Annex D: Early Stage Financing Programmes
This annex outlines the principles and parameters for programmes to improve access to finance for early stage ventures, to be delivered through Industry New Zealand.
The Current Situation
The key themes in New Zealand capital markets are:
- Generally New Zealand has adequate investment capital and the venture capital market is functioning well. The venture capital market has grown significantly over the last two years at the development and expansion end of the market. However, the New Zealand venture capital market is relatively immature compared to some overseas markets.
- There are still difficulties in raising capital for innovative projects and firms at the early stage of development. While there is a small and growing number of firms that provide or broker such funding, including the entry of corporate investors, it is recognised that overall there is substantially less funding available than for later stage or expansion capital.
- Examples of such early stage development include:
- Further developing existing research with a view to developing potential commercial applications
- Establishing a firm
- Expanding a firm which is very small or has a limited track record
- There are a number of factors underlying this "gap":
- There are higher relative risks and costs of assessment and monitoring of finance required at this level of investment. Investors and financial institutions are often unwilling to lend because of a lack of track record, or to companies that are reliant on intellectual property or untested technology.
- While there is now a growing supply of venture capital available, businesses and entrepreneurs wishing to raise capital find it difficult to seek information on how to access venture capital. Companies are often too busy to determine whether they need capital, or do not know where to go to raise the necessary capital.
- Many businesses and entrepreneurs do not have the capability to promote their projects/ideas to investors. Innovators tend to lack understanding of the implications of different forms of funding, do not know how to present proposals, and are unwilling or reluctant to share control or provide information on their ideas/companies in return for capital.
- The venture capital market is highly specialised in that investors invest in industries that they understand and have expertise in. Many of the venture capital managers have expertise in the IT and high technology industry.
- Venture capital funds naturally tend to invest in industries where they get the best return based upon the perceived risks. Based on the current trends, high technology and IT industries are among the fastest growing industries and have the highest potential to provide the greatest returns.
- As a result of a combination of these factors, most early stage finance is provided through savings, friends and family. However, anecdotal evidence suggests that there is a significant level of funding available from business angel investors for early stage investment in New Zealand. Business angels are high net worth individuals with entrepreneurial backgrounds who invest equity capital directly into a business and often also work in some capacity with the business (and often become a director of the company). Research and consultation suggests that early stage ventures find it difficult to find appropriate angels (business angels generally are elusive and value their anonymity) and that angels find it difficult to match-up with appropriate deals. Apart from investment brokers which typically focus on expansion deals, only a few disparate broader angel matching services currently exist such as Canterbury Development Corporations business opportunities directory, Enterprise Waitakere's investment directory, and Nelson City Council's Venture Profiling Service.
- Similarly, there tends to be a lack of facilitation mechanisms and well-connected deal making experts at the early stage investment level who understand the problems faced in getting an idea developed, who can effectively link in with the needed expertise, and present a proposal for funding.
- The incubator development programme aims to address the skills and information gap in improving access to finance for early stage ventures. There is still a gap in terms of available finance.
Programmes' Objectives
It is proposed that Industry New Zealand:
- provide a grants programme to ensure that entrepreneurs with innovative ideas are not prohibited from realising the potential of those ideas by a lack of early stage finance
- facilitate the development of angel networks on a national basis. This would both support businesses with growth potential who may benefit from equity funding, and will provide a service to business angels who are looking to invest their money and time into growth businesses.
Programme principles
It is important that the programmes:
- do not crowd out private sector activity in this area and should accelerate and complement the development of private sector alternatives
- are based on partial funding so that there is both a partnership between central government and the private sector and commitment from participants
- are easily accessible, especially by Maori, Pacific peoples and women
- avoid high administrative costs and compliance costs
- have clear eligibility criteria
- complement and coordinate with Tech NZ and the Incubator Development Programme
- are consistent with New Zealand's international trade policy obligations.
Programmes' Parameters
Proposed parameters for the early stage financing programmes include:
A. Early Stage Venture Grants Programme
- Focus is on early stage projects and businesses, although support could also be offered on a group basis, for individuals and firms organised on a sectoral, regional or collective/tribal basis with a joint early stage project.
- Individuals and businesses must be resident in New Zealand and registered for income tax or GST purposes
- Applicants should have attempted to get alternative funding
- Applicants would be initially required to go through an appraisal process to demonstrate capability and have well developed proposals
- Applicants would be required to obtain management/mentoring advice
- No client would receive more than $50,000 at one time and no more that $100,000 over a two-year period.
- Grants would be paid on the basis on a minimum contribution of 25% of non-government funding sources (with a flexible scale according to need)
- Assistance would be offered for a number of early stage and new business development areas including:
- Market research into new markets
- Protection of intellectual property rights
- Commercialising ideas.
B. National Business Angel Network
- Would include a combination of a national matching website/database of angels and opportunities (angels could register on a confidential basis), and network forums
- Business angels with funds to invest would register directly with the national network, and provide information on their investment preferences and criteria.
- Businesses seeking equity finance would complete an application form detailing their funding requirements which would be reviewed by Industry NZ.
- Once businesses are accepted by the network, brief details would be immediately placed on the website and information included in a monthly publication. Registered investors could access further information and can request business plans.
- It would generally target businesses seeking funding of between $50,000-$500,000
- Would build on and link with existing angel networking arrangements such as First Tuesday Club, Business Opportunities Directories etc, and the Incubator Development Programme.
- Is likely to require an exemption from the Securities Act.
Delivery
Although the overall management of the grants programme will be the responsibility of Industry New Zealand, the application process could be devolved to regional organisations, such as EDAs, BIZ providers etc. In this case, Industry New Zealand would manage the approval process based on clear criteria, but scoping, documentation and the shaping of proposals/applications would be managed by local organisations. This would improve the responsiveness of the programme to regional needs. This could also be dependent on an equivalent financial commitment from regional organisations such as local government.
Support for a national angel network could be delivered via an open contestable tender process for existing organisations (deliverers) to design and deliver the services. The deliverers would receive partial funding to both design and deliver assistance within defined broad parameters. This would need to be closely coordinated with the incubator development programme.
Fiscal Implications
It is estimated that $5 million of Vote: Industry and Regional Development would be allocated for the early stage grants programme in 2000/2001.
It is estimated that the angel networking initiative would cost $200,000 pa.
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