NEW Zealand Venture Investment Fund, set up by the Government a year ago to pump $100 million into the venture capital market, is being hailed a success, even though less than 5 per cent of the moneyhas so far found its way to start-ups.
To date, the crown-owned entity has promised $75 million to four private-sector venture capital funds, which must match every dollar of government money with $2 sourced from the private sector and then invest the sum in innovative young companies.
Just under $5 million of the government money has been invested in three start-ups.
No new investments have been made using NZVIF money so far this year and none are believed to be imminent.
The NZVIF-backed funds — No. 8 Ventures VIF, Endeavour i-Cap Fund, iGlobe Treasury and TMT VIF — have raised $90 million of private investment. This guarantees government co-funding of $45 million, with another $30 million contingent on the first three funds, which remain open to investors, attracting further private sector cash. NZVIF’s remaining $25 million has been earmarked for a new venture capital fund specialising in biotech investment.
NZVIF general manager Francesca Banga is pleased with the success the venture capital funds have had getting commitments from private investors, given the low investor appetite globally for high-risk ventures.
Each needed to secure a minimum of $20 million from private individuals and institutional investors to qualify for VIF co- funding.
“With the venture capital market as it is, it is particularly challenging for these kinds of funds to raise capital.”
Ms Banga says the funds are investigating potential investment targets and she is happy with the progress they are making.
She expects them to invest the bulk of the $135 million raised so far within the next five years.
“It’s early days. It’s been a challenge for them to raise capital in the current market and that has kept fund managers busy for longer than they anticipated.”
TMT Ventures invested $5 million each in network software firms Esphion and EMS Global last year, before its agreement with NZVIF was finalised. NZVIF participation in the deals was subsequently formalised, and these are being counted as NZVIF-backed investments.
IO Fund, a venture-capital fund set up by Infratil and lines company Orion and which originally received $20 million from NZVIF, put $4.4 million into Wellington software firm Compudigm in October.
However, IO Fund refunded NZVIF’s contribution after Infratil and Orion decided not to further develop the fund.
Ms Banga says it is too early to say what NZVIF would do with any unallocated money if the three funds still seeking additional private sector investment fail to raise enough to qualify for the extra $30 million they have been allocated.
However, she indicates it wouldn’t go unspent.
“That $100 million is a commitment the Government has made to early-stage venture capital investment so our expectation is that money is available.”
The funds have the option of paying back the government co- funding plus a return equal to the five-year government bond rate within their first five years.
If they don’t exercise the option, the Government is entitled to its share of each fund once they wind-up in 10 years’ time.
The arrangement — which is similar to a scheme in Australia — is highly advantageous to the venture capital funds.
If in five years their investments appear to be fliers, they can maximise profits by buying out the Government’s stake. If not, they can minimise losses by letting NZVIF take its share of the downside risk.
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