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Israel and the NZ Venture Investment Fund

Pete Hodgson
Tuesday 24 September 2002 Speech Notes

Israel and the NZ Venture Investment Fund

[Address toe the New Zealand Israel Trade Association annual trade awards, Auckland]

You’ve asked me to talk about my visit to Israel a couple of years ago to look at that country’s venture capital sector, and for an update on the venture capital fund this government has developed, largely as a consequence of that visit.

I went to Israel in late 2000 and met innovators, venture capitalists, researchers, some smart politicians and officials and a few economic visionaries. My head reeled. It was a visit that gave me some of the most fascinating and inspiring days I've had as a minister.

After Silicon Valley and Massachusetts, Israel is the third most intense centre of venture capital activity in the world. Outside this room probably not a lot of people know that.

Over the past decade that venture capital activity has helped make Israel the hotbed of high-tech industry that we know today. The boost to the economy has been huge.

California’s Silicon Valley, which I also visited, is an extraordinary example of an innovation centre that grew up largely without parental supervision. Government was not irrelevant – it never is – but it can't take the credit.

Israel is the opposite. It has a thriving venture capital and high-tech scene largely because the Israeli Government decided it wanted one, set out to get it, and succeeded.

I went to Israel and California to learn from what happened there. I went because this Government wants to transform the New Zealand economy – and because technology, and the capital to back it, are going to be a crucial part of that transformation.

We need to add more value to what we produce as a nation. That doesn't mean giving up on primary production. It means enhancing and renewing its products. It means trading in expertise, intellectual property, technology. It means making more money out of stuff by adding knowledge to it, and making knowledge itself into stuff we can sell.

To transform the economy we must tune up our innovation system. That's the infrastructure that allows an idea, a scientific discovery, or a technological breakthrough to be turned into a business or an industry.

Key elements of that infrastructure include the education system, public and private sector research and development, our technological infrastructure, development finance, intellectual property protection, incubators, and most importantly our human resources – in both innovation and the skills to commercialise it.

Venture capital is also a vital part of the innovation system. It supports the formation of new businesses, particularly those with high growth potential based on technology and high value-added products and services. That’s why I went abroad to learn more about it, especially about what government can and can’t do to make sure it is a thriving part of the business environment.

I went because we learned that the seed capital end of New Zealand’s venture capital market needs further development. Although we have a growing venture capital market in this country, there is a shortage of visible, organised seed capital.

That’s not particularly surprising, because most OECD countries have gaps at the seed capital end of their venture capital markets. And many of them have taken steps to fill that gap.

Governments actively involved in venture capital markets include those of Australia, the United States, Ireland, Denmark, Finland, Norway, Belgium, Canada, Germany, Italy, The Netherlands, Sweden, the United Kingdom, Taiwan, Singapore and – of course – Israel.

Australia has something called the Innovation Investment Fund, set up in 1998 with $130 million for early stage investment in small new technology firms. Singapore's Economic Development Board created a venture capital fund in 1985 for direct investment in start-ups and young companies.

Israel has the outstandingly successful Yozma fund, which began as a Government-driven fund and has since been privatised. Yigal Erlich, the brain behind Yozma, has been an invaluable source of advice to us. Following our discussions in Israel he came here last year to add his wisdom to the design of what I hope will be New Zealand’s equally successful version of Yozma. We are indebted to him.

The New Zealand Venture Investment Fund has been established with $100 million of government capital, which will be invested in partnership with private funds in seed, start-up and early stage ventures. Our objective is to accelerate the development of this country's seed capital market, then exit when we are no longer needed.

We are using that capital to leverage private sector capital at the ratio of two to one, so total funds available are around $300 million. But even more importantly we are bringing in expertise with the money. The ultimate achievement of the Venture Investment Fund will not be the injection of $300 million of new investment into new businesses – although that will be no bad thing – but the creation of new international linkages and expertise in our venture capital sector.

Venture capital investment tends to be based on personal relationship building. There is a global network to which we are already linked but should be better linked. And skilled, experienced personnel are vital. Commercialising technology is hard. New Zealand venture capitalists routinely draw on overseas experience in one form or another, but there are still too few skilled venture capitalists in New Zealand. You could get all of them in this room, easily. We need more.

We chose a private sector “fund of funds” model for the Venture Investment Fund, with the parent fund entering partnerships with individual fund managers. There are some carefully laid out conditions for these partnerships, to ensure the government’s objectives are met. We do not want this money competing, for example, with the existing private sector funds that are chasing later-stage venture investments. It’s not needed there, so we’ve fenced it into the seed and early-stage end of the market.

We also have clear exit plans for these funds, because we do not see an ongoing role for Government in venture capital formation. When New Zealand's seed capital market is humming, we wish to withdraw. When we do so we will be asking for no more of a return on our investment than the cost of capital, no matter how successful the investment. The exit conditions have been carefully designed to ensure that our private sector partners have the incentive to buy us out sooner rather than later.

The pocket history of the fund so far goes like this …

We did the policy work enabling a decision to establish the fund in late 2000 and early 2001, and set aside the money in the May 2001 Budget. By the end of July we had a six-person advisory board, chaired by a very capable Australian by the name of John Grant, and the fund was formally launched in August. By September the very capable Franceska Banga was chosen as general manager. The call for expressions of interest from fund managers went out in October and by the end of November we had 44, including parties from Australia, Asia, USA and Israel. Sixteen of those were shortlisted in January this year and invited to prepare full and formal offers. Wilshire Australia was chosen in February to do due diligence on a shortlist of the proposals and by mid May we were down to a final six.

The Venture Investment Fund is now in the final stages of negotiation with five fund partners, one having withdrawn when its managers realised they wanted the room to do some longer-term investing as well as venture capital. Earlier this month all five signed term sheets, indicating the acceptance of key commercial terms by both sides. The funds are moving rapidly now towards completing full documentation and there could be money flowing into new investments by next month.

I’m pretty pleased with the way that history has unfolded. I’m especially pleased when I look at the quality of the proposals that came in and the outstanding quality of the five funds we are seeing established. They include impressive USA and Asian links, investment experience and high tech and biotech track records. All were rated by Wilshire as "investment grade" for institutional investors, based on international best practice benchmarks.

Let me run through them quickly, to give you an idea of who they are:

- Endeavour I-Cap is associated with Neville Jordan, the first New Zealander to list a company on the Nasdaq (MAS Technology) and Dr David Teece, an expatriate kiwi investment leader based in San Francisco;
- IO Fund is a joint venture between Infratil, Lloyd Morrison’s infrastructure investment company, and Orion New Zealand, the Christchurch based electricity network operator;
- iGlobe Treasury Funds is a joint venture between a Singaporean venture capital company with worldwide high tech investments and New Zealand-based merchant banker Tony Bishop;
- TMT Ventures is a venture capital fund seeded by Telecom and managed by Direct Capital and the US-based private equity investor Advent International; and
- No 8 Ventures 2002 Fund is associated with Jenny Morel’s No 8 Ventures, one of our best known VC companies, with strong US links and a focus on IT, electronics and biotechnology.

These are the funds we’ll be looking to to achieve the necessary thickening and strengthening of the seed capital market. They fill me, for one, with optimism on that score.

It all began with a visit to Israel a couple of years ago. Perhaps one day I’ll be able to go back, with an excellent story to tell.


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