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Hodgson Speech Taranaki Venture Capital Conference

Speech

Venture Taranaki 'Venture Capital' Conference
Plymouth International Hotel, New Plymouth

Hon Pete Hodgson, Minister for Small Business, Associate Minister for Economic Development, Associate Minister for Industry and Regional Development

3.30pm Thursday 4 May 2000


You will have noticed there's been a change of Government and you will have noticed, I hope, that the change is not just cosmetic. This Government's attitude to business and economic development is fundamentally different to what you've been used to for the last 15 years.

We don't say, any more, that the Government has no business with business. We don't stand back from the economy and say we're sorry, there's nothing we can do to help it grow, that we don't believe in partnerships, brokering, facilitating.

This Government is different. We have set ourselves some pretty broad goals. One of them is to transform the New Zealand Economy. We do mean business.

It's early days yet but we're moving as quickly as we can to build up some new resources for economic development. We've set up the Ministry of Economic Development to give us policy advice. We've applied CPR to the few remaining officials with expertise in that area and we've recruited an interim manager for our delivery agency, a guy who's been running economic development in the state of Victoria. He's a Kiwi who wants to come home.

Contrary to what became the conventional wisdom in this country, it is possible for government to help businesses grow. Most other countries do it as a matter of routine and this country became something of a Western world freak when it abandoned all efforts.

I have to make it clear, though, that we're not getting into heavy, expensive intervention in the economy. We're not going to spend huge amounts of money like Ireland to lure high-tech multi-nationals here. We're not going to put up a billion dollars in venture capital as Singapore has done. We're definitely not going back to lunacy of Think Big and having something like the DFC speculating with public money on the property market.

There's a middle way and a modern way in these things. We've learned from the past and our aims are modest.

You've had a long day hearing about the private sources of venture capital that are available in this country and how to get access to them. I'm pleased that those sources have increased, especially over the past 18 months or so, from the few pioneers like Caltech, who you heard from this morning.
In the early 1990’s you could count the number of venture capital funds on one hand, and they were focused largely on expansion and development funding. Now there are many more pure venture capital funds and many more brokers and merchant banks involved.
Our venture capital industry is now estimated to be worth well over a billion dollars. The Stock Exchange's New Capital Market, which it launched at the end of March with the support of the Ministry of Economic Development, also looks promising as a venue for smaller businesses to seek capital through share floats.
Some of the latest movements in the venture capital industry include a new seed capital fund of around 15 million dollars being set up by Auckland Uniservices, which is the commercial arm of the University of Auckland.
Wired Internet Group, based in Christchurch, has a deal with a New York venture fund manager called Island Capital to invest up to 5 million dollars in local e-commerce and technology ventures with global potential.
New Zealand entrepreneurs should also get something out of funds being established by the merchant bankers Grant Samuel and Associates and by Allen and Buckeridge in Australia. They're both targeting start-ups and early-stage expansions in Australia and New Zealand.
Last week Telecom asked me along to the launch of its TMT Venture Fund, which is the latest addition to the scene. It's an encouraging one too, because they're aiming to grow it to 150 million dollars and it's the first major New Zealand corporate entry to the venture capital market that I know of.

And just yesterday three companies in Dunedin announced the formation of a venture capital fund.

So the gap in the market for venture capital isn't as big as it was just a couple of years ago, which is fine with this Government. But we're not confident yet that the gap has been closed altogether.

We're thinking about what we might need to do to help meet the capital needs of businesses, particularly the needs of the small and medium sized businesses that are so important in this country.

Very soon we'll be introducing legislation to Parliament to set up a new agency called Industry New Zealand. Probably next week. When the law is passed we'll appoint the directors and open the door. That will probably be in July.

We're going to load Industry New Zealand heavily with private sector expertise, and if we're going to help boost the sources of venture capital then Industry New Zealand is the agency we'll use.

There are several ways it could deliver, including
 straight venture capital investment
 development finance
 pooled development finance in partnership with the private sector
 angel networks, which link small investors with small companies.

The venture funds could look something like the existing Greenstone Fund, which is pretty modest and already spoken for several times over. We might have a Soapstone Fund or a Sandstone Fund, or whatever. Or we could use other models.

It'll be several months before we make any decisions on moving into this area. We're not interested in crowding out private sector providers of capital. What we do, if anything, will depend on the maturity of the market at the time.

But one of the first programmes Industry New Zealand will deliver is the Incubator Development Programme, which Jim Anderton announced several weeks ago. It's not a source of capital as such, but it is designed to improve the ability of innovators and small or medium businesses to get access to seed and start-up funding.
I've got an example of an incubator being set up in my home town, Dunedin, where the University of Otago and the Dunedin City Council are building what they're calling the Centre for Innovation. It'll be three stories high, with 24 research suites. It'll have offices, labs and common areas for about 80 to 100 scientists and researchers.
The hope is that it will be a magnet for new research projects backed by New Zealand and international companies, focused to start with on biotech, health science, infotech, food science and pharmaceuticals.
There are other examples springing up in other places. The Canterbury Development Corporation's has one they call ICAN, or Innovation Canterbury. Victoria University has the Innovation Greenhouse. Unitec in Auckland has a Centre for Innovation and Entrepreneurship and Massey University has an incubator at its Albany campus in Auckland.
Typically these places supply workspace on favourable terms and they back that up with various levels of business planning or managerial advice. They'll often have office facilities and access to finance and accounting expertise, business networks and legal services.
The examples we have already are terrific, but we need more. Officials reviewed existing incubation services last year and found that support for start-ups was thin compared to other developed economies.
So over the next year the Government will put up a bit over 2 million dollars to support incubators. And we'll do that in partnership with the private sector, which is fundamental to our approach to economic development.
The programme will help innovators in three ways:
 investment readiness services, teaching innovators how to develop their ideas to the investment stage
 ideas brokers and deal-making services, providing thorough hands-on assessment of the potential of ideas and matching up innovators with investors
 supporting existing and emerging incubators, like the ones I've mentioned.
We've invited tenders for the programme and we'll be assessing proposals later this month, with the aim of getting services in place by early July.

Now I'm going to put my science hat on for a moment and remind you of some Government support coming from another direction in the Technology for Business Growth programme, which is run by Technology New Zealand, which in turn is part of the Foundation for Research, Science and Technology.

Through TBG the Government invests in up to half the cost of technology that will increase the level and the quality of R&D in New Zealand business. About 15 million dollars a year goes to business through the scheme so it's a significant source of capital if you're in the high-tech sector.

Technology New Zealand has a couple other very useful business assistance programmes as well.

One is Tech-link, which helps businesses assess their technology needs. It helps them to develop a strategy for R&D and assess on overseas technologies they might be able to use. It also helps them acquire those technologies if they decide that's what they want to do. The Government contributes to the cost of the consultants who provide the advice.
There's also a programme called the Graduates in Industry Fellowships, better known as GRIF. It supports undergraduate, masters, doctoral and post-doctoral research done within businesses, either through tax-free scholarships or taxable remuneration.
I'm not about to reveal Budget secrets, but of all the R&D funding that comes out of the public sector, about 600 million dollars, it is the funding at the TBG and GRIF end of the spectrum that we'll be putting the greatest emphasis on. The details will be out in mid-June.

One other thing I want to mention is the work we're doing on the finance needs of exporters. All developed nations except New Zealand and Luxembourg provide some form of export finance assistance to their exporters, through export credit guarantee schemes or suchlike.

We've had officials report to us on the finance issues our exporters face, and they've identified both pre-shipment finance and export credit as areas of interest. This builds on work several years ago showing that policies like this could improve New Zealand's export performance by several hundred million dollars a year.

We haven't decided yet whether programmes like these are necessary and how they might be delivered. If we do go down this track, it is likely to be in partnership with the private sector. There would be a fiscal risk involved, as there is with all finance. But risk can be managed, of course, and it can be worth taking. After all, nearly every other western government has some direct or indirect involvement

I want to stress the point that everything we do in the economic development area will be subject to hard-eyed monitoring and evaluation. If it works we'll keep doing it, if it doesn't we'll can it.

Someone funnier than me once said that finance is the art of passing currency from hand to hand until it finally disappears. It's a good line, but we're determined that's not going to happen to public money. Like I said at the beginning, this Government is not going to repeat the mistakes of Think Big and the DFC.

By international standards what we're doing in economic development is cautious and modest. We're going to take it step by step and we're going to get it right. Government can be a useful partner to business. We've all seen how it shouldn't be done, and now we've got a chance to do it right.

Thank you.


Enquiries: Graeme Speden, press secretary, 04 471 9707 or 025 270 9055

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