New Investment Fund to Help High Growth SMEs - 18 July 2005
Media Statement from Hon Jim Anderton, Minister for Economic, Industry, and Regional Development
18 July 2005
A new investment programme aimed at small to medium sized businesses with strong potential for high growth, particularly in the technology area, was announced today by Economic Development Minister, Jim Anderton.
The Seed Co-investment Fund (SCIF) will be available for co-investments of up to 50 per cent of an equity investment, where other investor groups will contribute the balance required. Crown investment will be limited to $250,000 in any single proposal by pre-qualified investment partners. The programme will commit up to $40 million capital over five years.
"Many SMEs find it extremely difficult to attract investors because their businesses are smaller than those which usually attract venture capital. SCIF will support the further development of early-stage investment markets through this co-investment scheme aimed at the first-round of seed and start-up investment," Jim Anderton said.
The SCIF programme objectives are to:
- Attract and catalyse investment that would not have occurred without the programme;
- Develop greater professional capacity in the market for intermediating funds between investors and newer technology-based firms;
- Enhance networks for early-stage investment;
- Lift the skills of specialists, and numbers of specialists with the skills needed to assess and manage early-stage technology-based investment.
"The New Zealand Venture Investment Fund Ltd (VIF) will manage the SCIF. They have the necessary skills to complete due diligence, manage ongoing relations and contracts with partners, and provide input on the state of development of the early-stage investment market. In addition, VIF has appropriate incentives and governance arrangements to achieve the objectives of the programme while protecting the Crown from financial risk," Jim Anderton said.
Contact: Jim Anderton 021-777 680 or Joy Gribben 04-471 9172, 027-407 6719
Editor's Note
The VIF is a Crown Owned Company established under the Companies Act 1993 and incorporated on 1 July 2002. VIF is responsible for implementing the New Zealand Government venture capital programme.
The detail design of the SCIF programme will include consultation with principal participants in the early-stage equity markets. The government and VIF will be engaging interested parties immediately to get the programme underway.
It is anticipated that the SCIF's initial investments will be committed before July 2006 with the programme ramping up in 2006/2007.
The Government has taken significant steps over the last five years to address issues firms face in accessing finance. The programmes target the development of markets that provide equity to new high-growth firms, reduce tax and regulatory barriers to venture capital investment, and aim to reduce the information gap between firms and the investment community.
Recent measures to improve access to finance include:
- Escalator - provides innovative small businesses that need capital to expand with skills and assistance to pursue investment opportunities;
- Incubators - provides services that assist businesses to become established and profitable during their start-up phase;
- Equity Investment Fund - capital for CRIs to support larger-scale commercialisation operations ($16 million of capital);
- Pre-Seed Accelerator Fund - assists an innovative process or product move from the conceptual stage to the point where there it is demonstrably marketable;
- Taxation of Venture Capital - tax exemption for non-residents on the sale of shares in companies that they have invested into alongside the VIF;
- Limited Partnerships - introduction of a limited partnership regime to remove barriers to venture capital investment;
- Securities Law - exemption notice regime for capital-raising in specific circumstances.
Questions and Answers on Seed Co-Investment Fund
1. What Is Early-Stage Capital?
Seed and early-stage capital is money provided by individuals, companies and groups who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Seed capital is an important source of equity for early-stage companies.
2. Why Is the Government Doing This? Surely Early-Stage Capital Investing Involves Risk - Why Should the Government Take the Commercial Risks of Seed Capital Investment?
Seed and early-stage 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 achieved significant progress with initiatives such as the VIF programme. However, there is an identified gap in the provision of capital and expertise for very early-stage companies with high growth potential. These are companies that have identified an opportunity to develop an innovative product or service and require capital and/or expertise in order to commercialise the product locally and internationally. It is in response to this gap that the SCIF programme has been established.
3. Is the Government Breaking New Ground with SCIF or Do Other Governments Internationally Have Seed Investment Initiatives?
Many Governments play an active and often continuing role in nurturing the establishment and successful development of a strong local seed capital industry to capture the widely reported public benefits. Some specific examples of these are:
- United States - Small Business Investment Companies (SBIC) Programme
- Scotland - Scottish Co-investment Fund Programme
- United Kingdom - Early Growth Fund
4. What Is the New Zealand Venture Investment Fund Limited and Why Is It Managing the Seed Co-investment Fund?
New Zealand Venture Investment Fund Limited (NZ VIF Ltd) was established in 2001 to implement the Venture Investment Fund (VIF) programme of equity investment designed to accelerate the development of the venture capital market in New Zealand. The VIF programme has invested NZ$56 million, alongside private sector co-investors, in a series of privately managed venture capital investment funds.
The goals of the VIF programme and the SCIF programme are complementary but SCIF is focussed on smaller and earlier stage equity investments. Both programmes have objectives to accelerate development of the New Zealand early-stage equity capital industry by increasing the level of early-stage investment activity in the New Zealand market and to develop a larger pool of people with skills and expertise in early-stage investment.
5. How Will the $40 Million Be Invested?
The Government has committed $40 million to the Seed Co-investment Fund (SCIF). SCIF is a seed capital fund that invests its money alongside pre-approved co-investment partners who have committed their own money to early-stage investment opportunities. Investments will be made on a "deal by deal" basis, alongside pre-approved investor groups.
6. Does This Mean that the Government Is Making Investment Decisions? Shouldn't That Be Left to Private Investors?
SCIF will invest alongside private investor groups - the private investor groups that have been selected and pre-approved will make the investment decision. SCIF will invest on the same terms.
7. Who Are the SCIF Approved Investor Groups?
The SCIF manager will select and established contracts with early-stage investor groups, assessed through a rigorous due diligence process.
8. How Are the SCIF Approved Investor Groups Selected?
The SCIF approved investor groups will be selected following a rigorous due diligence. Registrations of interest will initially be called for by the manager in late 2005.
Following completion of due diligence, The Manager will enter into negotiations with selected investor groups.
Key commercial terms, reporting requirements and investor governance arrangements are being finalised with reference to international experience and practice.
9. What Type of Investment Does the SCIF Make?
The SCIF invests in young 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 initial investments must be made in businesses at the early stage of their development.
10. What Is the Maximum Amount that Can Be Invested by the Seed Co-Investment Fund?
The SCIF will normally invest no more than $250,000 in any individual company.
11. Are There Any Investment Restrictions on the SCIF Investments?
SCIF investment terms exclude investment in the following classes of businesses:
- Property development
- Retailing
- Mining
- Hospitality industry businesses
12. How Will Government Get a Return on Its Investment?
SCIF will take a pro-rata share of the net proceeds of the individual funds (including losses, if these have occurred), in the same manner as all other investors, when the fund terminates.
13. How Did Government Design the New Zealand Seed Co-Investment Fund?
The Government has consulted with managers and policy advisors associated with international programmes that provide similar schemes in countries including United Kingdom, Europe, Canada, United States and Australia. Research and consultation with early-stage equity market participants provided information on the New Zealand market. Further consultation with early-stage investors and market participants will be competed during July - September 2005 to refine the detailed design and operating configuration of the scheme.
14. I Think My Business May Meet the Criteria for Investment by the SCIF Co-Investment Approved Investor Groups, What Should I Do?
Once approved investor groups are announced, prospective companies may contact any of the SCIF approved investor groups. Details will be available on the NZ VIF Ltd website.
15. I'm an Entrepreneur with a Great Business Idea - How Do I Get Some Money?
SCIF does not make the investment decision - private investor groups do. Entrepreneurs who are seeking angel investment capital should still approach private investor groups.
16. What Are the Commercial Terms on which SCIF Invests?
The contracts signed with each SCIF Approved Investor will include key commercial terms that are consistent with international experience for these kinds of early-stage capital funds.
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