Venture Capital 0700

Disclaimer: The views expressed are those of the author(s) and do not
necessarily reflect the views of the New Zealand Treasury. The Treasury takes
no responsibility for any errors or omissions in, or for the correctness of, the
information contained in these working papers.
TREASURY WORKlNG PAPER
00/19
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3UHSDUHGE\,QIRPHWULFV/WG
ABSTRACT
New Zealands venture capital market is evolving rapidly as capital markets and
associated professional service firms respond to the demand for private equity
from businesses looking for capital and expertise to expand. The focus of this
paper is on how the venture capital market in New Zealand is developing - the
size, number and type of participants, the process of attracting and then
selecting investments, expected returns, exit strategies possible gaps, and
potential policy changes to assist the development of market. The paper is
based on interviews with twenty market participants ranging from conventional
venture capital firms to corporates with internal venture operations and
professional service firms involved in the grooming of potential business
opportunities. The market is still relatively immature and although there are
currently gaps in the market they are by no means overwhelming. Furthermore,
there is evidence that the market is segmenting and expanding to fill most of the
obvious gaps, which tend to centre around information asymmetries.
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A A s sl lu ud dy y c co om mm m s ss s o oh he ed d b by y l lh he e
N Ne ew w Z Ze ea a a ah hd d T Tr re ea as su ur ry y

F Fr re ep pa ar re ed d b by y
l lh h o om me el lr r c cs s L Ll ld d

J Ju u y y 2 20 00 00 0

8tudy undertaken by Andrew Gawith with input
frcm Gareth Mcrgan and David Grimmcnd
New Zeaahd's Vehlure Capla Markel
Ccntents
ExecutIve Summary 1
1. Backgrcund tc thIs Study 4
1.1 The perceved probem 4
1.2 Ob|eclves o lhs sludy 4
1.3 Whal s vehlure capla! 5
1.4 The approach 5
1.5 Oulhe o reporl 6
Z. Structure cf BusIness In New Zealand 7
2.1 Demahd or capla 9
3. The Venture CapItal Market 11
3.1 8lage o malurly 11
3.2 8ze o lhe markel 13
3.3 Markel parlcpahls 14
3.4 8uppy, demahd ahd dea ows 17
3.5 Felurhs 21
3.6 Exl ahd capla gahs 22
3.7 Caps 23
3.8 8lock o deas versus lhe ow 25
4. Hcw well Is the market wcrkIng! Z7
4.1 Vehlure caplasm 27
4.2 Markel aure, or smpy hgh cosl o hormaloh! 29
5. PclIcy lssues 31
5.1 lhormaloh 31
5.2 Capla gahs lax 32
5.3 8eed/eary slage hveslmehl, ahd F&D 32
5.4 Froxmly lo lechhoogy/bushess rohler 33
5.5 Olher modes 34
AppendIx l 36
AppendIx ll 38
AppendIx lll 4Z
AppendIx lV 48
New Zeaahd's Vehlure Capla Markel Fage 1 o 49
ExecutIve Summary
1. There s a wdespread perceploh lhal a ack o vehlure capla or sma
bushesses cohslrahs lher growlh, wlh adverse cohsequehces or lhe wder
ecohomy.
2. New Zeaahd's bushess seclor s domhaled by sma bushesses wlh 96 o
a ehlerprses empoyhg ewer lhah 20 peope. There aso appears lo be a
hgh bushess brlh rale wlh slarlups h 1999 equvaehl lo 22.7 o a sma
prvale hohagrculura ehlerprses.
3. Alhough lhe hgh rale o bushess slarlups pohls lo a polehlay slrohg
demahd or vehlure capla, our assessmehl s lhal probaby ewer lhah 5 o
a sma ahd medum szed rms seek such capla. The ma|orly o sma
bushesses (eg, dares) do hol seek vehlure capla because lhey helher
requre hgh rsk equly, hol oer a sucehl relurh lo equly hveslors.
Ceheray lhe slrohgesl demahd comes rom hew (ahd amosl by dehloh,
sma) compahes ookhg lo deveop hew producls ahd markels (bolh hvovhg
hgh eves o rsk), or whch lhey requre capla as we as good slralegc
lhhkhg ahd cohlacls. Crlcay, such bushesses provde a relurh lhal s
commehsurale lo lhe rsk hvoved h deveophg lhem.
4. A growhg humber o rms are aclvey hephg sma bushesses ahd
ehlrepreheurs secure vehlure capla. The key compohehls o lhe markel are:
The ehlrepreheurs wlh bushess proposlohs ookhg or capla,
Bushess advsors, rahghg rom hdvdua pracllohers lo arge proessoha
rms ahd slockbrokers, who work wlh ehlrepreheurs lo secure capla.
Vehlure caplasls, hcudhg wealhy hdvduas lhrough lo arge
hslluloha or corporale uhds, speccay orehled lo hveslhg h bushess
vehlures.
Exl oplohs whelher ah lFO, or lrade sae.
5. The suppy o capla has hcreased sghcahly over lhe pasl lhree years wlh
lhe ehlry o hew sled vehlure caplasls, arge hsllulohs, bahks ahd
corporale vehlure capla uhds. The eslabshmehl o lhe 8lock Exchahge's
New Capla Markel has aso hcreased polehla uhds avaabe.
6. There s ho cohvhchg shorlage o hgh qualy bushess proposlohs lo hvesl
h. Mosl vehlure capla rms ackhowedge (perhaps hol surprshgy) a hgh
eve o good qualy hqury. lh mahy cases vehlure caplasls proaclvey
pursue polehla deas. There s some cohcerh lhal hexperehced vehlure
capla rms may be chashg quahlly ralher lhah qualy, h lerms o deas.
Ths woud hol be uhusua durhg a perod o rapd expahsoh h a capla
markel.
7. Less lhah 5 o hla hqures al mosl vehlure capla rms evehluay
receve capla. Mosl rms have wedehed apprasa processes. The mosl
commoh reasohs or re|eclhg deas s lhal lhey are al lhe wrohg slage o
Execulve 8ummary
bushess deveopmehl (hormay loo eary), lhe producl or dea s uhkey lo
succeed h lhe proposed markel, lhey ack a credbe bushess pah, or cahhol
agree oh lhe proposed equly arrahgemehls. Fersohales, as we as sks,
pay a domhahl roe h delermhhg deas lrusl s a vla hgredehl.
8. Vehlure capla rms are geheray amhg or, ahd achevhg, relurhs o
belweeh 25 ahd 40pa rom lher porloo. Vehlure caplasls do hol
expecl lo make lhese relurhs oh each hveslmehl, bul use l as a hurde rale
or proposlohs. lh realy, relurhs oh hdvdua hveslmehls rahge rom a
lola oss lhrough lo mahy lmes lhe orgha sum hvesled. The mmalurly o
lhe markel makes l dcul lo oblah robusl hveslmehl perormahce dala.
9. Exl slraleges are a cehlra parl o vrluay a vehlure capla hveslmehls.
Havhg a delaed ahd eeclve exl pah s regarded by mosl as uhdamehla lo
reashg lhe relurhs oh lhe lme ahd capla lhal are hvesled h bushess
vehlures. Bul where lhere s a cear hlehl lo se, vehlure caplasls are abe
lo pay lax oh lher capla relurhs. ll woud ehcourage vehlure capla
hveslhg lhe goverhmehl removed lhe ambguly surrouhdhg lhe lrealmehl
o capla relurhs by makhg l expcl lhal vehlure capla hveslmehls are hol
sub|ecl lo capla gahs lax desple cear exl hlehlohs.
10. There s ho cear evdehce lhal lhere s elher a ack o vehlure capla avaabe
or bushesses, hor a shorlage o good qualy bushess proposlohs lo hvesl
h. Caps are mosl key lo exsl arouhd lhe bushess slarlup pohl, where
hormaloh s dcul ahd expehsve lo hd ahd lhere s a hgh eve o
uhcerlahly aboul qualy/ perormahce o lhe producl as we as markel
prospecls. l lhese gaps do exsl, lhey do hol hecessary cohsllule a markel
aure. Falher lhey hdcale lhe dculy h lrahsaclhg h a markel where
hormaloh s cosly.
11. There s some evdehce o ehlrepreheurs ackhg lhe lme, mohey ahd sks lo
pul logelher ah eeclve bushess proposa. 8ome vehlure caplasls argue
lhal ehlrepreheurs cahhol gure oul how lo hegolale lhs rsl hurde o
bushess, lhey may hol have lhe melle lo mahage lhe mahy olher chaehges
lhey w ace h budhg lher bushess.
12. The qualy o decsoh makhg ahd advsory servces wlhh lhe vehlure capla
markel s crlca lo ls medum lerm perormahce. Frvale seclor advsors ahd
hveslors have slrohg hcehlves as we as lhe requsle experehce lo provde
hgh qualy advce ahd make wse hveslmehl decsohs. Ahy hvovemehl by
lhe goverhmehl h lhs markel shoud deay be va exslhg payers ralher lhah
slahdaohe pubc agehces.
13. As or vehlure capla rms ah exl slralegy shoud be a prorly or ahy
goverhmehl programme lo asssl bushess deveopmehl va lhe vehlure capla
markel. The markel s malurhg sleady gaps are behg cosed ahd lhe
markel s segmehlhg lo caler or specc demahds. Alhough lhs process s
sow, lhe hcreased humber ahd rahge o bushesses aclve h lhe vehlure
capla markel over lhe pasl ve years cohrms lhal progress s behg made.
ll lehds lo be more dcul or goverhmehls lo wlhdraw rom programmes
lhah lo slarl lhem. The more permahehl a programme s perceved lo be, lhe
more key l s lo dslorl bushess behavour.
Execulve 8ummary
14. l prolabe pro|ecls are behg oregohe h lhe vehlure capla markel l mosl
probaby reales lo hormaloh. Derehces h lhe qualy ahd deplh o
hormaloh hed by lhe lwo parles h mosl vehlure capla deas cah vary
sghcahly. The lme ahd cosl o achevhg hormaloh symmelry ahd
lhereore achevhg a muluay acceplabe agreemehl cah be prohblve ahd
lhereore ho dea s cohsummaled. ll s dcul lo cohcude cohdehly lhal
such mpasses cohsllule a markel aure.
15. The ogca pohl or lhe goverhmehl lo hlervehe woud be lo reduce
lrahsacloh cosls or parlcpahls. lh lhe rsl hslahce, lhs s probaby besl
acheved va drecl assslahce lo lhose aready hvoved h groomhg ahd
mehlorhg prospeclve bushesses. The qualy o lhs work s crlca ahd
lhereore s besl el h lhe hahds o lhose wlh a cear hcehlve lo compele
lhe lask accuraley, promply ahd skuy geheray prvale seclor bushesses
ahd hdvduas.
16. A key ssue or ahy hlervehloh s lo avod dslorlhg lhe hcehlves ahd
dscphes lhal are aready becomhg eslabshed wlhh lhe vehlure capla
markel, ahd lo avod dspachg currehl ahd polehla payers. Ths s
especay mporlahl h a markel lhal hslorcay has beeh qule rage.
17. New Zeaahd's vehlure capla markel s malurhg. Nol asl ehough or some
ahd hol souhdy ehough or olhers. The uhdamehla ssue or lhs markel s lo
bud cohdehce amohgsl hveslors ahd ehlrepreheurs lhal lhe markel w
cohlhue lo deveop eeclvey. The emergehce o wemahaged ahd
successu prvale seclor vehlure capla bushesses s ah mporlahl eemehl h
lhs process. Ahy goverhmehl hlervehloh h lhs markel heeds lo be sehslve
lo geheralhg dslorlohs lhal coud uhdermhe cohdehce h lhe vgour ahd
suslahably o vehlure capla rms.

1. Backgrcund tc thIs Study
1.1 The perceIved prcblem
8ma ahd medum szed bushesses h New Zeaahd oleh compah lhal lhey hd l
dcul lo secure lhe capla lhey requre, oh sulabe lerms, lo uhderph lher
deveopmehl ahd expahsoh. The presehce o such capla cohslrahls woud
represehl a serous hahdcap lo lhe perormahce o lhe New Zeaahd ecohomy.
Aler ah hla eslabshmehl perod, some o lhe mosl rapd growlh h rms occurs
al lhe eary slages o lher deveopmehl.
From lhe pohl o vew o mahy buddhg bushesses, lhe probem cehlres oh lhe
reuclahce o bahks ahd vehlure capla rms lo back bushess deas, slarl ups ahd
expahsohs. lh cohlrasl, hveslors perceve lhe probem as behg a weak suppy o
gehuhey good bushess proposlohs lo back.
Whal s cear, s lhal lhere s ohy a weak cohsehsus oh whal lhe rea probem s:
ls lhe markel ahg lo behave ralohay!
Do rms have uhreaslc expeclalohs o lher vaue lo polehla hveslors!
Are lhere sghcahl hormaloh gaps lhal buhl lhe eeclve uhclohhg o lhe
markel or bushess hahce!
These are mporlahl ssues lo cohsder beore decdhg how lo address whal mghl
be a ma|or mpedmehl lo bushess deveopmehl ahd lhe perormahce o lhe wder
ecohomy.
The goverhmehl may be abe lo pay a useu roe h resovhg some shorlcomhgs h
lhe bushess hahchg markel ahd l has commssohed lhs sludy lo hep mprove
ls uhderslahdhg o lhe vehlure capla markel.
1.Z ObjectIves cf thIs study
lh lhs sludy we ocus oh areas hcudhg:
1. The mah characlerslcs o New Zeaahd's bushess seclor reevahl lo lhe
vehlure capla markel.
2. The sze ahd scope o lhe vehlure capla markel.
3. Fossbe gaps, h lerms o scae ahd scope, h New Zeaahd's vehlure capla
markel.
4. The halure o lhe dea ow.
5. Evdehce o horma capla ralohhg ahd/or markel aure.
6. lhlalves lhe goverhmehl coud lake lo mprove desred oulcomes.
Backgrouhd lo lhs 8ludy
The Mhslry o Commerce (how Mhslry o Ecohomc Deveopmehl) has uhderlakeh
ah ahhua survey o lhe vehlure capla markel h New Zeaahd. Ther 8ources o
capla avaabe lo sma ahd medum sze rms" reporls provde a sl o khowh
vehlure capla rms ahd delas o lhe rms' capla ahd hveslmehl slralegy. They
have aso carred oul a sludy ookhg al access lo capla or sma ahd medum sze
rms (8MEs)
1
. These reporls are useu backgrouhd lo a more delaed ook al New
Zeaahd's vehlure capla markel.
The cehlra am o lhs sludy s lo expahd our uhderslahdhg o lhe vehlure capla
seclor parlcuary ls sze, scope, processes, gaps, elc, as a vauabe hpul lo pocy
deberalohs.
1.3 What Is venture capItal!
Vehlure capla s a subsel o lhe broad capla markel, whch ehcompasses a
sources o hahce lhal are requred lo cohducl bushess. Arguaby a equly capla
s a orm o vehlure capla h lhe sehse lhal l s rsk capla, lhough ceary lhe
amouhl o rsk vares cohsderaby lhroughoul lhe equly markel.
Whal geheray sels vehlure capla aparl rom equly capla as a whoe!
ll lehds lo be realvey qud ahd hehce lhe lerm palehl capla.
ll s more aclve, or hahdsoh, capla lhah equly geheray vehlure caplasls
lake more lhah a passhg hleresl h lhe bushess ahd are expecled lo oer
more lhah smpy mohey.
ll s accompahed by a cear exl slralegy, reeclhg lhe realve qudly o lhe
capla hveslmehls uhderlakeh.
ll s ah hveslmehl h rea ahd hlahgbe assels a bushess ralher lhah a
hahca assel or hslrumehl such as a ready lradabe share.
As compahes grow ahd malure lhey are more key lo access pubc equly markels
ahd cohvehloha debl markels, hghghlhg lhe acl lhal vehlure capla s smpy
lhe hgh rsk, hgh relurh compohehl o lhe capla markel wlh a ew specc
characlerslcs.
1.4 The apprcach
The approach we have lakeh lo meel lhe ob|eclves o lhs sludy s lo cohducl bolh
deskbased research ahd a seres o hlervews wlh parlcpahls h lhe vehlure
capla markel. We have carred oul 13 hdeplh aceloace hlervews ahd seveh
leephohe hlervews. Ceheray hlervews have beeh cohducled ushg ohe o lwo
gudes lhal are allached as Appehdx ll lo lhs reporl. However, h praclce lhe
peope/ orgahsalohs were oleh qule derehl ahd lhereore adherhg slrcly lo a
sel o queslohs woud have deealed ohe o lhe mah purposes o lhe sludy lo
gah a beller dea o lhe scope o lhe vehlure capla markel.

1
Fhahce 8cophg Feporl, Jasoh LeuhgWa, Mhslry o Commerce, December 1999.
Backgrouhd lo lhs 8ludy
The malera rom lhe hlervews has beeh used lo shape lhe commehls lhal make
up lhe buk o lhs reporl. Where lhere are specc pohls rom hlervews lhal
hghghl, cohrm or cohlradcl our observalohs we have holed lhem h lhe orm o
hdehled lexl ahd ushg a sghly smaer ohl. These peces o lexl are hol lhe
precse words used by hlervewees ahd we have lred lo ehsure ahohymly. Mosl
are based oh commehls rom |usl ohe or lwo peope ahd cahhol be regarded as
represehlalve. Nohelheess, lhey are made by some o lhe mosl sehor ahd
experehced execulves wlhh lhe vehlure capla markel ahd h our vew provde
vauabe hsghls. lh some cases we have used commehls lhal show lhe spread o
ophoh h lhe markel aboul where polehla cohslrahls reay e.
1.5 OutlIne cf repcrt
The core seclohs o lhs reporl are:
Ah ahayss o lhe bushess seclor h New Zeaahd hghghlhg lhe parlcuar
characlerslcs lhal have ramcalohs or capla markels ahd parlcuary lhe
vehlure capla markel Chapler 2.
Ah oulhe o lhe vehlure capla markel ls slruclure, lhe parlcpahls, ahd
sze Chapler 3
A dscussoh o whal cohsllules markel aure ahd lhe evdehce ahd
characlerslcs o such aure wlhh New Zeaahd's vehlure capla markel
Chapler 4.
A revew o lhe pocy ssues lhal arse rom lhs sludy ahd some commehls oh
whal hlalves mghl be cohsdered lo urlher ehhahce lhe eeclvehess o lhs
mporlahl parl o lhe capla markel Chapler 5.

Z. Structure cf BusIness In New Zealand
New Zeaahd s a sma ecohomy where bushess s cohducled oh a sma scae
96 o ehlerprses empoy 19 or ewer u lme sla sma ahd medum
ehlerprses (8MEs). 84 o ehlerprses empoy ve or ewer peope sma
ehlerprses.
8MEs domhale lhe New Zeaahd bushess seclor lo a degree hol ouhd h mosl
olher couhlres. lh Auslraa 82 o ehlerprses empoy 19 or ewer peope (1994
dala), compared lo 96 h New Zeaahd h 1999 (91 h 1994); see delas h
Fgure 2.1 beow.
|igure 2.1 8ize Distributicn cf Manufacturing |ndustry
2

Percentage cf EnterprIses /
EstablIshments
Fercentage cf |mplcyment
Ehlerprse 8ze (FTEs) Ehlerprse 8ze (FTEs)
Ccuntry Year 1-19 Z0-99
100-
499 500+ 1-19 Z0-99
100-
499 500+
Auslraa 1994 82.0 14.1 3.4 0.4 22.3 27.5 32.7 17.5
Auslra 1993 43.2 41.5 10.0 5.2 4.3 26.9 23.4 45.5
Cahada 1994 50.6 37.8 10.2 1.4 7.6 27.8 39.4 25.2
Czech Fepubc 1995 94.9 2.9 1.6 0.5 18.0 10.3 24.6 47.1
Cermahy 1993 71.5 19.4 4.1 5.0 19.9 22.1 10.8 47.2
Creece 1992 59.0 34.3 6.0 0.7 20.4 35.0 27.5 17.2
llay 1992 89.7 9.0 1.2 0.2 38.7 25.0 17.3 19.0
Japah 1994 74.3 21.6 3.6 0.5 22.4 30.9 25.0 21.6
Korea 1994 69.5 26.1 3.0 1.3 20.5 32.0 14.2 33.3
Luxembourg 1992 79.4 15.0 4.7 0.9 13.0 22.1 35.0 29.9
Mexco 1994 80.3 15.1 2.7 2.0 12.2 21.2 15.6 51.0
Nelherahds 1993 78.0 17.2 4.3 0.6 15.7 24.8 27.8 31.7
New Zeaahd 1994 90.6 7.7 1.5 0.3 27.3 24.7 24.0 24.0
Norway 1994 40.2 47.4 7.5 4.9 9.3 34.9 18.2 37.6
Forluga 1994 85.8 11.8 2.2 0.2 23.5 32.3 27.8 16.5
8wedeh 1993 44.4 40.8 12.4 2.4 6.9 23.1 35.3 34.7
8wlzerahd 1991 84.2 12.3 3.1 0.4 20.2 26.9 31.3 21.5
Turkey 1992 36.6 47.1 13.3 3.0 5.5 22.2 32.2 40.1
Uhled Khgdom 1994 82.7 12.9 3.7 0.8 13.2 21.6 28.9 36.3
Uhled 8lales 1993 73.7 19.8 5.1 1.4 7.4 14.6 16.5 61.5
Average 70.5 ZZ.7 5.Z 1.6 16.4 Z5.3 Z5.4 3Z.9
NOTE: 8lalslca uhl eslabshmehl excepl or lhe Uhled 8lales, New Zeaahd, Czech Fepubc,
llay, Luxembourg, Forluga (ehlerprses). 8ze casses der: Cahada, New Ze aahd: 019;
Mexco: 115, 16100; Norway: 119, 2099, 100199, 200-; Czech Fepubc: 024; 2599.

2
Mhslry o Commerce, 8MEs h New Zeaahd: 8lruclure ahd Dyhamcs, Jah 2000, Tabe 11,
p27.
8lruclure o Bushess h New Zeaahd
Nol surprshgy mosl bushess brlhs ahd dealhs occur amohgsl sma rms. lh
1999 93 o a slarlups ahd aures were or ehlerprses empoyhg ve or ewer
peope
3
. 8urvva rales vary depehdhg oh lhe hla sze o lhe ehlerprse lhe
smaer lhe bushess lhe ower lhe survva rale, wlh |usl 40 o sma ehlerprses
sl operalhg uhder lhe same owhers ve years aler slarlhg, see Fgure 2.2. As
lhe aulhors o lhe reporl rom whch lhe graph s lakeh pohl oul, lhe survva
slalslcs are perhaps overy slrhgehl h lhal ehlerprses are deemed lo have aed
lhey shl ocaloh or chahge owhershp.
|igure 2.2
4

Survival Rates of 1995 Enterprise Births
0
10
20
30
40
50
60
70
80
90
100
0-5 6-9 10-19 20-49 50-99 100+
Size of Enterprise
%

o
f

1
9
9
5

E
n
t
e
r
p
r
i
s
e

B
i
r
t
h
s

S
u
r
v
i
v
i
n
g
1996
1997
1998
1999

lh 1999 bushess slarlups, or brlhs, accouhled or |usl uhder a quarler o a hoh
agrculure 8MEs h New Zeaahd. Alhough we have hol beeh abe lo ocale
comparalve gures or olher couhlres we regard lhs rale o slarlups as behg very
hgh. Al easl lwo mporlahl ssues ow rom lhe realvey hgh humber o slarlups
ahd lhe sma scae o our ehlerprses:
There woud appear lo be a slrohg demahd or seed ahd slarlup hahce. As we
pohl oul beow lhal does hol hecessary meah buddhg ehlrepreheurs w seek
lhal hahce rom lhe vehlure capla markel. They may lake oh bahk debl va
lher house, hvesl lher owh lme or lle or ho remuheraloh hcreashgy
commoh h lhe hew hgh lech areas where solware deveopmehl s hol
parlcuary capla hlehsve.
New Zeaahd's bushess culure seems lo cehlre oh eslabshhg hew bushesses
ahd deveophg lhem lo a sze cohsslehl wlh lhal o lhe oca markel.
Compahes wlh hlerhaloha appea w oulgrow lhe lypca New Zeaahd
bushess, bul, more oleh lhah hol, lhese bushesses are lheh sod lo or lakeh
over by, oreghers. lh some cases lhe ouhdhg ehlrepreheurs begh lhe
process agah by becomhg ahge hveslors hgh proe exampes hcude Doug
Myers, Neve Jordah, Dehhs Chapmah.

3
lbd, p 12.
4
lbd p14.
Z.1 Demand fcr capItal
Alhough 8MEs are a domhahl parl o lhe New Zeaahd bushess seclor, lhey are
hol hecessary capla huhgry, parlcuary or equly capla, whch s lhe ocus o
lhs sludy.
lh a reporl revewhg Auslraa's Fooed Deveopmehl Fuhd
5
(essehlay a scheme lo
ehcourage vehlure capla hveslmehl) lhe aulhors pohl lo ahayss lhal suggesls
equly uhdhg s hol ah ssue or lhe vasl ma|orly o 8MEs h Auslraa. The BlE
6

eslmaled exlerha equly h a sampe o sma rms al aboul 4. The lhduslres
Commssoh
7
eslmaled lhal ess lhah 2 o 8MEs wlh 2 lo 19 empoyees
(hcudhg lhe operalor) receved equly rom 'bushess ahges', wealhy hdvduas
hol prevousy assocaled wlh a bushess who drecly hvesl h sma rms. The
Yeow Fages 8ma Bushess lhdex
8
mped lhal ewer lhah 2 o sma bushesses
are seekhg equly hahce.
The cear mpressoh rom lhe above research s lhal lhe proporloh o 8MEs
aclvey seekhg vehlure capla s probaby very sma. There are approxmaley
190,000 sma hohagrculura seclor bushesses h New Zeaahd. Based oh say 30
vehlure capla rms h New Zeaahd revewhg oh average 200 independent requesls
or capla a year, lhe humber o sma ehlerprses searchhg or capla s probaby
somewhere belweeh 5,000 ahd 10,000, or lo be geherous, belweeh 3 ahd 6 o
a 8MEs.
Aholher approach s lo lake lhe ralo o aclua hveslmehls lo hla apprasas lhal
mahy vehlure capla rms pul al belweeh 3 lo 5 ahd lheh appy lhal lo lhe
humber o deas acluay cohsummaled.
The Auslraah Vehlure Capla Jourha/ FrcewalerhouseCoopers survey o vehlure
capla h Auslraa ahd New Zeaahd eslmaled 25 hew deas were compeled h
New Zeaahd over 1999. Eveh we were lo be geherous ahd argue lhal 100 vehlure
capla deas were compeled h a year, ahd lhe cohversoh rale rom deas
apprased lo deas dohe was |usl 2, l mpes a lola o 5000 rms aclvey
ookhg or vehlure capla, or ess lhah 3 o a hohagrculure 8MEs.
The Creal New Zeaahd Bushess Vehlure compelloh ooks ke recevhg arouhd
1400 hla hqures wlh over 400 rms gohg oh lo prepare a ve page bushess
pah. Ths respohse s we ahead o whal was expecled based oh experehce h
olher couhlres. Nohelheess, h lhe cohlexl o lhe lola 8ME popualoh, 1400
hla hqures s ess lhah 1 o lhe lola polehla popualoh.

5
Fevew o lhe Fooed Deveopmehl Fuhds Frogramme, a reporl prepared by ocers o lhe
Deparlmehl o lhduslry, 8cehce ahd Fesources, Treasury ahd lhe Auslraah Tax Oce,
17 Juhe 1998.
6
Bureau o lhduslry Ecohomcs (1987), lhhovalve sma rms h emerghg hduslres, 8mall
Business |eview 1987, pp 1652, ACF8, Cahberra.
7
lhduslry Commssoh (1997), |nfcrmal |quity |nvestment, 8ma bushess research program,
ACF8, Cahberra.
8
Yeow Fages Auslraa (1995), 8mall Business |ndex: A 8pecial |epcrt 8mall Business Grcwth
Aspiraticns and the |cle cf |xpcrts.
Mosl 8MEs are hol lryhg lo grow ahd h mahy cases have lle scope lo grow lhe
corher dary, lhe uhch bar, servce slaloh, elc. 8ma bushesses lhal are ookhg
lo grow w lehd lo ook al relahed earhhgs or debl hahce (elher orma or
horma) secured over lher house. Vehlure capla s hol a source o capla lhal
ready sprhgs lo mhd or lhe lhousahds o 8MEs lhal are ookhg or securly
ralher lhah advehlure. Mahy are hosle lo lhe dea o havhg lo rehqush some
owhershp h exchahge or capla, eveh lhough capla s hol a lhal s behg
oered. From lhe perspeclve o lhe vehlure caplasl, lhese bushesses do hol
provde sucehl scope or growlh ahd lhereore prol.
Alhough, lhe ma|orly o rms seekhg vehlure capla are sma, l s hol lher sze
aohe lhal dslhgushes lhem. Ther age ahd lher rsk are aso mporlahl
characlerslcs. Frms ookhg or vehlure capla are geheray youhg bushesses
ookhg lo grow ahd lhey requre bolh capla ahd cohlacls lo hep deveop hew
producls ahd opeh up hew markels.
The rsks or vehlure caplasls hveslhg h sma ahd youhg bushess are geheray
hgher lhah hveslhg h weeslabshed medum szed bushesses. Youhg
compahes do hol have a lrack record lo |udge lhem by. 8ma compahes slrugge
lo dever lhe laehl ahd experehce lo reassure polehla hveslors lhey cah grow
successuy. Hehce lhe ocus o mahy vehlure caplasls s oh weeslabshed
medum szed bushesses ookhg lo expahd. However, overseas experehce has
showh lhal as prol opporluhles are lraded away h lhs segmehl, vehlure
caplasls lehd lo have acqured lhe experehce helworks lo aow lhem lo push
dowh hlo earer slage bushess hveslmehls.

3. The Venture CapItal Market
There are a humber o aspecls o lhe vehlure capla markel lhal hep bud a
cearer pclure o ls scae ahd scope, how l operales, lhe characlerslcs o suppy
ahd demahd, lhe halure o lhe ow o deas ahd where lhere are polehla gaps h
lhe markel. lh lhe oowhg seclohs we dscuss lhese ssues, bul rsly we sel oul
a bre descrploh o lhe vehlure capla markel by slage o bushess deveopmehl.
3.1 Stage cf maturIty
Sood cap11a1
Few eslabshed vehlure capla rms gel hvoved h provdhg seed capla hahce
lo uhderlake producl research, deveopmehl o ah hla cohcepl ahd some
assessmehl o markel prospecls, or lhe bushess case.
Typcay hcubalors, oca aulhorly malchhg servces, specasl seed capla
uhds, ahge hveslors
9
, uhversles ahd proessoha bushess servce provders
such as accouhlahls ahd awyers provde hpul al lhs very eary slage o bushess
deveopmehl. lhdvdua ehlrepreheurs ahd lher rehds ahd amy w oleh be
mporlahl sources o capla al lhs slarl up slage.
Frobaby lhe besl exampe o a gehuhe seed capla uhd h New Zeaahd s
Uh8ervces cosey hked lo Auckahd Uhversly.
S1a11-up cap11a1
To lrahsorm deas hlo bushesses hormay requres capla beyohd lhe meahs or
appelle o core ehlrepreheurs, who may have uhded lhe bushess lo lhs pohl.
They w seek addloha capla rom ahge hveslors ahd sma vehlure capla
rms ahd assslahce rom lhe ma|or pubc accouhlhg rms. The equly, h lhe
orm o capla or uhcharged servces, w hep lo gel hew vehlures operalhg as
edghg bushesses, wlh producls, a markel ahd a revehue slream. Ths slage ays
lhe ouhdaloh h lhe orm o hormaloh ahd credbly lo allracl urlher capla or
growlh rom lradloha vehlure capla compahes al a aler slage.
Oovo1opmon1, oxpans1on o1 ox11 cap11a1
Mahy sma bul weeslabshed bushess may seek vehlure capla hol |usl lo
hahce growlh, bul lo provde lhe helworks, markels, slralegc vsoh, elc cruca lo
eeclve growlh. Tradloha vehlure capla compahes oer lhe sorl o aclve
capla lhal supporls lhe growlh o sma compahes. Fuhds may be used lo hahce
hcreased producloh capacly, markel or producl deveopmehl ahd/or provde
addloha workhg capla. Capla provded or lurharouhd slualohs s aso
hcuded h lhs calegory, as s lhe rehahchg o bahk debl.

9
We use lhe lerm ahge hveslors h lhs reporl lo hcude hgh hel worlh hdvduas. 8lrcly
speakhg lhere s a derehce ahge hveslors cah be lhoughl o as aclve equly hveslors,
whereas hgh hel worlh hdvduas are oleh passve hveslors.
The Vehlure Capla Markel
lh some cases bushess owhers are ookhg or hveslors who w ehabe lhem lo
rease al easl some o lhe equly lhey have bul up h lher compahy, ahd
ulmaley lo arrahge a sulabe exl or lhem, va a pubc slhg or lrade saes.
managomon1 uy-ou1s and uy-1ns
Normay lhs hvoves lhe provsoh o capla lo a leam o mahagers wlhh a
realvey malure compahy lo buy oul exslhg owhers, or lo hahce a hew
mahagemehl leam lo lakeover ah exslhg owheroperaled bushess. There are
specasl MBO rms operalhg h lhe New Zeaahd markel lhal have allracled
vehlure capla rom ma|or hsllulohs.
|igure 3.1 Characteristics cf the venture capital market

lhcubalor
Early stage

Deveopmehl
Expahsoh
Malure

Characteristics cf the market
The oowhg geherasalohs hghghl some o lhe ssues lhal sma bushesses ahd
vehlure caplasls ehcouhler wheh hleraclhg wlh capla markels.
Folehla cahddales or vehlure capla are hol geheray amar wlh whal s
avaabe rom capla markels ahd whal s requred lo oblah hahce.
Vehlure capla rms oleh slrugge lo cosl eeclvey assess pro|ecls. They use
specasaloh ahd helworks as a course ler or polehla pro|ecls. Folehla
hveslors hd l dcul lo |usly lhe lme ahd eorl hvoved h pursuhg slarl
up opporluhles gveh lhe sma sums hvoved.
8ome ehlrepreheurs lehd lo shuh equly hahce, whch lhey see as a lhreal lo
lher owhershp. They preer lo morlgage lher homes lhah lo share lher
prospeclve wealh.
Mosl orma hveslmehl uhds have hveslmehl crlera lhal are geheray ohy
oosey adhered lo avodhg hveslhg h properly ahd eary slage deveopmehl
appear lo be lhe lwo crlera mosl slrcly comped wlh.
lqudly s a serous ssue or polehla hveslors, lhereore vehlure caplasls
pace huge mporlahce oh havhg ah eeclve exl slralegy h pace beore
hveslhg.
high
rich
poor
low
I
n
f
c
r
m
a
t
I
c
n

r
I
s
k

U8 trends
Ah hcreashg share o lola vehlure capla hvesled h lhe U8 s gohg lo eary slage
bushess deveopmehl. Over lhe December 1999 ahd March 2000 quarlers |usl
uhder ha o a hew vehlure capla hvesled wehl lo eary slage deveopmehl
compahes. Oh average, ormalve slage compahes receved |usl over S10 moh
heary doube lhe average amouhl hvesled h lhese sorl o compahes a year earer.
These sums are arge by New Zeaahd slahdards ahd hghghl lhe geheray arger
scae o bushesses (eveh al ah eary slage), ahd markel opporluhles compared lo
here.
3.Z SIze cf the market
ll s cear lhal lhe humber o payers h lhe vehlure capla markel has hcreased
sghcahly over lhe pasl lhree years. The amouhl o capla avaabe or hveslhg
has aso hcreased subslahlay as hsllulohs ahd ma|or compahes have become
more aclve h lhe vehlure capla markel.
Eslmales o |usl how bg lhe vehlure capla markel s h New Zeaahd are rough,
bul ohe prvale seclor eslmale s lhal l s worlh h lhe order o S2 boh, ha o
whch s hvesled ahd lhe olher ha sl avaabe or hveslhg.
Thal gure s realvey sma by comparsoh lo lhe lola vaue o
sharehoders/equly h a New Zeaahd bushesses o S171 boh h 1997/98
10
.
Eveh excudhg lhe vaue o sled equly al arouhd S50 boh, vehlure capla sl
ohy represehls ess lhah 2 o a uhsled equly hveslmehl.
By comparsoh wlh bahk (M3 hsllulohs) ehdhg lo bushesses o |usl over
S40 boh, lhe vehlure capla uhds o S2 boh ooks more mpressve. Aholher
perspeclve s lo compare bahk ehdhg lo bushesses over 1999 S7.3 boh wlh
ah eslmale o lhe vaue o vehlure capla deas compeled asl year
S135.76 moh.
11

The oowhg labe provdes some hlerhaloha perspeclve oh lhe realve
sghcahce o vehlure capla hveslmehl wlhh lhe cohlexl o lola capla
expehdlure.
Va1uo o1 now von1u1o cap11a1 doa1s as _ 1o1a1 p11va1o cap11a1 1nvos1mon1 spond1ng
US AustralIa
New
Zealand
1988 0.8
1999 2.4 0.8 0.8

10
Bushess Aclvly 8lalslcs, 1999, 8lalslcs New Zeaahd, Tabe 4.01.
11
Auslraah Vehlure Capla Jourha, March 2000, p6.
3.3 Market partIcIpants
lh lhs secloh we oulhe lhe rahge o payers h lhe vehlure capla markel ahd
lher ob|eclves hol a parlcpahls are ocused oh lhe provsoh o vehlure capla.
There are lhree basc payers lhe ehlrepreheur wlh a bushess proposloh, lhe
hveslor(s), or vehlure caplasls, ahd a rahge o peope ahd orgahsalohs cruca h
brhghg lhese lwo parles logelher ecehly ahd successuy.
Tno on11op1onou1
The ehlrepreheur s bolh lhe orghalor o lhe dea ahd lhe rsl hveslor. They are
prepared lo work oh lhe dea oleh or ho mohelary reward. lh mahy cases lhey w
uhd deveopmehl rom lher owh capla resources, hcudhg morlgaghg lher
house. lh lhs sehse lhey are lhe rsl hveslors. Over lhe year ehded March 1999,
over 43,000 hew ehlerprses were slarled equvaehl lo 22.7 o a sma prvale
seclor hohagrculura ehlerprses.
Ah mporlahl ssue rased durhg hlervews wlh parlcpahls h lhe vehlure capla
markel was whelher lhe soca ahd ecohomc cmale h New Zeaahd was
sucehly cohducve lo slmualhg ehlrepreheura aclvly, ahd lhereore lhe
suppy o buddhg bushesses. 8ome argue slrohgy lhal bushess rsklakhg by
hdvdua New Zeaahders has beeh sled by a culure lhal cohdemhs aures ahd
despses success. Feope may orm bushesses bul lhey are realvey
uhadvehlurous h mosl cases seekhg ah hcome ahd a eslye, ralher lhah sleady
growlh.
There are a hosl o hhovalve ahd cever peope who have eslabshed lher owh
bushess, be l a sma ehgheerhg workshop, or a reslaurahl, bul lhey are reay
hobby bushesses, ralher lhah wealh crealhg ehlerprse. ll s lhe aller lype o
bushess we ack, accordhg lo some.
The couhler vew pul orward s lhal lhe ow o good prospeclve bushesses s hol a
probem. The hgh eve o hla hqury or lhe Creal New Zeaahd Bushess
Vehlure was cled as evdehce o a lhrvhg bushess culure. Accordhg lo ohe
sghcahl vehlure capla hveslor, lhe suppy o good deas ahd good peope lo
back lhem s hol a cohslrahl h New Zeaahd.
8uppcrters
The hexl group o hveslors" h lhe vehlure capla process mghl oosey be
reerred lo as supporlers. These are peope ahd orgahsalohs lhal hep
ehlrepreheurs lo lrahsale lher deas hlo vabe bushesses. Assslahce rahges
rom:
Casua advce rom a mehlor, rehds, bushess assocales, specasl suppers,
elc.
Facles lo uhderlake deveopmehl work bushess hcubalors lhal provde
space ahd h some cases equpmehl.
Basc bushess advce rom oca accouhlahls, awyers ahd bahks, ahd servces
such as Bzho ahd oca aulhorly ecohomc deveopmehl agehces.
ll was made cear by severa rms hlervewed lhal lhe qualy o lhe advsory
servces was cruca lo lhe success o ahy dea. Fubcy uhded servces were
regarded as dehley heror h lerms o qualy compared lo prvale seclor
servces lhal more ready drew oh deep bushess experehce ahd exlehsve
persoha ahd bushess helworks.
Equly capla ahd proessoha bushess parlcpaloh rom ahge hveslors or
seed capla uhds are aso parl o lhe supporl slage.
There s al easl ohe specasl seed capla uhd operalhg h New Zeaahd ahd
al easl ohe corporale aclvey provdhg seed ahd slarlup capla or bushess
vehlures.
Bushess slralegy ahd advsory servces rom ma|or pubc accouhlhg rms. lh
some cases lhese rms are ookhg al provdhg servces al lle or ho charge h
exchahge or equly.
The cohcepl o provdhg servces or ree h exchahge or equly s ave wlhh New
Zeaahd's vehlure capla markel ahd s ah mporlahl ralohae or behg hvoved h
lhs markel. The ma|or proessoha accouhlhg rms are ookhg al ways o
achevhg a lradeo belweeh lher ees or servces provded ahd a slake h lhe
cehl's bushess. The praclce s commoh h olher couhlres
12
where lhese rms
operale, bul lhe exlehl o lhs lype o bushess h New Zeaahd makes l dcul or
lhe ma|or proessoha rms lo |usly sellhg up a healy se cohlahed uhl.
Fuhhhg such a scheme as parl o lhe gehera bushess advsory servces rases
ma|or cosl aocaloh ahd rsk ssues.
Aholher mporlahl ralohae or behg hvoved h supporlhg bushess slarlups s
lhal al easl some o lhese compahes become vauabe ee payhg cehls as lhey
grow.
Qua111y o1 suppo11
8evera hlervewees holed lhal lhe qualy o lhe supporl ahd mehlorhg servces
was cruca h delermhhg whelher bushess deas were successuy lrahsaled hlo
successu bushesses. The Bzho servces were hol regarded as behg sucehly
sophslcaled lo auhch sghcahl hew bushesses.
The ssue o qualy reales lo lhe eve o experehce, ahd parlcuary lhe cohlacls
ahd helworks, lhal mehlors ahd advsors coud brhg lo emerghg bushess. The
ecehcy, h lerms o lme ahd resources, wlh whch prospeclve bushesses cah
dehly lhe approprale roule or lher deveopmehl, cah make lhe derehce
belweeh success ahd aure. Two hlervewees emphassed lhal lhe perormahce o
lhs parl o lhe vehlure capla markel s cruca. Who you khow ralher lhah whal
you khow s ceary a very mporlahl eemehl o success h deveophg bushesses.

12
Cash! How od ecohomy, The Ecohomsl, May 6 2000, p77.
Vehlure/ehlerprse compellohs lhe Creal New Zeaahd Bushess Vehlure
13

compelloh has beeh successu al demohslralhg lhere s hleresl rom buddhg
ehlrepreheurs ahd supporl rom bushess mehlors, proessoha servce rms ahd
ahge hveslors h aclve equly hveslmehl. ll has rased lhe proe o lhe vehlure
capla markel ahd has aso demohslraled lhe alehl poo o bolh bushess deas
ahd lhe whghess o experehced bushess peope lo cohlrbule eeclvey (ahd
geherousy) lo bushess deveopmehl. 8ee Appehdx lV or delas.
|unders
For lhe vehlure capla markel lo uhcloh, lhere musl be peope wlh capla who
are prepared lo lake rsks. Vehlure caplasls do hol smpy provde equly capla
lhey pay ah mporlahl roe h ehhahchg bushess opporluhles va lher helworks,
assocalohs ahd slralegc lhhkhg. The mporlahce o helworks ahd cohlacls s
parlcuary mporlahl h lhe New Zeaahd vehlure capla markel gveh lhe sma
sze o lhe ecohomy ahd mled markel polehla ocay. Access lo hlerhaloha
cohlacls s a cruca aspecl o lhe more successu vehlure capla rms h New
Zeaahd.
There s a wde rahge o vehlure capla provders, hcudhg:
Ahge hveslors
Nelworks o prvale hveslors oleh mahaged by proessoha rms ahd
slockbrokers
8eed capla uhds
Cohvehloha vehlure capla uhds, sel up wlh lhe specc purpose o aclve
equly hveslhg. The sl o bushesses hvoved h vehlure capla has expahded
sleady over lhe pasl ve years. lh 1998 lhe Mhslry o Ecohomc
Deveopmehl
14
dehled 11 provders o deveopmehl capla. Two years aler
lhal humber has hcreased lo heary 40.
Corporales wlh vehlure capla uhls:
Teecom's |ohl vehlure wlh Advehl h a TMT (Techhoogy, Meda ahd
Teecommuhcalohs) uhd behg mahaged hdepehdehly ahd advsed by Drecl
Capla Frvale Equly
Felcher Chaehge's lhvehlure
Carler Hol Harvey
Loh Nalhah aso have lher owh vehlure uhds
8lockbrokhg rms ahd lhe New Capla Markel (NCM)
8uperahhualoh ahd uhds mahagemehl compahes
Bahks

13
A compelloh based oh a mode used by McKhsey & Co hlerhalohay. The compelloh,
ruh or lhe rsl lme h New Zeaahd lhs year, has beeh very successu by comparsoh wlh
McKhsey's experehce h olher couhlres.
14
8ources o Capla Avaabe lo 8ma ahd Medum Ehlerprses, Mhslry o Ecohomc
Deveopmehl, alesl ahhua reporl Juhe 2000.
Overseas hveslors al easl lwo Auslraah vehlure capla rms
The goverhmehl, lhrough ls hveslmehl h lhe Creehslohe Fuhd, eslabshed h
1993
From lhe process o hdhg reevahl peope/orgahsalohs lo hlervew or lhs sludy
l s cear lhal lhe humber o polehla sources o vehlure capla has growh slrohgy
over lhe pasl lhree years. Ths probaby reecls our key lrehds:
Foor relurhs rom mahy sled equly hveslmehls (see lhe ANZ's work oh
ecohomc vaue added by New Zeaahd bushesses
15
savers are ookhg or
beller vaue rom lher hveslmehls).
The heed or good slralegc lhhkhg, beller bushess helworks ahd hks hlo
hlerhaloha markels has hlehsed as mahy sma ahd medum szed
bushesses rease lhal lo grow lhey w heed lo compele h lhe goba markel
pace, ralher lhah |usl New Zeaahd.
The lechhoogy/ hormaloh revouloh has reduced or emhaled ehlry barrers
lo mahy arge ahd vauabe markels. Ehlrepreheurs wlh lhe approprale
lechhca sks cah auhch realvey ow cosl bushesses. Ahd h some cases
lher producls opeh up ehormous growlh polehla lhal musl be uhded
8wchlec h Chrslchurch s probaby lhe besl recehl exampe o lhs
phehomehoh.
The hcrease h lhe humber o polehla sources o vehlure capla may aso
reecl rshg demahd rom lhe growhg humber o sma/hursery bushesses
ookhg lo expahd. The acl lhal New Zeaahd s seeh as a realvey uhlapped
bushess hursery may aso have allracled overseas uhds hlo lhs markel.
lhcreased demahd coud aso be due lo good deas behg arblraged away
oshore.
3.4 Supply, demand and deal flcws
Supp1y
The suppy o vehlure capla has uhdoubledy hcreased over lhe pasl lhree lo ve
years, hol |usl because o ah hcrease h lhe humber o payers h lhe markel bul
aso because o who lhese payers are. The ehlry o corporales, bahks ahd uhd
mahagers has subslahlay hcreased lhe amouhl o capla pctentially avaabe.
8ome specasl vehlure capla compahes have aso eslabshed overseas
realohshps lhal have lhe polehla lo provde more capla. The sleady
deveopmehl o a recoghsed ahd reabe hraslruclure wlhh lhe vehlure capla
markel has heped wealhy hdvduas lo access polehla hveslmehls ahd has
allracled more mohey lo lhs parl o lhe capla markel.

15
The EVA Forum, The 8harehoder Vaue Ferormahce o Corporale New Zeaahd, Joseph
Heay, ANZ lhveslmehl Bahk, 24 February 2000.
The auhch o lhe slock exchahge's New Capla Markel eary lhs year has urlher
expahded lhe polehla suppy o equly capla lo sma bushesses. Two compahes
have sled oh lhe NCM shce lhe slock exchahge begah acceplhg appcalohs oh
10 March 2000, ahd lhere was ohe hew slhg pehdhg as al md Juhe 2000.
There was ho suggesloh rom lhose we hlervewed lhal lhe suppy o capla was a
probem or lhe New Zeaahd vehlure capla markel. Eveh lhose seekhg vehlure
capla cohceded lhal suppy o capla was much ess o ah ssue lhah l had beeh
lhere were more oplohs avaabe.
8ome parlcpahls perceved lhal whe lhe suppy o mohey was hol a probem,
vehlure capla bushesses acled more ke bahkers lhah rsk capla hveslors.
Aholher ssue rased by al easl ohe hlervewee was lhe ack o urgehcy vehlure
caplasl showed h deahg wlh asl movhg lechhoogy bushesses.
A gehera pohl rased by ohe parlcpahl, bul aso auded lo by severa olhers, was
lhe slale o lhe ecohomy, whch or lhe pasl lwo years or so has avoured hveslors
h lerms o subduhg bushess vaualohs. Ths s sghcahl h delermhhg medum
lerm relurhs rom hveslhg ahd lhereore lhe ow o capla lo lhe markel.
Besdes capla, lhe avaably o sked peope lo mahage lhe apprasa, decsoh
makhg ahd slralegc lhhkhg processes s cruca lo lhe eeclve uhclohhg o
vehlure capla bushesses. Alhough lhe requsle sks are hol ready avaabe,
severa o lhose hlervewed holed lhal l s possbe lo allracl saared execulves
wlh lhe approprale sks ahd experehce lo lhe vehlure capla bushess. The
allracloh or lhese peope seems lo be lhe grealer exclemehl oered h budhg
bushesses as opposed lo smpy mahaghg lhem, ahd aso lhe prospecl o ah equly
slake h whal lhey are dohg.
The rapd growlh h lhe humber o vehlure capla rms over lhe pasl lhree years
suggesls a dearlh o gehuhey experehced peope wlhh vehlure capla
bushesses. Alhough rms may we be correcl h arguhg lhal sked peope cah
be allracled hlo lhs seclor, l s dcul lo beeve lhese peope have lhe requsle
experehce lo meel lhe demahds o vehlure capla hveslhg. However, as more
pro|ecls move lhrough lhe hveslmehl cyce, more hdvduas w gah experehce,
cohlrbulhg lo lhe poo o polehla vehlure caplasls.
Criteria
Mosl compahes had some crlera lhey used lo gude lher hveslmehl pocy.
Ceheray, lhough, lhe crlera cohcehlraled oh whal was excuded ralher lhah
hcuded. Mahy avoded hveslhg h slarlups ahd eary slage bushesses. Vrluay
a excuded hveslhg h properly vehlures. Olherwse lhe hveslmehl slralegy
appeared lo be very exbe.
8ome vehlure capla rms were lghly ocused oh lechhoogy, ahd h lhe case o
corporale vehlure caplasls, lhere was a reasohaby cear ocus oh slralegc l. Ah
experehced ahge hveslor had lwo cear lesls he apped lo ahy prospeclve
hveslmehl ahd a lhrd uhdamehla ssue:
Does lhe ehlrepreheur hssl oh relahhg cohlro hodhg al easl 50 o lhe
bushess! Alhough lhal s hol hecessary ah ssue or lhe hveslor al lhe hla
slage l s a warhhg sgh lhal lhe bushess's ably lo expahd w be mled by
lhe ehlrepreheur.
How ehlrepreheurs wahl lo exl lher bushess lhey haveh'l lhoughl aboul
lhs lheh lhey are h ove wlh lher dea ralher lhah ahy cohcepl o bushess.
The persoh s cruca. The ehlrepreheur s hveslgaled h cohsderabe deplh
because lhs ahge hveslor woud ralher do a ess lhah dea dea wlh lhe rghl
persoh, lhah a greal dea wlh lhe wrohg persoh.
The sleady segmehlaloh o lhe suppy o vehlure capla hdcales lhal lhe markel
s malurhg. ll aso hghghls lhe acl lhal lhe markel does respohd over lme lo
demahd sghas.
Demand
The very hgh rale o bushess slarlups h New Zeaahd (43,000 asl year) suggesls
lhal lhere s ho shorlage o polehla hveslmehl prospecls. Bul as we dscussed h
secloh 2.1 ohy a sma proporloh o a sma bushesses acluay requre equly
capla, or are prepared lo accepl l.
From hlervews wlh arouhd 20 parlcpahls wlhh lhe vehlure capla markel lhe
suppy o deas s geheray hol seeh as a probem h lerms o quahlly. Alhough
some expressed cohcerhs aboul lhe qualy o deas avaabe, lhe gehera
cohsehsus was lhal lhe suppy o good deas backed by good peope was hol a
probem. Ohe hveslor slaled lhal he had lurhed dowh some good proposlohs lhal
ddh'l a wlhh hs crlera.
Ohe o lhe mporlahl sources o hew ehlrepreheurs appears lo be rom wlhh hgh
growlh compahes. Where owherexeculves h lhese compahes cah acheve a
sulabe exl lhey w oleh lurh arouhd ahd sel up hew bushesses, or drecly asssl
olhers lo do so. Ths spawhhg, or seedhg, process was parlcuary cear rom al
easl lwo hlervews wlh hdvduas who have exled successu ahd asl growhg
compahes wlhh lhe asl lhree years. lhlereslhgy, h bolh cases, exls, h lhe
orm o lrade saes or pubc slhgs, were a cruca calaysl h spurrhg lhe seedhg
process. Ths emphasses lhe vaue o a dyhamc equly ahd vehlure capla markel.
uantity versus quality
The ssue or lhe New Zeaahd vehlure capla markel, parlcuary gveh ls realve
mmalurly, s hol lhe voume o deas avaabe, bul lhe qualy o lhe deas lhal are
cosed.
8evera o lhose peope hlervewed or lhs sludy pohled oul lhal ew parlcpahls
h lhe markel have deep experehce o vehlure capla hveslhg. Furlhermore, mahy
were h lhe eary slages o compelhg hveslmehls ahd were yel lo ehcouhler lhe
cohsequehces o poor hveslmehl decsohs.
As lhe ecohomy moves lhrough a compele bushess cyce lhe pressure oh vehlure
capla bushesses (parlcuary hew rms) lo perorm w hcrease. Ths process
w squeeze oul poorer operalors ahd orce lhose survvhg lo rase lher sks ah
oulcome lhal s cohsslehl wlh a malurhg markel.
New vehlure capla rms are amosl compeed lo pursue voume h lhe eary
slages, lo gel uhds hvesled, lo bud a repulaloh or dohg deas ahd lo oblah a
spread o rsk h lher porloo.
Cerlahy l was lhe vew o al easl ohe experehced hveslor lhal mahy hewcomers
lo lhe markel have yel lo ace lhe chaehge o deahg wlh hveslmehls lhal begh
lo slrugge.
As lwo who have had lo dea wlh slrugghg bushesses have admlled, lhere s rea
pressure oh lhem lo rescue lher dud hveslmehls lo prolecl lher repulaloh, al
easl h lhe shorl lerm. Ther lrack record o successu hveslmehl s cruca h
securhg uhdhg aures ca hlo quesloh lher compelehce lo ahayse accuraley
ahd make lhe rghl cas. Bul lhere s lle or ho commerca |uslcaloh or lhe
lme ahd resources hvoved, ahd lhey cohcede lhal as lhey become more
eslabshed, as vehlure caplasls, lhey w be more rulhess al dlchhg dud
bushesses. Mosl vehlure capla compahes we hlervewed had ewer lhah leh ve
hveslmehls. The more aclve hveslmehls a bushess has, lhe easer l s lo dump
poor perormers l makes ess derehce lo lhe overa hveslmehl porloo.
lhlereslhgy lhose rashg cohcerhs aboul lhe qualy o lhe dea ow lehded lo be
amohgsl lhe more experehced vehlure caplasls. Thal may reecl gehuhe
cohcerhs aboul lhe robuslhess o lhe hveslmehl proposlohs behg backed ahd lhe
wder repulaloh o lhe markel, or l coud be dsmssed as eslabshed payers
reaclhg lo hcreased compelloh or deas. A lhrd expahaloh s lhal lhe more
eslabshed vehlure caplasls lehd lo ocus oh ewer bul arger deas, where qualy
s everylhhg.
The qualy o decsohmakhg h lhe vehlure capla markel w mprove over lme
as peope h lhs markel gah experehce lhrough lhe humber ahd rahge o
lrahsaclohs uhderlakeh. The vehlure capla process hvoves a humber o slages
seecloh, hveslmehl, mahagemehl, exl whch cah lake al easl ve years lo
compele. Cehuhe experehce, lhereore lakes lme lo acqure. The ma|orly o
vehlure capla rms currehly operalhg h New Zeaahd have hol yel beeh lhrough
lhe u cyce rom seecloh lo exl. They may appear lo be successu oh lhe bass
o lhe humber o deas lhey are hveslhg h. Bul mosl are yel lo ace lhe rea lesl
deverhg oh lhe aclve" compohehl o lher hveslmehl, achevhg ah exl ahd
cacualhg lhe ha relurhs. Thal experehce s key lo prove soberhg or mahy,
ahd w be a rea lesl o lhe robuslhess o lhe hduslry.
Deal flcw
Ah mporlahl aspecl o lhe hlervews was lo eslabsh lhe characlerslcs o lhe dea
ows.
Frobaby lhe mosl slrkhg ealure rom mosl o lhose aclvey hvoved h provdhg
vehlure capla was lhe hgh voume o polehla deas rms were hahdhg.
Ceheray rms camed dea ows o belweeh 3 lo 15 per week depehdhg oh lhe
sze o lhe bushess. ll s mporlahl lo remember lhal or youhg vehlure capla
rms lher ocus w be oh securhg hew hveslmehls. As lhey malure lhe emphass
o lher bushess w lehd lo shl lo mahaghg hveslmehls ahd ookhg or exls,
ralher lhah seekhg polehla deas.
Mosl orma proposas or capla w gel al easl a bre (up lo ha a day)
apprasa, ahd elher be re|ecled wlh some cohslruclve advce, reerred lo
proessoha advsors or more work (groomhg or scrubbhg up), reerred lo olher
vehlure capla rms, or hveslgaled urlher. The hcreashg humber o vehlure
capla rms provdes more scope or hdvdua proposas lo hd ah approprale
malch belweeh ehlrepreheurs ahd lhe vehlure caplasls.
The humber o deas lhal cah be cohsdered serousy al ahy ohe lme appears lo be
belweeh 5 lo 12, agah depehdhg oh lhe sze o lhe rm. The ma|orly o vehlure
capla rms have belweeh lwo ahd our prhcpas who have lhe experehce ahd
experlse lo sgho apprasas ahd mahage hveslmehls. There s cohsderabe
pressure lo cu hveslmehl proposas sooher ralher lhah aler lo avod overhead
cosls swamphg prospeclve revehues.
There s aso ah hcehlve or vehlure capla rms lo bud up lher porloo o
hveslmehls realvey qucky lo spread lher rsk. Ceary every dea lhey do musl
salsy lher rsk relurh requremehls, bul lhe more ve hveslmehls lhe broader
lher spread o rsk. Cohveslhg s aholher melhod o reduchg rsk by spreadhg
lhe humber o hveslmehls ahd sharhg lhe apprasa cosls ahd experlse.
The process rms go lhrough h apprashg deas s probaby besl uslraled by lwo
orma procedures oulhed h compahy documehls avaabe lo bushesses seekhg
vehlure capla. They are presehled h Appehdx lll al lhe back o lhs reporl.
3.5 Returns
The prme molvaloh o vehlure caplasls s lo make mohey. Thal meahs lhey are
ookhg or hveslmehls lhal provde relurhs commehsurale wlh lhe rsks lhey are
lakhg. The ma|orly o lher relurhs come rom lhe rse h lhe vaue o lhe equly
lhey hvesl ahd so exl s a key ssue. 8ome hveslors aso geherale ee hcome rom
advsory work as lhey deveop lhe dea ahd seek couhdhg.
Expecled relurhs vary cohsderaby lhrough lhe hduslry, depehdhg whal pohl o
lhe rsk/ relurh curve lhey are operalhg al. Frms hveslhg h lhe slarlup or eary
slage o bushess deveopmehl are ookhg or relurhs rahghg rom 40 lo 100,
whereas rms ocused oh lhe expahsoh, or buyoul slage w lehd lo seek relurhs o
belweeh 20 ahd 40. Those compahes wlh ah eslabshed lrack record are
geheralhg relurhs wlhh lher expecled rahge. lh some cases eary slage hveslors
are sellhg lher relurh largels h lerms o mulpes o lher orgha hveslmehl.
8lar perormers wlhh vehlure capla porloos cah produce speclacuar relurhs,
wlh ohe hdcalhg gahs o 22 lmes lhe orgha hveslmehl h ess lhah lhree
years.
There are hveslors who are hol soey ocused oh equly relurhs. Corporale vehlure
caplasls have a slrohg slralegc eemehl lo lher hveslhg ehsurhg lhe hew
bushesses lhey hvesl h have a good l wlh lher owh bushess or reduce
compellor aclvly. lh lhe case o bahks ahd slockbrokers, aclve equly hveslhg
h a sma, or youhg, compahy polehlay oers a vauabe ohglerm realohshp lo
geherale servce ees. Ths realohshp s oleh a precohdloh o hla equly
uhdhg.
8evera vehlure caplasls pohled oul lhal overa relurhs were heavy huehced
by lhe vhlage year o lhe hveslmehl lhe year h whch lhe hveslmehl was made.
Essehlay, lhe argumehl s lhal hveslhg h dcul ecohomc lmes s more key
lo geherale some allraclveyprced hveslmehls as rms slrugge lo hd hahce
ahd perceplohs o vaue are pessmslc. Thus lhe slale o ecohomc cohdlohs al
lhe lme o hveslmehl, ahd exl, has ah mporlahl bearhg oh overa relurhs.
ll seems cear lhal compahy vaualohs h New Zeaahd, eveh or lechorehled rms
wlh good goba producl, has agged we behhd lhe sorl o vaualohs apped lo
slarlup ahd eary slage U8 bushesses. lhdeed a sghcahl parl o ohe New
Zeaahd vehlure capla compahy's ralohae s lhe subslahla derehce h bushess
vaualohs belweeh New Zeaahd ahd olher couhlres.
3.6 ExIt and capItal gaIns
A uhdamehla aspecl o vehlure capla hveslhg s securhg ah exl rom each
hveslmehl. Nol uhl lhs slage has beeh compeled s lhere a cohcrele relurh or
lhe vehlure capla compahy.
Tme ahd agah vehlure caplasls emphassed lhe mporlahce o a we eslabshed
exl slralegy. 8evera vewed lhe exl slralegy as ohe o lhe key ssues lo resove
beore hveslhg h a bushess. lh mahy cases lhe lmhg, lhe prospeclve buyer ( l
s hlehded lo be a lrade sae), lhe producl rahge ahd hahca perormahce o lhe
bushess are a delermhed as parl o achevhg a successu exl. lh lhs sehse l s
a melcuousy pahhed process.
Ah mporlahl ssue s exposure lo lax oh capla gahs. The prorly gveh lo havhg
a we dehed exl rom ahy hveslmehl ceary demohslrales ah hlehloh lo se al
lhe lme mohey s hvesled. Ths lheh makes lhem abe lo pay lax oh ahy capla
gahs lhey make. 8ome vehlure capla bushesses avoded lhe ssue o exlhg oul
o cohcerh or lhe lax mpcalohs. Ahd ohe vehlure caplasl had beeh advsed lo
pay lax oh lher lola relurhs.
The quesloh o lax oh capla gahs s a very mporlahl ssue or lhe vehlure capla
markel. Al lhe momehl mosl rms operale oh lhe assumploh lhey w hol be
sub|ecl lo lax oh lhe capla gahs acheved h lher hveslmehls. Ths approach
smpy adds lo lhe rsks hvoved h vehlure capla hveslhg. For ma|or hsllulohs
keeh lo prolecl lher repulaloh lhe ssue o capla gahs lax s parlcuary vexhg
l appears lhal lhey lehd lo err oh lhe sae sde ahd pay lax oh lher capla gahs
lhereore hcreashg lhe relurhs lhey requre beore hveslhg.
lh Appehdx l we reproduce ah lhomelrcs arlce rsl pubshed h Juhe 2000
dscusshg lhe mpcalohs o lhe ack o a capla gahs lax or New Zeaahd's
corporale behavour. The gsl o lhe arlce s lhal ehlrepreheurs may be persuaded
lo se ralher lhah expahd lher bushess because o lhe realve rsks ahd behels
realhg lo each oploh.
3.7 Gaps
lh smpe lerms lhe gap h lhe vehlure capla markel w aways be belweeh
buddhg bushesses seekhg hahce ahd lhe whghess o vehlure caplasls lo
provde l. Ths socaed uhdhg gap does hol hecessary meah lhal lhe markel s
hol operalhg ecehly h lhs area. The acl lhal mahy polehla vehlures are
uhsuccessu h securhg hahce may smpy reecl a reaslc assessmehl o lher
prospecls. The gap, lheh, s belweeh uhdhg ahd prospecls.
lh essehce l s a gap h perceplohs o rsks ahd rewards ahd may bo dowh lo
hormaloh ahd lhe cosl o oblahhg whal s requred lo brdge lhe gap h
perceplohs. l lhere s ah hormaloh gap lheh lhere woud seem lo be ah
opporluhly or lhe markel lo l.
Ma|or proessoha accouhlhg rms ahd a sghcahl humber o smaer vehlure
capla bushesses are ookhg lo do |usl lhal. The process o groomhg, or
scrubbhg up, bushess pahs lo presehl lo polehla hveslors s behg uhderlakeh
by lhese rms h ah allempl lo reduce lhe perceved rsks ahd hormaloh shorlas
lhal cohslahly lhrealeh lo shk deas.
The mah probem, lhough, s lhe cosl o uhderlakhg lhs work, especay gveh lhe
rsk or lhe bushess advsory rm o hol recevhg ahy rewards or lhe work
uhderlakeh, or or lhe ehlrepreheur payhg or servces lhal sl do hol gel hm lhe
mohey.
8ome vehlure capla ahd proessoha servces rms are prepared lo share lhese
rsks by makhg ees depehdehl oh lhe success h rashg lhe requred capla.
There are al easl lwo hormaloh hurdes lo overcome: rsly gellhg lhe delas o
lhe proposed bushess cear. Ths meahs uhderslahdhg lhe dea, budhg ah
accurale pclure o lhe ehlrepreheur (lrusl s cruca) ahd eslabshhg lhe
hahca/bushess credehlas. Ceary lhe ehlrepreheur geheray has a beller
hahde oh lhs hormaloh lhah lhe vehlure caplasl. The secohd key area o
hormaloh s lhe polehla success o lhe cohcepl h lhe markel pace.
Ehlrepreheurs are oleh poory hormed aboul markel prospecls ahd prchg. lh
cohlrasl vehlure caplasls, wlh lher helworks, are geheray beller paced lo
assess lhe commerca vably o lhe cohcepl lhah lhe ehlrepreheur.
The cohcerh expressed by a humber o vehlure caplasls was lhal mahy bushess
proposas acked lhe eve ahd robuslhess o dela requred lo make l worlhwhe
progresshg. The herehce s lhal lhe cosls lhal woud have lo be hcurred by lhe
vehlure caplasl lo assembe ahd very lhe requred hormaloh, h realoh lo lhe
sze o lhese sorl o deas, made lhem uhecohomc lo pursue.
Our cohcusoh s lhal ah hormaloh gap does exsl, ahd lhal lhe markel s
addresshg lhe gap, wlh specasl groomhg" servces lryhg lo hd hhovalve
ways o brdghg lhe hormaloh ecohomcay. Nohelheess, lhe cosls o groomhg
realve lo lhe sze o deas oh oer s ah hevlabe cohslrahl lo lhe markel
addresshg lhs ssue more eeclvey or mahy sma bushesses. The Creal New
Zeaahd Bushess Vehlure compelloh has hghghled lhe hormaloh gap ahd lo a
degree has heped address l by oerhg lhe sorls o groomhg" servces requred
or ree.
Trahsacloh cosls (hormaloh, hegolaloh ahd cohlraclhg) are a sghcahl parl o
vehlure capla hveslhg especay gveh lhe hlahgbe halure o lhe assels, ahd lhe
voale ahd uhproveh relurhs. Alhough lrahsacloh cosls are uhavodabe we
uhclohhg markel hlermedares w mhmse lhem va specasaloh ahd
segmehlaloh. Evdehce o bolh s appearhg h lhe New Zeaahd vehlure capla
markel.
A useu dscussoh o perceved rsks, ahd lhe cosl o hormaloh h realoh lo
scae s provded h a revew o Auslraa's Fooed Deveopmehl Fuhd
16
(FDF)
programme.
|n scme circumstances infcrmaticn flcws cannct cverccme percepticns abcut risk. The
ccncepts cf asymmetric infcrmaticn and mcral hazard are central tc many discussicns
abcut small business finance. |xternal investcrs are cften held tc have less infcrmaticn
abcut the business than the cwner. (The reverse is alsc pcssible fcr start -up businesses
where prcfessicnal external investcrs may have a better idea cf the business envircnment
than the cwner.)
This infcrmaticn differential between insiders and cutside investcrs clearly exists fcr large
and small businesses alike. Hcwever, the transacticn ccsts fcr external investcrs
disccvering the relevant infcrmaticn abcut a small investment cppcrtunity are
prcpcrticnally larger than fcr a large investment cppcrtunity. There may be fixed ccsts cr
declining marginal ccsts asscciated with dcing due diligence research. |urther,
infcrmaticn abcut large (listed) firms can be cf benefit tc a large number cf investcrs sc
they are each prepared tc pay a brcker whc can reccup the ccsts cf infcrmaticn frcm a
large number cf investcrs (a price-excludable public gccd). A large existing firm has a
histcry, which can relatively easily be evaluated by external investcrs. A new small firm
has nc histcry.
The insider may therefcre have a different view cf the risks asscciated with investment in
the small enterprise than the cutsider whc is less certain abcut the infcrmaticn they hcld.
The cutsider may judge it eccncmically unprcfitable tc seek cut expensive infcrmaticn
abcut small investment cppcrtunities. |n these circumstances a perceived gap arises
between the supply and demand fcr finance at any given price. 8mall entrepreneurs
believe that external investcrs are excessively risk adverse and investcrs believe that
entrepreneurs have an unrealistic expectaticn abcut the ccst and availability cf capital.
|n additicn, the external investcr faces a mcral hazard prcblem that ccntributes tc the
perceived funding gap. The prcjects that entrepreneurs are whclly ccnfi dent abcut are the
least likely tc be cffered tc investcrs. This means that expensive due diligence exercises
are required by external equity investcrs. |quity participaticn enables an external investcr
tc participate in the success cf a prcject, but withcut the safety net cf ccllateral. There
are cnly imperfect guarantees abcut the acticns cf the 8M| cnce the investment is made,
thus it is unlikely that the investcr can value a deal in the same way that the equity seeker
will. This difference in valuaticn will appear as an equity gap tc 8M|s.

16
Fevew o lhe Fooed Deveopmehl Fuhds Frogramme, a reporl prepared by ocers o lhe
Deparlmehl o lhduslry, 8cehce ahd Fesources, Treasury ahd lhe Auslraah Tax Oce,
17 Juhe 1998, p 29.
Hcwever, this dces nct mean that there is an equity gap that can be cverccme by
gcvernment acticn. Different infcrmaticn sets and the existence cf mcral hazard cr risk
are nct issues that can be cverccme withcut ccst. These ccsts cf disccvering infcrmaticn
are real and dc nct ccnstitute a market failure. 8imply transferring these ccsts tc
taxpayers wculd nct imprcve the eccncmic efficiency cf capital markets.
The above lehds lo cohrm our vew lhal lhe paucly, ahd cosl, o hormaloh
assocaled wlh cohsderhg hveslmehl h sma bushesses, ahd parlcuary al ah
eary slage o deveopmehl, are a ma|or cohslrahl wlhh lhe vehlure capla
markel. 8pecasl rms are aware o lhe opporluhly lhal exsls lo reduce lhe
hormaloh/rsk gap, bul dohg so al reasohabe cosl s a key ssue.
Ohe parla souloh lo lhe rsks ahd hormaloh cosls hvoved h vehlure hveslhg
s lhe praclce o cohveslhg. Ths appears lo be commoh h New Zeaahd.
lhveslors share lhe cosls o hveslhg ahd lhe rsks hvoved. ll speeds up lhe
crealoh o a baahced porloo, whch s mporlahl h reduchg rsks. ll aso
provdes access lo subsequehl capla cas rom lhe same bushess lhese w
lehd lo be sghcahly more cosl eeclve gveh lhe accumualed khowedge aboul
lhe bushess ahd ls ably lo succeed. Cohveslhg aso hcreases lhe helwork o
cohlacls lo hep lhe compahy succeed.
3.8 Stcck cf deals versus the flcw
The rapd growlh h lhe vehlure capla seclor h New Zeaahd over lhe pasl lhree or
our years may smpy reecl lhe markel calchhg up wlh ah opporluhly lhal has
beeh slarhg lhem h lhe ace or some years. The hcreashg avaably o vehlure
capla ahd assocaled servces may we be ehcouraghg prevousy dsusohed
ehlrepreheurs lo oer lher deas. There w be, o course, deas lhal are realvey
lme sehslve. lT orehled bushess proposas are key lo age qucky ahd woud
lhereore hol be parl o a polehla slock o deas lhal may have accumualed over
lhe pasl ve or so years.
l lhere s a sghcahl slock o deas lhal s avaabe lo hvesl h lheh lhere are
some mporlahl mpcalohs or vehlure capla rms over lhe hexl ve years:
ll has beeh a realvey easy lme or vehlure caplasls lo hd good deas over
lhe pasl lhree years as lhey have worked lher way lhrough a backog o deas
The slrohg dea ow may hol cohlhue
The humber o good qualy deas w deche as lhe markel moves lo rey oh lhe
uhderyhg ow o hew deas
These pressures may begh lo ble |usl as some o lhe deas lhey have lakeh up over
lhe pasl lwo years or so slarl lo wobbe. As ohg as lhe sks ahd resources
requred lo apprase deas cah be shled hlo mahaghg probem bushesses,
vehlure capla rms w remah busy.
The surge h vehlure capla aclvly over lhe pasl lhree lo ve years may aso reecl
relurhhg cohdehce h lhs area o hveslmehl. As hveslors become more
cohdehl lhal lhere s a robusl vehlure capla operalhg lhey w be whg lo appy
uhds lo l. Furlhermore ehlrepreheurs ahd a hosl o supporl servces w be keeh
lo lap hlo lhe markel.
Markel cohdehce s uhdamehla lo lhe deveopmehl o a vabe markel. New
Zeaahd had a lhrvhg vehlure capla markel h lhe md1980s, bul lhe share
markel crash h 1987, ahd some hghproe aures h lhe eary 1990s (lhe
8keerup MBO) has made l dcul lo reslore lhe eve o cohdehce requred or a
vgorous markel. Bul currehl aclvly h lhe vehlure capla markel suggesls rea
progress s behg acheved.

New Zealands Venture Capital Market Page 27 of 49
4. How Well is the Market Working?
In this chapter we take a more theoretical look at how the capital market works with
a particular focus on the tensions relevant to the venture capital market. Our aim is
to illustrate how the information gap discussed above actually impacts on the
functioning of the venture capital market and how it may constitute a market failure.
The key messages from this more technical analysis of the venture capital market
are set out at the end of this section.
4.1 Venture capitalism
An investor contemplating different investment projects will be trading off the
potential risks and returns associated with each project. As the perception of risk
rises the investor will seek a higher rate of return to justify taking that risk. The
risk/return line on the left-hand side of Figure 4.1 represents this trade off between
risk and return.
Figure 4.1
The capital market

The expected rate of return (gross) for any investment, R
VCg
, can be defined
(ignoring tax impacts) as:

R
VCg
, is equal to the risk-free rate of return, R
F
, plus the perceived riskiness of the
investment, , multiplied by the difference between the average market rate of
return, R
M
, and the risk free rate.
By definition the perceived risk of the average market investment is equal to unity.
Projects with higher than average levels of risk associated with them will need to
offer investors proportionally higher rates of return to attract sufficient funds to
( )
F M F VCg
R R R R + =

How we s lhe markel Workhg!
uhderlake lhe pro|ecls. The gross rsk/relurh he h Fgure 4.1 represehls lhs
lradeo.
lhveslors cohlempalhg ah hveslmehl w uhderlake some orm o due dgehce
beore commllhg lher uhds. 8uch hveslgaloh s hol cosless, lhough or mahy
ow rsk hveslmehls lhe cosls are key lo be sma. As perceplohs o rskhess
hcrease geheray a uhcloh o uhcerlahly ahd paucly o hormaloh lhe cosls
o uhderlakhg due dgehce w aso hcrease. These lrahsacloh cosls (TC) musl
be deducled rom lhe gross relurhs, lhus produchg lhe hel rsk relurh he, whch
cah be dehed as:
( ) TC R R R R
F M F VCn
+ =
ll seems reasohabe lo cohcude lhal due dgehce cosls w hcrease more lhah
proporlohaley as rsk hcreases. There w come a pohl where lhe cosls o
assesshg ahd supervshg lhe perormahce o prospeclve hveslmehls w geherale
ho exlra relurh lhe pohl where lhe hel rsk/relurh he s horzohla.
lhveslmehl pro|ecls lhal have lrahsacloh ahd mahagemehl cosls lhal exceed lhe
expecled rsk ad|usled relurhs w hol be uhderlakeh. As uslraled h Fgure 4.1,
F
VCg
, represehls lhe maxmum rale o relurh lhal a hahcer w be prepared lo
hahce a pro|ecl al. Beyohd lhal pohl lrahsacloh ahd mahagemehl cosls w
more lhah oulwegh lhe addloha prospeclve relurhs avaabe, so h hel lerms,
relurhs begh lo deche as rsks hcrease. No sehsbe hveslor w slray hlo lhs
lerrlory.
We cah assume lhal pro|ecls wlh hleresl cosls o F
M
or ess w geheray be
hahced ushg lradloha bahk debl, corporale bohds, or lhe slock markel. For
rsker pro|ecls, more aclve supervsoh s requred. We aso assume lhal
perceplohs o rsk w be drecly realed lo compahy sze ahd experehce.
Business ccllateral credibility, experience
We have allempled lo caplure lhs cohcepl oh lhe rghl hahd sde o Fgure 4.1, by
realhg lhe lrahsacloh cosls o uhderlakhg due dgehce ahd mahaghg
hveslmehl pro|ecls lo lhe amouhl o compahy coalera or credbly. We use lhe
lerm coalera h a very broad sehse lo hcude hlahgbe aclors as we as lhe
lahgbe hahca posloh o compahes. For exampe, ah hdvdua wlh a lrack
record o successuy deveophg hew bushesses s key lo have grealer sway wlh
hahcers lhah a smpe ahayss o her currehl assels mghl suggesl.
The lrahsacloh cosls o assesshg someohe, or a bushess proposa, wlh hgh
coalera w be ower lhah or a proposa or hdvdua wlh ow coalera or
credbly. lh praclce, bushess coalera w be geheray hgher h arger ahd
weeslabshed bushesses, lhah h sma ahd eary slage ohes. Furlhermore, wheh
deahg wlh a arge compahy, as ohg as lhe compahy s hahcay secure, lhe
perormahce o lhe specc pro|ecl w hol hecessary harm lhe securly or relurhs
o lhe hahcer. For a sma rm, lhe vably o lhe pro|ecl s everylhhg. Ths
realohshp s represehled by lhe lrahsacloh cosl curve oh lhe rghl hahd sde o
Fgure 4.1.
How we s lhe markel Workhg!
Ah hlereslhg pohl arshg reevahl lo lhe above pohl was lhe slralegy o a
bushess ocushg oh lhe lT seclor wlh respecl lo polehla, or aclua, aures. The
key resource (coalera) h lhese rms lehds lo be lhe hleeclua capla,
parlcuary h lhe area o solware deveopmehl. These resources are realvey
lrahserabe, as we as behg realvey scarce. The slralegy lo mhmse dowhsde
rsks s lo ehsure lhese lT sks cah be lrahserred lo olher vehlure compahes
wlhh lher porloo. lh lhs sehse lhe coalera s relahed ahd redepoyed.
By our assumplohs, rms or hdvduas who have coalera h excess o B, w lehd
lo have lher pro|ecls hahced by lhe lradloha hahca markels (bahks, elc) h a
ary hahdso way. Frms or hdvduas wlh ess coalera lhah B, bul more lhah
A, w be servced by vehlure capla rms (or lhe vehlure capla arms o hahca
rms). Frms or hdvduas wlh ess coalera lhah A w hol have lher pro|ecls
hahced lhe cosls assocaled wlh ahayshg lhe rsks are loo hgh lo |usly
hahca supporl. Thal lhese pro|ecls are hol behg hahced does hol represehl a
markel aure lhey smpy do hol represehl good bushess opporluhles.
4.Z Market faIlure, cr sImply hIgh ccst cf InfcrmatIcn!
Markel aure h capla markels lypcay occurs wheh parlcpahls make decsohs
based oh hadequale or happroprale hormaloh, whch eads lo suboplma
resource aocaloh. The vehlure capla markel s characlersed by sghcahl
hormaloh asymmelres. Ths s uhavodabe gveh lhe halure o lhe assels
hvoved. These asymmelres make lrahsaclhg h lhs markel rsky ahd dcul.
The parlcuar hslluloha slruclures lhal have evoved arouhd vehlure capla
couhler lhe asymmelres lo a cerlah exlehl alhough lhey are hol a compele
souloh.
Ah exampe o a polehla markel aure ahd ls cohsequehces s uslraled h
Fgure 4.2. Fgure 4.2 s smar lo Fgure 4.1, excepl we have assumed lhal
hormaloh asymmelres resul h ah hcrease h lhe lrahsacloh cosls o assesshg
hveslmehl pro|ecls. Ths s represehled by ah oulward shl h lhe lrahsacloh cosl
curve rom lhe sod he, TC, lo lhe dashed he, TC'.
8uch ah hcrease h cosls woud chahge perceplohs aboul lhe rskhess o derehl
pro|ecls ahd woud lhereore chahge lhe preparedhess o hahcers lo oer uhds
17
.
The lradloha hahce seclor woud how ohy be prepared lo oer uhds lo rms
wlh coalera o D ahd over (lhus reduchg lher markel by DB). Vehlure
caplasls woud be prepared lo uhd lhese pro|ecls, bul, wlh hgher due dgehce
cosls, lhey woud aso demahd a hgher eve o coalera rom polehla credlors.
The vehlure capla markel how hahces rms wlh coalera belweeh C ahd D. The
hel oss s experehced by rms wlh coalera belweeh A ahd C.

17
Ths exampe s hol a comprehehsve expahaloh o how markel aure mpacls oh lhe
hahca markel. For exampe, ohe woud aso expecl lo see a shl h lhe lrahsacloh cosl
curve oh lhe elhahd sde, bul lhs was avoded lo smpy lhe presehlaloh h Fgure 4.2.
Obvousy ohce lhere was a chahge oh lhe el hahd sde we woud aso expecl lo see chahges
h pro|ecl rales o relurh.
How well is the market Working?
New Zealands Venture Capital Market Page 30 of 49
Figure 4.2
The capital
market
C D
TC
TC
$/I
Risk ( ) Collateral
1
R
VCn
R
M
R
F
A B
Transaction
costs
Transaction
costs
Gross
risk/return line
Net
risk/return
line
R
VCg

The key messages from this analysis are:
The inability of some entrepreneurs to access finance does not necessarily
constitute a market failure. It could merely reflect a rational assessment of the
projects merits in light of the costs likely to be incurred assembling the
required information.
If market failures do exist, they are likely to disadvantage entrepreneurs with
lower levels of collateral, but they will also reduce the market share of the
formal finance market.
It is not obvious whether venture capitalists would necessarily benefit from a
reduction in due diligence costs. They might simply have a change in their
client base.
If market failures do not exist, market interventions that promote venture capital
activities would potentially impose net costs on the economy as the money
spent would be on the high risk projects that rational agents would not support
on their own volition.
Risk aversion and the existence of risk per se are not market failures. It is
sometimes argued that governments are better able to pool risks than the private
sector because of their longer time horizon and access to funds. However, this
argument only carries weight for high value risky investments. For the relatively
small investments relevant to the New Zealand venture capital market, the private
sector is probably capable of providing the necessary risk pooling mechanisms,
such as co-investing.

5. PclIcy lssues
Those sma ahd medum szed bushesses backed by good vehlure caplasls, w
arguaby perorm beller lhah olher bushesses h lerms o |ob crealoh, exporls,
growlh, ahd lhe lakeup o lechhoogy. To lhe exlehl lhs proposloh s lrue, lhere
s a case or ocushg goverhmehl pocy oh ehsurhg lhe vehlure capla markel
works we.
From lhe hlervews cohducled as parl o lhs sludy ahd our ahayss sel oul h lhs
reporl lhere are al easl our mporlahl cohcusohs lhal have mpcalohs or pocy
deveopmehl:
The vehlure capla markel s sl realvey mmalure h New Zeaahd. As l
broadehs ahd deepehs some o lhe bollehecks lhal currehly appear lo exsl
may we be resoved.
There s ho cear evdehce lhal a ack o vehlure capla or exslhg sma
bushesses wahlhg lo expahd s a ma|or cohslrahl lo lhe growlh o sma ahd
medum szed ehlerprses.
Nor s lhere a cohsehsus wlhh lhe vehlure capla markel lhal lhere s a ack o
good bushess proposas backed by good peope; lhal s, lhe suppy o good
deas s hol a probem.
The cosl ahd paucly o hormaloh s lhe ma|or cohslrahl lo uhdhg bushess
vehlures, especay lhose arouhd lhe slarl up slage.
The markel s hslorcay rage ahd lhereore ahy pocy hlervehloh heeds lo
be careuy cohsdered.
5.1 lnfcrmatIcn
lh secloh 4.2 above we poslualed lhal hormaloh ssues probaby e al lhe rool o
ahy perceved gap or cohslrahl h lhe vehlure capla markel. Dculy h oblahhg
accurale hormaloh aboul:
lhdvduas how lhey w respohd lo cohslahl ahd severe bushess chaehges.
Froducls, cohcepls lher ease o producloh, reably, elc.
Markels how lhey may chahge, compellve pressures, prchg, opehhg up hew
markels.
Uhcerlahly aboul lhe ulure presehls a cockla o rsks lhal musl be sel agahsl
lhe polehla rewards lhal lhe pro|ecl oers. Oleh lhe lme ahd cosl o recohchg
lhese lwo aclors w be loo hgh or lhe dea lo be cohsdered h ahy greal deplh.
The cosl o galherhg ahd assesshg hormaloh s by ho meahs borhe soey by lhe
vehlure caplasls. ll s cear lhal mahy ehlrepreheurs hd l dcul lo uhd lhe
cosl o presehlhg a credbe bushess pah elher lhey doh'l have lhe lme,
resources or sks lo do l lhemseves, or lhey cah'l aord lo have lher proposa
deveoped by a proessoha servce rm.
Focy lssues
Vehlure capla rms cahhol |usly pursuhg loo mahy deas h deplh lhal may a
al lhe asl hurde. The cosl o assessmehls lhal are evehluay dumped
subslahlay adds lo lhe cosls lhal musl be recovered rom successu deas.
Po11cy 1mp11ca11on gveh lhal hormaloh cosls ahd asymmelres are polehla
sources o markel aure h lhe vehlure capla markel, acloh lo ower lhe cosls o
hormaloh galherhg ahd presehlaloh may mprove desred oulcomes.
There s aready a rahge o rms ahd hdvduas provdhg groomhg servces or
lhe vehlure capla markel. The Creal New Zeaahd Bushess Vehlure has
demohslraled bolh lhe alehl demahd or groomhg servces amohgsl buddhg
ehlrepreheurs ahd lhe whghess (ahd geherosly) o lhe bushess commuhly lo
hurlure youhg bushesses. Arguaby, lhereore, lhe markel s sovhg lhe
hormaloh dvde.
A programme lhal uhderwrles lhe search ahd apprasa cosls based oh a maxmum
humber per vehlure capla bushess, ahd a maxmum doar amouhl per apprasa,
woud hep resove some o lhe hormaloh probems lhal are hevlabe h lhe
vehlure capla markel. Where deas are successuy uhded ho mohey woud be
avaabe. Essehlay l woud ower lhe rsks hvoved h dea searches ahd
lhereore hcrease lhe humber o deas lhal are serousy cohsdered.
ll s mporlahl lo eave lhe hormaloh galherhg ahd apprasa lo lhe markel lo
ehsure speed ahd qualy o servce bolh are cruca. Commehls rom lhe
hlervews aboul experehced execulves behg keeh lo work h vehlure capla
bushesses suggesl lhal lhe sk base requred lo process more bushess proposas
coud be expahded, bul probaby hol rapdy. Havhg lhe resources ahd sks
avaabe lo uhderlake lhe work s ceary ah mporlahl precohdloh lo provdhg
whal amouhls lo subsdy or lrahsacloh cosls.
5.Z CapItal gaIns tax
The quesloh o whelher vehlure capla hveslors are sub|ecl lo lax oh lher capla
gahs s ah mporlahl ssue gveh lhe prorly mahy gve lo havhg a cear exl
slralegy or each o lher hveslmehls. Taxhg capla relurhs woud sghcahly
aler lhe rsk reward lradeo lhal mahy vehlure capla compahes are currehly
workhg wlh. The oulcome woud be a reducloh h lhe humber o deas compeled
ahd lhe amouhl o vehlure capla avaabe.
Po11cy 1mp11ca11on lhe currehl slualoh smpy adds lo lhe eve o uhcerlahly
some vehlure capla compahes have lo cope wlh. A cear ruhg, or specc
egsaloh woud remove uhcerlahly or hveslors. Fues surrouhdhg vehlure
capla hveslhg are more expcl, see beow.
5.3 Seed/early stage Investment, and R&D
The rsks ahd hormaloh dcules are mosl hlehse al lhe very eary slages o
bushess deveopmehl. There are ew prvale, slahd aohe orgahsalohs lhal
provde uhdhg or premarkel producl research ahd deveopmehl.
Focy lssues
Nohelheess, lhere s cear evdehce lhal mahy medum lo arge bushesses are
hveslhg h producl research ahd deveopmehl o lher owh, emphasshg lhal
vehlure caplasm s more wdespread lhah specasl vehlure capla compahes.
The cehlra ssue here s how lo commercase more o lhe haloh's pubcy uhded
F&D expehdlure. Alhough lhs was hol a ocus o lhs sludy, commehls rom
severa o lhose hlervewed pohled lo some dssalsacloh wlh how lhe Crowh
Fesearch lhsllules hleraced wlh bushesses, ahd cohcerh aboul lhe ack o
hraslruclure or aboralory deas lo be mahaged lhrough lo commercasaloh.
A realed pohl rased by al easl lhree o lhose hlervewed was lhe apparehl ack o
commlmehl by lhe goverhmehl ahd pubc hsllulohs lo deveophg lechhoogy
hlehsve bushesses. Ther worry s lhal lechhoogca progress s acceeralhg ahd
New Zeaahd lech bushesses wahl lo secure uhdhg, polehla hveslors w heed
lo be cohvhced lhal lhe ecohomy has lhe deplh o laehl ahd hraslruclure lo
supporl lhem. These sehlmehls are based, lo a sghcahl degree, oh whal lhese
bushesses see happehhg h Asah couhlres. They are cohcerhed lhal New Zeaahd
w cohlhue lo become a bushess backwaler.
Po11cy 1mp11ca11on cohsder chahghg lhe way lhe goverhmehl's scehce ahd
research uhdhg s depoyed wlh specc allehloh gveh lo lhe dea o lakhg a
proporloh o pubc expehdlure oh research ahd deveopmehl ahd appy l oh a co
hveslmehl bass lo slarlup ahd pre slarlup bushesses. l lhe am o goverhmehl
hvovemehl h provdhg F&D uhdhg s lo slmuale lhe commercasaloh o
lechhoogy lheh cohveslhg h prvale seclor seed bushesses aohgsde prvale
seed/vehlure caplasls s perhaps lhe easl dslorlhg approach.
5.4 PrcxImIty tc technclcgy/busIness frcntIer
Coverhmehl uhded bushess assslahce programmes w be mosl eeclve wheh
bushesses are operalhg we beow besl bushess praclce slahdards.
Huahg ahd Xu
18
argue lhal lhe polehla success o goverhmehl spohsorshp o
hduslra deveopmehl depehds crlcay oh lhe slale o lechhoogca advahcemehl
h ah ecohomy. Al ow lechhoogy eves, mosl F&D pro|ecls cah be characlersed
as mlalhg successu deas rom abroad. The rsks o such pro|ecls are ow ahd
growlh cah be promoled by ehcouraghg grealer amouhls o hveslmehl (e capla
deepehhg s lhe hame o lhe game).
As a haloh's lechhoogy advahces, ahd approaches khowedge rohlers, lhe
uhcerlahly o success rom F&D pro|ecls hcreases. The ably o F&D pro|ecls
(ahd hveslmehl pro|ecls h gehera) lo promole growlh hhges more ahd more oh
lhe seecloh o pro|ecls ralher lhah oh lher scae or voume. Huahg ahd Xu
cohlehd lhal hahcers operalhg h compellve capla markels are more key lo
seecl whhhg pro|ecls lhah goverhmehl spohsorshp hol hecessary because lher
seecloh processes are ahy beller, bul because lhey w be more rulhess h
lermhalhg bad pro|ecls.

18
lhsllulohs, lhhovalohs, ahd Crowlh, Huahg H ahd Xu C, lMF Workhg Faper, WF/99/34,
lhlerhaloha Mohelary Fuhd, 1999.
Focy lssues
Po11cy 1mp11ca11on: Ah acceplahce o lhe Huahg ahd Xu argumehls mpes lhal
goverhmehls heed lo be caulous aboul |umphg hlo lhe vehlure capla markel.
New Zeaahd bushesses may be operalhg we wlhh lhe besl bushess praclce
rohler, mpyhg lhere s a reasohabe prospecl o hel behels owhg rom
goverhmehl hlervehloh. As lhe markel malures, lhough, lhe prorly or lhe markel
s lhe qualy o decsohmakhg ralher lhah lhe quahlly o capla avaabe. Lke
lhe vehlure caplasls, lhe goverhmehl heeds a cear exl slralegy.
5.5 Other mcdels
Australia
The oowhg paragraph hghghls lhe ralohae behhd Auslraa's Fooed
Deveopmehl Fuhd (FDF) programme delaed beow.
Given the impcrtance cf 8M|s in the Australian eccncmy, and the widespread percepticn
that 8M|s have an unduly difficult time in accessing equity finance, there may be a r cle
fcr gcvernment in educating the market abcut unexplcited cppcrtunities, especially fcr
high-grcwth 8M|s. There may alsc be a rcle tc develcp and deepen the venture capital
market by enccuraging new entrants if this can accelerate the attainment cf eccncmies cf
scale and sccpe by venture capitalists and cther investcrs in the analysis cf investment
cppcrtunities. Cn this raticnale the purpcse cf the FD| scheme wculd be tc enccurage
8M| investments that wculd ctherwise nct cccur. The resultant greater experience cf
bcth 8M|s and investcrs with equity financing wculd see the develcpment cf increased
awareness cf market cppcrtunities, increased skills and reduced ccsts in evaluating such
cppcrtunities and lead tc a greater participaticn. Cnce this pcint had been reached the
prcgram wculd have achieved its purpcse and cculd be wcund up.
The mah ealures o Auslraa's FDF programme are:
FDFs musl hvesl h hewy ssued ordhary shares h Auslraah compahes wlh
lola assels o ess lhah S50 moh. Ths hew equly musl be used lo eslabsh
a hew bushess, subslahlay expahd capacly, or expahd or deveop markels;
FDFs cahhol hvesl h compahes whose prmary aclvly s relahg or properly
deveopmehl;
There s ho ml lo lhe humber o compahes lhal cah be regslered as FDFs,
bul a musl rsl be approved by lhe FDF Fegslraloh Board. lh gehera lerms,
ah appcahl or FDF slalus heeds lo cohvhce lhe Board lhal l has a good
slralegy or rashg mohey ahd or ushg lhal capla lo purchase hew equly h
Auslraah compahes h a mahher cohsslehl wlh lhe hlehl o lhe programme.
The appcahl aso heeds lo show lhal l has lhe resources ahd experlse lo
mpemehl lhal slralegy;
A FDF cah hvesl up lo 30 o ls ssued capla h ahy ohe hveslee bushess.
Bul lhe FDF Fegslraloh Board has dscreloh lo aow FDFs lo exceed lhs ml
uhder cohdlohs agreed h advahce by lhe Board;
FDF prols rom hveslee compahes are laxed al 15, whe prols rom a
olher sources (essehlay hleresl hcome oh uhds hol yel hvesled) are laxed
al 25;
Focy lssues
lhveslors h FDFs are exempl rom capla gahs lax oh lhe sae o lher share h
a FDF, ahd cohsequehly lhere s ho deducloh or capla osses. Uhrahked
FDF dvdehds are lax exempl h lhe hahds o lhe hveslors. Frahked FDF
dvdehds are aso ree o lax h lhe hahds o hveslors uhess lhe hveslor eecls
lo be laxed, h whch case lhey cah use lhe mpulaloh credls allached lo lhe
dvdehd al lhe corporale lax rale o 36 lo osel olher lax obgalohs. The
eecloh lo have rahked dvdehds laxed lhrough lhe mpulaloh syslem cah be
allraclve lo hveslors wlh a margha lax rale beow lhe compahy lax rale, eg
superahhualoh uhds;
A sharehoder (logelher wlh assocales) may owh up lo 30 o a FDF, excepl
or bahks ahd e oces or whch lhere s ho ml. The FDF Fegslraloh Board
has lhe dscreloh lo vary lhs rue.
Germany
The Cermah goverhmehl asssls lhe vehlure capla hduslry by hveslhg aohgsde
prvale seclor hveslors ahd aso oerhg lhem lwo oplohs:
Ful oploh: lh lhe evehl lhal ah hveslmehl lurhs sour, lhe cohveslor cah se
back ls equly share lo lhe goverhmehl al a guarahleed mhmum prce eve o
40 beow ace vaue.
Ca oploh: lh lhe case o slar perormers, lhe cohveslor cah buy oul lhe
goverhmehl or a 25 premum over ace vaue. Ths, h eecl, caps lhe
goverhmehl's upsde, hahdhg l over lo lhe prvale seclor.
Nol surprshgy lhs scheme s regarded as havhg beeh hslrumehla h |ump
slarlhg lhe Cermah vehlure capla markel.
Netherlands
A reporl prepared
19
or lhe Nelherahds' Mhslry o Ecohomc Aars argues or a
seed/slarlup uhd backed ehlrey by lhe goverhmehl because o lhe uhallraclve
rsk/relurh proe o such hveslmehls. The case or such drecl goverhmehl
hvovemehl resls oh research lhal shows lhal:
There s a heed or capla al lhe seed slage.
Frovsoh o lhs capla s hgh rsk, ahd uhkey lo be prolabe.
The prvale seclor h lhe Nelherahds s uhprepared lo lhs gap.
Exslhg seed/slarlup uhds are hsucehl lo meel lhe heeds o ehlrepreheurs.
Our vew s lhal lhese are hol parlcuary robusl argumehls or such decsve
hlervehloh.

19
Nelherahds' lCT Twhhhg Cehlres ahd lhveslmehl Fuhds, Mhslry o Ecohomc Aars,
reporl prepared by Booz, Aeh & Hamloh, February 1998.

AppendIx l
Has 1no 1ac o1 a cap11a1 ga1ns 1ax n1ndo1od co1po1a1o
dovo1opmon17
Mahy rms eslabshed h New Zeaahd have beeh hhovalve ahd successu, bul
very ew ( ahy) have kcked oh lo be successu, hhovalve, arge ahd New Zeaahd
owhed corporalohs. A lypca sceharo s or a compahy lo be eslabshed by a
laehled hdvdua who lhrough a combhaloh o hhovalve deas, good
mahagemehl, hard work ahd perhaps ah ouhce o uck, expahds lhe compahy hlo a
successu medum szed compahy (by New Zeaahd slahdards). Ths compahy
mghl have a mulmoh doar lurhover, bul lhe ouhder remahs lhe hearl o lhe
compahy. However, lhere comes a slage h lhe compahy's deveopmehl where
urlher expahsoh requres a arge hcremehla capla h|ecloh ahd a
comprehehsve chahge h mahagemehl slruclures.
Ths expahsoh represehls a hghrsk proposloh or lhe owher/ouhder. l lhe
expahsoh does hol work lhe ouhder rsks oshg everylhhg lhey bul up over mahy
years. Alhough lhe rewards rom lhe expahsoh coud be cohsderabe, lhe owher
may sl pace a bgger weghl oh each polehla doar osl compared wlh every
polehla doar gahed.
The owher/ouhder may aso ressl lakhg advahlage o polehla expahsoh
possbles or hohhahca reasohs. For exampe, lhey may hol wahl lo reduce
lher cohlro over lhe compahy, elher lhrough hahdhg cohlro lo hew sharehoders
or lhrough lhe deegaloh o respohsbles h a arger mahagemehl leam.
Alerhalvey lhere may be eslye or compahy culure ssues lhal coud be pul al
rsk wlh a arge expahsoh. lhdeed mahy rms have hol survved lhe deparlure o
lher ouhder.
Thus a rm h lhs posloh has lhree possbe respohses:
To mahage lhe proposed expahsoh, perhaps lhrough a pubc slhg
To mahlah operalohs al currehl eves, or
To se lhe compahy elher lo be amagamaled wlhh lhe corporale slruclure
o ah exslhg arge scae bushess wlhh lhe hduslry or lo ah orgahsaloh lhal
s beller paced lo mahage lhe expahsoh.
A cohcerh we have s lhal New Zeaahd's lax syslem, h parlcuar a ack o a
comprehehsve capla gahs lax (CCT), may be ehcouraghg owhers lo preer lhe
lhrd oploh (or alerhalvey lhe secohd oploh wlh ah hlehloh lo se evehluay).
A prepohderahce o such decsohs coud be cohlrbulhg lo a scarcly o homebred
corporale mahagemehl sks h New Zeaahd, as evdehced by lhe poor perormahce
o sled compahes h New Zeaahd.
Appehdx l
The markel vaualoh o a compahy w hcude a vaualoh o ls capla assels ahd
aso a vaualoh o ls ulure prospecls. 8uch vaualohs w hcude mahy
hlahgbe aclors such as:
brahd vaues,
compahy repulalohs,
ecohomes o scope,
humah capla ahd
lhe mpacl o expecled markel deveopmehls.
lh prhcpe lakhg lhese aclors hlo accouhl shoud be equvaehl lo lhe hel presehl
vaue o lhe ulure earhhg power o lhe compahy gveh currehl hormaloh ahd
expeclalohs ahd provdhg or a horma relurh or ahy polehla purchaser. As such
lhe compahy vaualoh w hcorporale ah aowahce or ulure hcome growlh. l
lhe owher chooses lo se he or she w rease loday a proporloh o lhe compahy's
ulure hcome polehla, e lhey w earh a capla gah.
There s holhhg wrohg wlh lhe owher makhg lhs capla gah; l s a ar relurh oh
pasl eorl ahd hhovaloh. However, s l ar lhal lhey pay ho lax oh lhs hcome!
The ack o a capla gahs lax s key lo skew owhers lowards decdhg lo se
ralher lhah rsk carryhg oul ah expahsoh lhemseves. By sehg lhey cah rease a
share o ulure hcome growlh, wlhoul lakhg lhe rsk ahd wlh a ower lax burdeh.
Nol ohy does lhe currehl owher acheve a rskree share o ulure expahsoh
prospecls (s)he aso receves a lax break or dohg so.

AppendIx ll
The hlervew gudes
Ooa1 11ows7po11o1manco
|stablish what funds the firm/enterprise has available tc invest:
MED's vehlure capla rm reporl provdes hla gude
ls capla a pad up weghl o mohey probems or uhd mahagers
Or avaabe lo be caed up rom hveslors ormay or hormay
Backed by realed parly baahce sheels successu pehly more avaabe
what rules gcvern use cf the funds sectcr, naticnality, dcmestic/expcrt, single
amcunts
|evel and characteristics cf demand
How mahy prospeclve hveslmehl largels do lhey hormay have oh record al
ahy ohe lme
Number lhal are haclve, aclve, lop o lhe hveslmehl commllee agehda
Number lhal are re|ecled amosl mmedaley
Tme ahd resources hvoved per dea
what channels dces ycur firm use tc identify/attract pctential ventures
Aclve search ahd drecl approach
Brokers accouhlahls, bahks, slockbrokers, elc
Deal drcp-cff rate
Whal slages o ahayss/cohsderaloh do deas go lhrough
Whal s lhe dropo rale al each slage
Whal percehlage o rms hlay cohsdered, acluay receve uhdhg
Whal commoh aclors ahy are lhere h lhose proposlohs lhal are re|ecled
|nvestment criteria
Whal are lhe rm's hveslmehl crlera sze, hduslry, equly ohy, perod
How slrcly does lhe rm slck wlh lhe crlera!
Appehdx ll
8ize and structure cf deals
Whal s lhe average sze o a dea
How s l hormay slruclured equly, debl, oplohs, elc
Are rms smpy ookhg or capla or are markelhg cohheclohs, mahagemehl
experlse, elc cruca hgredehls
Board represehlaloh, reporlhg
Ahy cohsslehcy across hduslres/aclvles, compahy szes
what stage cf develcpment are pctential recipient firms at in practice and ideally
|ailure rate
O lhe hveslmehls made how mahy have hol relurhed ahylhhg ahd are uhkey
lo
How mahy have relurh ess lhah was hvesled ahd how do you relreve lhal
mohey
Whal were lhe mah reasohs or hveslmehls ahg poor |udgemehl by
hveslor, uhoreseeh lechhca probems, laehl chahges, ecohomc cohdlohs,
elc.
How mahy provde ah hadequale relurh
How mahy provde expecled, or beller lhah expecled, relurhs
Cveh lhe mmalure slale o lhe markel l mghl be dcul lo gel good
qualy ahswers lo lhese queslohs.
|ate cf return
Whal rale o relurh do you ook or wheh hveslhg, ahd h praclce whal s lhe
rahge o relurhs you are currehly ookhg al
Whal s lhe lypca ehglh o hveslmehl
Ccmmcn prcblems/mistakes asscciated with actual investments unrealistic
budgets, pecple prcblems, pccr infcrmaticn flcws.
|xit strategy
Whal exls have beeh acheved
Whal are lhe oplohs cohvehloha, hhovalve
Appehdx ll
Gaps ana1ys1s ~ 1n1o1ma11on, s111s, 1und1ng
1. Whal roe do you see your orgahsaloh hg h lhe vehlure capla markel!
8crubbhg up proposas
Brokerhg deas
Frovdhg capla
Eslabshhg mporlahl realohshps belweeh bushesses ahd hdvduas

2. Whal experlse do you brhg lo lhe vehlure capla markel!
Fhahca ahd accouhlhg khowedge/sks
Techhca khowedge
Cehera bushess sks ahd experehce
Markelhg experehce lo rehe slralegy ahd bud eeclve cohlacls
Cood helwork or rashg capla

3. Whal relurhs/rewards are you seekhg rom your hpul lo lhe vehlure capla
markel! whal's your bushess case or slralegy!
8lraghl hahca relurh oh lme ahd mohey hvesled
Lohg lerm capla gahs (whal lax mpcalohs are lhere!)
New cuslomers

4. Where s lhe ma|or cohslrahl lo growlh or your vehlure capla realed
bushess!
The humber or qualy o rms seekhg uhdhg
Capla lo hvesl
Approprale experlse lo deveop successu proposas

5. How much capla have you beeh drecly hvoved h hveslhg! How mahy rms
have you salsed"!
Wahl a ee or lhe voume o bushess behg cohducled

Appehdx ll
6. Where do you gel your capla rom!
Frvale hdvduas ahge hveslors
Famy ahd rehds
Fooed prvale uhds
Exslhg vehlure capla compahes
Fealed bushesses/ corporale hveslors
Olher

7. Where do you see lhe mah gaps h lhe vehlure capla markel!
Are lhese gaps behg cosed by hew rms ehlerhg lhe markel/exslhg
rms chahghg lher bushess!
Do you perceve ahy roe or goverhmehl h addresshg exslhg gaps
so whal roe!
Have ahy gaps beeh ed over lhe pasl ve years whch ohes!

8. Whal realohshps do you have lhal are cruca h perormhg your bushess!
Lawyers/accouhlahls
Bahks
Olher vehlure capla compahes
lhdvduas wlh specc lechhca bushess experlse
Crowh research agehces
lhlerhaloha bushesses ookhg or oca parlhers

AppendIx lll
Dea apprasa process
Craig c Cc
P1ocoss
1. EnquIry
Fespohd Oulhhg Crag & Co process
Terms o ehgagemehl
lhveslor requremehls
Cohdehlaly uhderlakhg
Z. Ccmplete Memcrandum cf UnderstandIng
8ME respohsbly
Crag & Co roe
lhormaloh Fequremehls by who
wheh
Fee 8lruclure
3. EvaluatIcn Prccess
Queslohhare
lhdepehdehl ophohs ahd assessmehls
Vaualohs
Fecommehdalohs
4. Panel OpInIcn
Fe|ecl 8CM lFO
Feer Vehlure Caplasl
Fu lFO
Trade 8ae
Froceed 8CMlFO
5. SCM
lFO FFOCE88
Appehdx lll

NEW CAPlTAL MARKETS
Overvew o Crag & Co Frocess

EnquIry frcm small tc
medIum enterprIse
SME

EVALUATlON PROCESS
QuestIcnnaIre/EnquIry
(BC, RTB, NJC)

CRAlG & CO PANEL DEClSlON
NCM
lFO
Fu
lFO Foal
Trade 8ae
Feer lo
Vehlure
Caplasl or
Agehl
Feer Cehl
Croup
Crag & Co
Brahch
Vehlure
Caplasl or
olher Agehcy |nquiry
Recommendation
|eject
|FC
|eject
Appehdx ll
CALTECH lnvestment prccess
1n11oduc11on
Calech has deveoped a comprehehsve hveslmehl process hvovhg a lhree phase
screeh. The process s desghed lo mhmse lhe rsk o CDCF Croup hveslhg h
porloo ehlles whch are uhabe lo acheve CDCF Croup's relurh ob|eclves. A
premhary assessmehl o lhe compahy s carred oul h phase ohe. Fhase lwo
hvoves appcaloh o lhe comprehehsve BeMasoh hveslmehl daghoslc.
Furlher ahayss, hcudhg dscussohs wlh exlerha parles reevahl lo each
dmehsoh, s uhderlakeh h phase lhree.
F11s1 sc1oon ~ Tno CALTCH
Fhase ohe assesses polehla hveslees agahsl lhe CALTECH premhary screehhg
crlera. These crlera seek lo eslabsh lhe kehood o lhe vehlure achevhg
rapd growlh. Areas examhed lo delermhe lhe ecohomc vably o lhe bushess
ahd ls polehla lo cohlrbule lo CDCF's hveslmehl slralegy ahd relurh ob|eclves
are:
Compellve Advahlage uhquehess o lhe producls, owhershp o hleeclua properly
Aahces slralegc aahces, ehdorsemehls rom cehls, board members
Lml o markel markel ahd segmehl szhg, compelloh, palhway lo markel
Team cabre ahd sks o lhe mahagemehl leam
Ehlrepreheur lrack record ahd ably o lhe che execulve
Capla capla requremehls, burh rale ahd vaualoh o lhe vehlure
Hslory meslohes acheved, hahca perormahce, ahd successu
capla rashg

Socond sc1oon ~ Tno Bo11-mason O1agnos11c
Fhase lwo hvoves appcaloh o a comprehehsve daghoslc melhodoogy across
each o lweve bushess dmehsohs behg lechhoogy, producl, mahuaclurhg,
bushess pah, saes, markelhg, che execulve, leam, board, cash, hahceably
ahd cohlros. The daghoslc s lhe BeMasoh Daghoslc ahd s delaed oh pages
17 ahd 18 o lhs Memorahdum. The resul o appyhg lhe daghoslc s a graph
whch uslrales a gap ahayss behchmarked agahsl a dalabase o sx huhdred
successu hgh growlh compahes.
To1ms snoo1
The lerm sheel s lhe hahdshake agreemehl" belweeh CDCF Croup ahd lhe hveslee
compahy ahd accompshes lhe oowhg purposes:
l reecls lhe agreed vaualoh o lhe bushess ahd lhe proposed aocaloh o
lhal vaue belweeh lhe exslhg sharehoders ahd CDCF Croup;
l summarses lhe key hahca ahd ega lerms o lhe lrahsacloh whch w
serve as lhe bass or preparhg dehlve ega documehls;
Appehdx ll
oh occasoh, lhe lerms sheel w mpose ega obgalohs oh lhe parles, such
as requrhg paymehl o expehses h lhe evehl lhe hveslmehl does hol occur or
prohblhg hegolalohs wlh olher parles pehdhg lhe compeloh o lhe
lrahsacloh.
Above a, lhe lerms sheel s used by CDCF Croup lo ecl lhose cohcerhs o
hveslee compahy mahagemehl whch, uhaddressed ahd uhresoved, mghl aler
deveop hlo dea kers". Typcay, lhe CDCF Croup lerm sheel covers:
lhe slruclure ahd orm o lhe hveslmehl h lerms o orm o securly,
cohversoh, preemplve ahd volhg rghls;
board represehlaloh ahd mhorly proleclohs;
warrahles ahd hdemhles;
empoyee cohlracl requremehls ahd reslrahl o lrade provsohs;
cohdlohs hcudhg due dgehce; ahd
workabe procedures or dveslmehl.
Tno 1n11d sc1oon
Fhase lhree hvoves ah h deplh ahayss ahd dscussoh wlh exlerha parles oh
key aspecls o each dmehsoh. Fevew o documehlaloh provdhg hleeclua
properly prolecloh, dscussohs wlh mahuaclurers or key compohehl suppers,
leslhg o cohsslehcy h slralegc ahd operaloha pahs, dscussohs wlh
cuslomers ahd cehsed dslrbulors, dscussohs wlh pasl empoyers, revew o
empoymehl documehlaloh hcudhg reslrahl o lrade agreemehls ahd prol share
agreemehls, ahayss o board meelhg procedures ahd mhules, assessmehl o cash
requremehls measured agahsl accumualed ables ahd burh rales, revew o
capla slruclure ahd relurh ob|eclves ahd revew o key cohlro syslems are
uhderlakeh.
Loga1 documon1s
Lega documehls w lypcay hcude ah hveslmehl agreemehl, whch w dela
lhe lerms o purchase ahd lhe provsohs o lhe securles behg acqured. A
obgalohs or mled obgalohs debehlures ahd oah agreemehls may be requred.
A mhorly sharehoders agreemehl w documehl reslrclohs upoh lhe lrahser ahd
volhg o securles. Ah empoyee share purchase agreemehl whch goverhs ahy
currehl or ulure aocaloh o equly h lhe bushess lo key empoyees may orm a
separale ega documehl or orm a parl o lhe hveslmehl agreemehl. Addlohay,
empoyee cohdehlaly ahd proprelary rghls agreemehls assurhg lhe relehloh
by lhe hveslee compahy o ls hleeclua properly may orm parl o ega
documehls.
Appehdx ll
Ca11ocn ~ 1no Bo11-mason d1agnos11c
P1ovon ova1ua11on mo1nodo1ogy dovo1opod ovo1 1111oon yoa1s
The BeMasoh Daghoslc s ah evaualoh melhodoogy rehowhed h lhe Uhled
8lales. Calech has adopled l as parl o ls evaualoh process o CDCF Croup
porloo compahes. The melhodoogy s ah experl syslem whch provdes a
rgorous ahd slruclured approach lo assesshg a proposed hveslmehl agahsl
recoghsed behchmarks.
The ahaylca approach o lhe BeMasoh Daghoslc s based upoh evaualoh rues
whch have beeh geheraled rom h excess o sx huhdred aclua cases over leeh
years. By comparhg lhe hveslee compahy lo lhe poo o experehce, lhe daghoslc
provdes a cohsslehl ahd ob|eclve melhodoogy or ahayshg ahd comparhg
compahes.
Alhough lhe daghoslc was orghay desghed lo serve hgh growlh compahes lhe
gudehes are equay useu or arge compahy hlrapreheurs ahd l s used by
corporalohs such as Mlsubsh, Moloroa, DEC ahd Fhps. Execulves wlhh lhese
arge corporalohs musl dea wlh lhe same ssues as ehlrepreheurs.
The syslem assesses lhe healh o ahy bushess al each slage o ls deveopmehl
rom cohcepl lhrough lo achevhg a sleady slale h lhe markel deveopmehl slage.
Ro1a11ona1 g1apn1c ou1pu1
Ohe o lhe ealures o lhe BeMasoh Daghoslc s lhe way l depcls lhe resuls o
lhe ahayss by use o a realoha graph. Ths ehabes Calech lo assess a compahy
by examhhg lweve crlca dmehsohs al a gveh slage. The shape o lhe dea
hveslmehl has beeh ormed by observaloh ahd leslhg.
The our cohcehlrc crces oh lhe graph dehole lhe deveopmehl slage o lhe
compahy. The lweve bushess dmehsohs are polled oh lhe graph or lhe hveslee
compahy. Al every slage, lhe vaue or every dmehsoh shoud e h lhe rahge
belweeh lhe crces or lhe prevous ahd currehl slages. 8hce a compahy may hol
have compeled a o lhe currehl requremehls or a parlcuar slage, l s possbe
lhal lhe vaue or ohe or more dmehsohs may e somewhere wlhh a prevous
slage. 8uch a dscrepahcy hdcales lhal lhe rm s uhderdeveoped h some
dmehsohs or lhe slage al whch l purporls lo be.
Fohls polled al lhe crcumerehce o lhe crce or a gveh slage represehl lhe
dmehsohs o grealesl mporlahce al lhal slage. For hslahce, al lhe cohcepl
slage, lhe our dmehsohs lhal orm lhe axes lhe bushess pah, CEO, cash, ahd
lechhoogy are lhe mosl crlca. A dmehsohs shoud be uy evoved ahd e oh
lhe ouler crce by lhe lme lhe compahy becomes ah eslabshed bushess.
Ooc11vo assossmon1 ac1oss 1wo1vo d1mons1ons
Appcaloh o lhe daghoslc asssls h ehsurhg lhal lhe Mahager s hol caplured by
sub|eclve assessmehls h lwo or lhree dmehsohs o a compahy bul has ah
ob|eclve assessmehl across lweve dmehsohs o each compahy. Forloo
compahes are hol expecled lo demohslrale perecl proes. Falher, lhe daghoslc
provdes a cear assessmehl o where ahd how Calech s abe lo add vaue lo
porloo compahes.
Appehdx ll

The Bell-Mason Diagnostic
Output Graph
1 Technology
4 Business Plan
3 Manufacturing
2 Product
7 CEO
6 Sales
5 Marketing
8 Team
10 Cash
9 Board
12 Control
11 Financeability
Stage I
Concept
Stage II
Seed
Stage III
Product Development
Stage IV
Market Development
The Bell-Mason Group Inc.
Systems For Enterprise Development
Copyright 1992

AppendIx lV
Tno G1oa1 Aow Zoa1and Bus1noss Von1u1o: S11mu1a11ng
1nnova11vo Bus1noss G1ow1n 1n Aow Zoa1and
The Creal New Zeaahd Bushess Vehlure s desghed lo slmuale ehlrepreheura
aclvly ahd lo ehhahce lhe deveopmehl o helworks h whch hhovalve bushesses
w lhrve. The hlalve s based oh a proveh ormal whch has beeh successuy
mpemehled by McKhsey h severa U8 ahd Europeah slales h recehl years. ll
represehls a hghmpacl, popuar ahd cosleeclve melhod o mobshg New
Zeaahd's dormahl ehlrepreheura polehla, ahd w ruh rom eary March lhrough
uhl 8eplember 2000.
The prmary am o lhe programme s lo bud a slrohg culure o ehlrepreheurshp
wlhh New Zeaahd. lls specc ob|eclves are:
To creale mulpe vabe hew bushesses
To ehhahce lhe deveopmehl o helworks o ehlrepreheurs, proessoha advsers
ahd vehlure caplasls ocused arouhd lhe cohcepl lo compahy" phase.
The hlalve s essehlay a bushess pah awards programme h whch parlcpahls
w progress lhrough a lhreeslage process lo compele a uscae bushess pah.
A hghproe pubc auhch w be hed h each o lhe lhree mah cehlres
Auckahd, Wehgloh ahd Chrslchurch h lhe week beghhhg 6 March. The
compelloh has lhree phases:
Fhase 1 (commehchg 6 March): Freparaloh o a bushess dea.
Fhase 2 (commehchg 8 May): Freparaloh o a bushess case (hcudhg ahayss
o lhe markel, producloh processes, capla requremehls ahd markelhg
slralegy).
Fhase 3 (commehchg 10 Juy): Freparaloh o a delaed bushess pah.
Coachhg ahd mehlorhg opporluhles w be provded lo cohleslahls (ree o
charge) by mahy o New Zeaahd's ma|or servce rms. Ehlry w be opeh, bul lhere
w be a parlcuar emphass oh hew lechhoogy bushesses (or exampe e
commerce, bolechhoogy ahd hlech bushess) wlh a ocus oh slarlups ahd
growlh phase bushesses.
Al each phase o lhe compelloh a pahe o |udges (vehlure caplasls ahd
ehlrepreheurs) w evauale ehlres. Frzes descrbed as seed capla" w be
awarded al lhe cohcusoh o each phase wlh lola prze mohey o S360,000
avaabe. A parlcpahls who compele a phase w be egbe lo progress lhrough
lo lhe hexl phase o lhe compelloh.
8mar bushess pah awards programmes overseas have beeh hghy successu h
crealhg vabe hew bushesses ahd a ohglerm hraslruclure. A mohlh aler lhe
rsl awards programmes h Cermahy, 8wlzerahd ahd lhe Nelherahds, 200 hew
bushesses had beeh ormed. The 5year largels or lhese bushesses are revehues
Appehdx lV
h excess o NZS7 boh ahd 8,000 |obs. Eary hdcalohs suggesl lhal lhe
programmes creale gehuhey hew bushesses wlh mproved chahces o success.
The Creal New Zeaahd Bushess Vehlure has beeh eslabshed as a Charlabe
Trusl. Johh Hood, Vce Chahceor o lhe Uhversly o Auckahd, s ah advsor lo lhe
pro|ecl. The Che Execulve s Brdgel Wckham ahd she s supporled by a core
leam o promhehl New Zeaahd bushess peope: Ahdrew Crahl, Joh Harley, Fau
Lockey ahd 8coll Ferkhs.

Cohlacl delas FO Box 90282
Auckahd
Websle www.grealvehlure.co.hz
Fhohe (09) 306 2492

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