New Year Revolutions

Mid-February already! Am i too late to post my new year’s resolutions? What the heck, lets do it anyway. I titled this post “New Year Revolutions” after my partner asked our eight year-old daughter what her new year resolutions were this year. Her response was “I don’t need a revolution!” and maybe this should provide appropriate context for me this year.

For the MOVAC partners reading this for the first time, hopefully there’s no surprises…(-:

So what are our goals and aspirations this year? What we do is underpinned by a strong desire to improve the economic well being for all New Zealanders – we want to “move the needle” on job growth, wages and the standard of living. We’re doing this by actively investing in the high growth entrepreneurial sector of the economy.

Coming down from the clouds, we’ve got some pretty clear objectives for this year:

Fund 3 – Growth focus

Here’s what we need to do:

Get the new Fund up. We’re tracking well on this and targeting to close this at the end of March.
Compete two new quality investments for Fund 3. These will be investment commitments of up to $5 million into businesses that have a demonstrably scalable business model supported by existing paying customers and backed by an exceptional team. We’re starting to look at opportunities now, so if you have something that might fit contact Mark. We will do more deals if we find them and we will do larger deals under syndication if they stack up strongly.
Build our global investment partnerships. Throughout 2010 we started to build our international connections, with a particular focus on Asia, Australia and the US. We will continue to build on these contacts with the specific objective of finding one or more offshore co-investment partners in 2011 – for a Fund 2 or 3 company. We’re looking for partners that can help accelerate the growth of the companies we’ve invested in.

Fund 2 – Seed focus

We’ve closed Fund 2 to new investments, so we’re now into the proving it phase. Specifically what we’re targeting in Fund 2 for 2011 is:

200% Revenue growth on 2010. 2011 is a pivotal year for many of the companies that we have invested in in Fund 2. All of the companies are in market and now need to prove, for us and the founders, that top line growth can be significantly accelerated. It’s not a year for hyperbole and discussions on future potential – 2011 is the year we must deliver.
Secure scale-up funding rounds for the companies demonstrating that they are worthy. Some of the companies in Fund 2 will be looking for scale up rounds in 2011and we will be busy supporting that process. This funding can be found providing the companies prove their capability. Proof is critical, hope does not build an investment case, fact based evidence of revenue conversion, scalability and an understanding of how a business generates a profit does.

Angel investment

I’m personally committed to continuing to support Angel / seed investment in 2011 and looking at one at the moment. We’re working through the role that MOVAC will play moving forward now that Fund 2 is closed, but at this point we remain open to opportunity and syndicating deals with other investors Alongside this i’m partly through my two year tenure as Chair of the Angel Association and we’re working right now on how the Association should be supporting / promoting the sector moving forward. So what am I going to be doing:

One new “seed” deal this year. I’m in no hurry to expand my portfolio and will be focused on the quality of the team, execution capability and business model. I think i’ve got this one lined up but remain open to the “exceptional possibility”. I’m encouraged, however, by the investment community that’s been built in NZ and the potential to mobilise this into other good quality opportunities.
Supporting the Government wealthy migrant programme. I got an exposure to the potential of this programme late last year and i truly believe it has the potential to be a game changer. There are some significant world leaders looking to invest in New Zealand under this programme and their real value will be in their ability to a accelerate the companies they invest in into their local markets. Peter Thiel, the Paypal founder, and recent investor in Xero and Pacific Fibre is an excellent example of what this programme can achieve…..That said in 20 years time i’d love to see NZ inc. In a state where we had the breadth of local talent and money to do this.
Enrolling new Angel investors. I will continue to do what i can to promote and encourage new investors to join local investment clubs.
Fixing the “equity chasm”. I’ve documented the problem previously and will be working with the AANZ and NZVCA on short and long term solutions. THIS STUFF IS REALLY IMPORTANT…my top of the head thoughts are below.

Fixing the equity chasm

Here’s my bias for a range of short and long-term measures. DISCLOSURE: MOVAC is currently raising a new Growth Fund so we have direct exposure to and interest in these issues.

Deliver returns. As a sector – Angel and Venture – we’ve got to prove that positive returns can be delivered on a consistent basis. More stories like Trade Me, Hyperfactory, 42 Below, IceBreaker, Phil & Teds etc. will encourage flows of capital into the sector and the creation of funds with meaningful scale. This is the number one goal and requirement for a sustainable entrepreneurial investment engine.
Change the capital allocation rules for NZVIF. If you’re not deeply involved in the sector this requires some explanation. NZVIF is a govt sponsored programme to stimulate Angel and Venture investment. The programme invests public money along side private money and has been the key enabler of the sector over the last 10 years. That said the policy settings for capital allocation need to be tuned to reflect current economic reality. Essentially i’m advocating for the ability for NZVIF to allocate more public money alongside private money. To be clear they don’t need more money just the ability to spend what they’ve got and to direct it to the parts of the market where the need is greatest. It’s not rocket science. In a highly constrained market for private and institutional capital it is nearly impossible to achieve scale without some flexibility on these allocations. I’d like to see NZVIF have the ability to match private capital dollar for dollar for a venture / growth fund. Currently the answer is closer to one dollar public for two dollars private. The problem is that we have VERY VERY limited pools of private and institutional money in New Zealand and a POOR overall story to tell about venture returns. Where stuck in a perfect storm and need this sort of bridge.
Confirm the tax free status of capital gains and double down by enabling tax deductibility on “early stage investments”. Why tax deductibility? I’m posturing that this will stimulate: further Angel investment and the development of funds and pools of “scale” capital that can then be allocated to “worthy” companies looking for their second rounds of funding. Why confirming capital gains? Despite what people think NZs capital gains tax rules are vague and subject to interpretation. Giving confidence and certainty to the tax status will reduce compliance costs and further encourage domestic and international investors to the sector.
Require Government institutional funds like ACC and NZ Super to allocate capital to the growth economy. I cringe writing this as any investment should ride or fall on the results it delivers. The reality is, however, that the sector is immature in New Zealand and requires a long-term commitment to development of capability. These institutions have significant experience in the selection and oversight of fund managers and can bring capital, process and experience to the table. Here’s a rough example of the potential impact:
- ACC and NZ Super Funds under Management approx. $14b each = $28b
- 0.5% allocation to “early stage growth capital” = $140m
- Impact on ACC and NZ Super returns = negligible (either positive or negative)
- Jobs created = 920 (based on 33% of investment going to employing people at average salary of $50k, excluding leverage effect on money from other investors)
- Taxes paid = $25m (estimated PAYE, GST. Company tax would flow later)
Securities regulation. This area is tough and i don’t have the answer. My concern is that “increased regulation causes a retreat to the trenches”, brokers and advisers become highly conservative. Safe, bank bonds yielding 5% become the call of the day…the easy sell. Suggesting or dear I say recommending an investment in an early stage, high risk fund as part of an overall diversified portfolio strategy becomes fraught. Enabling investors to “self certify” their eligibility for this asset class would probably be the biggest step forward. This would enable brokers to confirm with their clients their interest in this asset class without exposing them to undue risk of penalty or worse imprisonment.
Savings. The countries with the largest pools of capital for the Angel and Venture asset class have the largest superannuation / retirement funds. It’s well documented regarding how far behind the eight ball New Zealand is in this regard and we’ve just got to keep working at it. Long-term the potential exists for the Kiwi Saver Fund Managers to allocate capital to this asset class as funds under management grow and experience grows.
Encourage Angel / private investors into Funds. Scaling businesses requires scaled pools of capital. I speak to lots of people that are happy to invest directly on a case by case basis. The challenge with this approach is it doesn’t scale and doesn’t build investment capability for New Zealand. In my view we need to have a quid both ways to manage risk – hence what i do – a combination of direct investment while financially supporting the funds and teams I like.