THE new head of the New Zealand Software Association, Bell Gully lawyer Wayne Hudson, is concerned a government-backed scheme to provide venture capital to hi-tech start-ups hasn’t yet resulted inmuch funding for software firms.
The New Zealand Venture Investment Fund (VIF), set up a year ago to pump $100 million of public money into the venture capital market, has so far helped three hi-techs secure investment funds — network software firms Esphion and EMS Global and business intelligence company Compudigm.
To date, VIF has promised $75 million to four venture capital funds, which are obliged to match the contribution with $150 million raised from private investors and invest the total in young technology businesses.
However, less than $15 million — including $5 million of the government money — has so far found its way to start-ups.
Mr Hudson says businesses which hoped they would now be raising mezzanine finance thanks to VIF haven’t yet had much joy.
“VIF has done it’s best to get money in. I just hope money starts to come out.”
The Government is entitled to a one third stake in each fund’s investment portfolio in return for its financial contribution, but the funds have the option of buying out the Government’s stake on favourable terms within their first five years.
Because the terms are attractive to the privately-run funds, Mr Hudson is concerned little venture capital may be provided to software firms outside the auspices of the VIF scheme.
He fears that if the funds don’t start investing soon, they may simply be tying up finance that might otherwise have been available to start-ups.
Mr Hudson assesses the current health of the Kiwi software industry at “four or five out of 10” versus “seven out of 10” three years ago.
The lower rating is not any indication of the quality of New Zealand software, but reflects the fact funding is not in place to ensure software firms can exploit their opportunities, he says.
Mr Hudson says there are more than 7400 software firms registered in New Zealand. While a proportion will be dormant, the industry also contains a large number of very small companies with fewer than five employees.
Many businesses which were founded two or three years ago now need further capital to expand.
Because of the difficulty of providing collateral for bank loans, the high compliance costs of a public listing, and the lack of venture capital, they are often having to rely on rights issues to their original backers to keep going.
Mr Hudson, who has specialised in serving clients in the IT sector for about 20 years, says he has recently seen more imaginative methods of funding overseas expansion.
Some Kiwi software firms have succeeded in persuading their overseas distributors to take equity stakes in their companies, for example.
“It is something that I recommend people think about.”
Mr Hudson predicts that while the information and communication technology sector may not return to the “heady days” of three or four years ago, the current slump “can’t carry on forever”.
He says the New Zealand Software Association can play a part in helping the Government meet its goal of creating 100 ICT businesses with a turnover of more than $100 million by 2013.
“I’m not going to knock the goal by saying it’s too ambitious. If we only got half way there, it would still be good.”
He hopes to expand the software association’s six-person executive committee to ensure it can be effective both at helping its 120 member organisations network and at lobbying on their behalf.
The association is also keen to collaborate and share resources and ideas with the estimated 40 or so other IT industry-related associations in New Zealand, he says.
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