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Venture Investment Fund to be enhanced

Venture Investment Fund to be enhanced

Changes are to be made to the government's Venture Investment Fund (VIF) to make it more attractive to private sector investors, Economic Development Minister Trevor Mallard announced today.

The fund, established in 2002, currently invests up to $160 million with private sector investors on a 1:2 ratio. The fund has, until now, concentrated on providing funding for young New Zealand firms at their very early stages, by focusing on seed, start-up and early expansion investment.

"This focus will continue, but the investment mandate will be extended to include expansion and late expansion stages of firm growth. The existing Crown to private sector investment ratio of 1:2 will now increase to 1:1 for the seed and start-up stages, Trevor Mallard said.

"In addition, a sliding scale will be introduced for later stages, with the current ratio of 1:2 being retained for the early expansion stage. The ratio of Crown to private sector investment at the expansion stage will be 1:4, while at late expansion stage it will be 1:5.

"Having such a sliding scale means that there will now be more incentive to invest at the very early stages of a business, plus the changes also recognise the need for greater private sector investment at the later stages."

Trevor Mallard said the changes to VIF were important if it was to continue to contribute to New Zealand’s economic transformation into a high-wage export-led and innovative economy.

"VIF has been a catalyst for developing New Zealand’s venture capital market. New Zealand venture capital investments have grown in size and number since VIF was established, with 35 high technology companies already being invested in.

"While innovation is vital to economic growth, financing young, high growth firms can be risky. Venture capital plays a pivotal role in the commercialisation of innovation and the development of young firms. In New Zealand our venture capital sector is still at an early stage of development.

"The initial investment momentum generated by VIF has slowed and it appears the current structure is not attractive enough to encourage further private investment co-investment in new VIF funds."

Trevor Mallard said this situation had to change as establishing new VIF funds was vital to maintaining a steady flow of capital for investing in new companies.

"The changes should encourage new investors who are willing to invest in funds with a broad investment strategy from early to late expansion stages. "Institutional investors when making their decision to invest are looking for a track record of successful exits. There is a need for government involvement to give the fledgling New Zealand venture capital market the assistance needed to see it through the 7-10 year period, before track record is established, and a self-sustaining venture capital industry is created with the help of institutional investment."

Questions and answers follow.

VIF Questions and Answers

What is the New Zealand Venture Investment Fund? NZVIF manages the VIF programme which invests with co-investors in a series of privately managed venture capital investment funds. To date, the programme has invested $101 million in 35 local companies in a range of sectors including the biotechnology, software, telecommunications and creative sectors. It has also played a significant role in catalysing the local venture capital market. The government demonstrated its confidence in the VIF programme through the allocation of an additional $60 million of capital funding in this year's Budget.

Since July 2005, NZVIF has also successfully launched and managed the $40 million Seed Co-investment Fund programme, aimed at small to medium-sized businesses with strong growth potential at the seed and start-up stage of development. The first four co-investment partners to this have recently signed up and it is likely that the first investments through this new programme will be made soon.

The goals of the VIF programme are: To accelerate development of the New Zealand venture-capital industry by increasing the level of early stage investment activity in the New Zealand market. To develop a larger pool of people in New Zealand's venture capital market with skills and expertise in early stage investment. To facilitate the commercialisation of innovations from Crown Research Institutes, universities and the private sector. To get more New Zealand businesses on paths to global success by increasing their access to international experts, networks and market knowledge.

Why does the government support VIF? Venture capital is recognised internationally for the key role it plays in the innovation process, especially in commercialising research and development, lifting exports, creating jobs and stimulating economic activity. In New Zealand the government has identified a gap in the provision of capital and expertise for early stage companies with high-growth potential.

What are the main changes? The government has increased its contribution to VIF fund from the existing 1:2 ratio, to match private sector investment on a 1:1 basis for seed and start-up venture capital investment. Crown funding for early expansion venture capital investment will remain on a 1:2 ratio.

The government has also decided to extend VIF’s investment mandate into the expansion and late expansion business stage investments for new VIF funds and agreed to Crown to private sector venture capital investment ratio of 1:4 and 1:5 respectively for expansion and late-expansion stage investments.

The changes take effect from 1 December 2006.

How are the different investment stages defined? As a consequence of its decision to enhance VIF by changing ratios and extending VIF’s investment mandate, government agreed to the following definitions of investment stages:

Seed: an investee company is at the seed stage of its development if the investment will enable development, testing and preparation of a product or service to the point where it is feasible to start business operations; Start up: an investee company is at the start up stage of its development if the investment will enable actual business operations to get underway. This includes further development of the company's product(s) and initial production and marketing; Early expansion: an investee company is at the early expansion stage of its development if the investment provides capital to initiate or expand commercial production and marketing but where the company is typically or likely to become cash flow negative; Expansion: an investee company is at the expansion stage of its development if the investment is provided for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to finance increased production capacity, market or product development, or provide additional working capital; Late expansion: an investee company is at the late expansion stage of its development if the investment is provided for the financing the expansion of a company that is producing, distributing and increasing its sales volume and to help a company achieve critical mass to position it for an initial public offering.

What type of venture capital investments do the VIF Venture Capital Funds make? The VIF Venture Capital Funds invests in innovative New Zealand businesses. A New Zealand business is defined as having the majority of assets and employees in New Zealand at the time that initial investments are made. The VIF will normally invest no more than $25 million in any individual fund.

Who are the VIF Venture Capital Fund managers? To date VIF has selected and established contracts with five Venture Capital Fund managers, assessed as "investment grade" through a rigorous due diligence process. The VIF Venture Capital Fund managers are BioPacific Ventures, TMT Ventures, No 8 Ventures, Endeavour i-cap and iGlobe Treasury.
Are there any investment restrictions on the VIF Venture Capital Funds? VIF Venture Capital Fund investment terms exclude investment in the following classes of businesses: Property development, retailing, mining, hospitality industry businesses, re-investing and re-lending, and businesses directly associated with other investors in the VIF Venture Capital Fund or directly with the VIF Venture Capital Fund managers.

For more information see VIF website


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