally, new business categories, such as iPhone and social networking applications, have development cycles that can be measured in weeks, not months or years'.

In part, I agree. In part....

The real cost of establishing a web company extends beyond the scope of development and hosting. Building a global presence is not cheap, so significant investment is still required to fund headcount, support, IP and structures. The question I think is rather, are VC's the ideal funding partners for this?

It is not a route that Pingar has taken. In NZ, the reason is quite simple. The lack of a competitive capital market means that the high net worth investor route has been more appropriate. Retaining IP in NZ would have been much more difficult if we had had to access global capital markets.

The issue raised by Professor Robert Hendershott is however an important and relevant want. An evolving technology market certainly impacts on web businesses funding options. As start up firms learn to become leaner and smarter in these 'economic times', venture capital is no longer the only play in town.

Palo Alto has Attitude

The meeting in Palo Alto yesterday was upbeat. It says a lot about Americans approach to life. VC start up deals in 'the Valley' might be down by about 25% this year - but they still represent around USD 9 billion of new money. It backs up my post yesterday. It is all about size and scale.

It's also about attitude. Start ups looking for investment today have what was referred to as 'balls'. The fact that they are still actively pursuing funding in this market marks them out. Cheque books in this part of the world are certainly not closed at this point. Word on the street is that one NZ tech company is about to announce a major VC win here.

What I had not fully appreciated until my visit was the significance of the presence of Stanford University. Palo Alto is what it is because of Stanford. Tech spin outs and VCs have clustered around the University campus making this a key play in the US technology market.

The striking thing about this was how it mirrors Pingar's own engagement with the Universities of Waikato in NZ and Swansea in Wales. In both instances it might be small scale stuff by comparison, but the model is right. It reinforces my own view that this is one model that should be actively promoted in NZ. The structure is in place. It just requires significant extra funding. Is this possible?

I believe the answer is yes. Another key lesson learnt from yesterday is a changing perception and attitude towards high growth potential NZ tech companies by Valley-based VC. Our geography is no longer such an issue. The opportunity is. It's a message I will be taking back home. Right now, 'The Valley' is open for business.

Angels + VC Stats

Some interesting stats from Don Dodge, of the Microsoft Information Worker team.

The Center for Venture Research at UNH have just released their annual Angel Capital report for 2007. Angels invested $26 Billion in 57,120 companies, up slightly from last year. The report says there are 258,200 active angel investors in the USA. By comparison, Venture Capitalists invested to $29.4B in 3,813 companies in 2007.

Software accounted for the largest share of Angel investments, with 27%, followed by Healthcare Services/Medical Devices and Equipment (19%) and Biotech (12%).

Angel Investors continue to be the largest source of seed stage and early stage start-up capital, with 39% of 2007 angel investments going there.

Angels tend to invest just like VCs except they do smaller investments $200K to $2M and they do about 15 times as many deals. However, Angels have the same investment criteria and expectations of significant returns. The "average" angel group makes 8 investments per year for a total of about $2M. The average deal size (seed stage) is about $250K.

In New Zealand, the word on the street is that the number of Angel and VC deals closed in 2007 was small. Given New Zealand's innovative culture and its potential global impact, it makes you think. NZ business needs the investment. Angels fly. It would be good if perhaps some could wing their way over the Pacific and make a home in Aotearoa. They would be very welcome.

VC - Go West

So it goes like this.

On Thursday, I post a blog with an observation about Venture Capital in the UK. On Friday, I receive an email from my friend Matt, who is based in the heart of Silicon Valley.

Start-ups and VCs there still talk. VCs understand the value of both the engagement and the investment. Think Sequoia Capital or think Sutter Hill. Look at their portfolios and imagine the return.

If the UK & Europe are to retain their best and most innovative IP, then VC's here need to compete. For the alternative, go west.

VC or Bust?

Are VC's abandoning the start-up sector?

Last week's London Technology Forum was focused rightly on some of the great innovative start-ups that are now going to market. A key plank in this journey of course is the ability to raise the capital necessary to execute one's business plan.

In the UK, that process may have just become a little harder.

This comment is based on the decision taken last week, by 3i, the former powerhouse of Europe's venture capital industry, to abandon early-stage investing in start-up companies, to focus on buy-outs, growth capital and infrastructure. That according to the analysts, is where the best returns in recent times have come from.

If this is the case, then the situation for start-ups becomes more fragile. There is an eco-system of other investors out there including angels, high net-worth individuals and incubators. But for scale, venture capital is often the only route.

For Pingar, these developments come at an interesting time. We are in what is probably best described as 'stealth mode' in regards to own own funding engagement. But it's interesting to take a broader industry perspective to understand just what challenges will now face many of those other great start-ups who joined us at the London Hilton, last week.

NZ Limited Liability Partnerships

An excellent article in this morning's New Zealand Herald about the new limited partnership regime, due to come into force on April 1st.

Limited partnerships are the most popular structural vehicles for private equity and venture capital investment. Already available in the US, the UK, Australia and Canada, the new regime will enable New Zealand to compete for international capital on a more equal footing.

Internationally, New Zealand is already a great place to do business. The 2008 Heritage Foundation / Wall Street Journal Index of Economic Freedom ranks New Zealand's economy as the world's sixth most free. Throw in the fact that New Zealand does not impose capital gains tax on the sale of shares, the new limited liability regime could improve NZ's global ranking even further.

The architects of the new regime are to be congratulated. As one who understands the challenge of securing offshore capital for NZ companies, the opportunity to offer a limited partnership to VCs and private equity players can only help. Roll on April 1st.