Nats support govt’s establishment of a venture capital fund to fill financing gap for high-tech companies

Critics  have long  lambasted  successive  governments  for their failure to  reverse  NZ’s woefully poor long-term economic performance.

So  Point of  Order  found   something positive  to address this in  legislation – given a third  reading in Parliament last week – that will establish a $300m  Venture  Capital Fund.

It’s the  brainchild  of  Associate  Finance Minister   David Parker   who   in an earlier  life  in  Dunedin  had  something to  do with  the  establishment of  A2  Milk,  now  one of the  top  capitalised  firms on the  NZX.

Parker  reckons   the  fund  will play an important role in building a more productive, inclusive and sustainable economy.  As  he puts   it,  NZ needs fast-growing businesses operating in a healthy, well-capitalised venture capital market.

Parker   contends new start-ups are well served by angel investors with some seed capital support from the government, but mid-sized ones, between about $2m and $20m in size, often struggle to find a source of funding in NZ.

“Developing early stage capital markets will strengthen the pipeline of innovative firms that have the potential to grow from NZ, generating employment, lifting productivity and economic growth and boosting international connections.

“I expect the fund will be leveraged by investments from the private sector, so far more than $300m will flow into the sector. The effect will be to ensure more of our start-ups and are not forced to sell – or forced to sell too soon – because of the capital constraints they face.”

The Fund will begin with $260m of available capital. The remaining $40m will be made available when required and is expected to support the fifth year of the Fund’s investment period.

The Guardians of NZ Superannuation will oversee and monitor performance of the Fund.  From early 2020, the NZ Venture Investment Fund (NZVIF), on behalf of the Guardians, will start formally engaging with private sector venture capital fund managers.

In his  third reading speech Parker noted  how the world is in the midst of  a technological revolution which is born of the confluence of affordable computing power, mobile positioning systems, sensors, robotics, big data and the internet of things, artificial intelligence, and a better understanding of genetics.

We know that the enormity of these changes is such that governments around the world, including in NZ, are having to deal with the challenges that this throws up. I think the estimate from McKinsey is that in the next 20 to 30 years, about 60%t of the jobs in NZ could theoretically be automated, and that, in reality, around 30% will be.

“ The enormity of that change, I think, measures the size of the opportunity, because the flipside of the challenge is the enormous business opportunity that arises from these opportunities to improve the efficiency of existing methods of production or the opportunities to commercialise new products and services that are borne of this revolution”.

New Zealanders  may be    already familiar   with   companies   like  Xero, Datacom  and Lanzatech   which   have been   hugely successful   in their fields.  Others   like  ERoad,  Pushpay,  Vista,  and  Plexure    which  are also  making their mark on the  NZX.

Outfits    like Rocket Lab  and  Vend   are  also  at the sharp end of the   technological revolution.

Yet too many   high-growth, early-stage companies struggle to access capital.  Some of them are well-funded, but the conversion rate of  early-stage ventures to high-growth companies is lower than international countries with which  NZ  compares itself.

Helen Clark’s Labour Government held the knowledge wave conference, where there was general agreement that NZ needed to lift the diversity and value of what it offered the rest of the world. Three sectors were identified: creative, biotechnology, and  ICT.

The subsequent National Government morphed the biotech more towards food and beverage.   Parker  says   as a  result  these technology exports are now one of NZ’s  highest growing.

National  supported the  legislation  before the  House,   with its spokesman  Andrew  Bayly arguing  NZ needs  a  more sustainable   venture capital industry.

He told  Parliament  this Venture Capital Fund is a way of dealing with what people term the valley of death in investment circles.

You have the seed capital, which is the very first stage; then you have the venture capital; and then you have private equity, before you move on to traditional banking arrangements which help fund and turbocharge our businesses. So this is a way of dealing with that valley of death—that second stage—where people, who are often young people, invest their time and a lot of their money, and often their family’s money, to try and start up these new businesses that in the end, ultimately, sometimes achieve great things”.

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