The Press, April 2005

Warren Buffet of Berkshire Hathaway, founder and CEO of the world's most successful investment company, has a simple recipe for providers of capital. "Why not invest your assets in the companies you really like?" As Mae West said, "Too much of a good thing can be wonderful". New Zealand's rate of venture capital investment is lower than many other developed countries - so why don't our investors like our entrepreneurs? Don't they have enough vision to understand what innovators are doing? Or are entrepreneurs not producing enough clever ideas? Neither statement is true - the real problem is a marketing one.

Lack of available capital is an issue for the government. "... valuable innovations go begging for investment. The Government is frequently getting the message that good ideas in Crown Research Institutes, universities, businesses or even garden sheds are not being turned into new businesses the way they are elsewhere," says Pete Hodgson, Minister of Commerce. His government put aside $100 million in 2002 to establish the New Zealand Venture Investment Fund (NZVIF).

The NZVIF's CEO Francesca Banga recently told a parliamentary select committee that New Zealand was well down the ladder when it came to the proportion of GDP invested as venture capital. Our figure was a quarter of that of Australia.

But there is plenty of contrary opinion, that it is not a lack of capital but a lack of viable business ideas that is the problem. Deutsche Bank corporate finance head Scott Perkins said in a 2002 University of Auckland Business Review article, that ". . . there is no real shortage of capital in New Zealand, but a shortage of propositions that are considered viable by venture capitalists."

Davis Lester Clarke from Business Angel Investments Ltd was more blunt in the February 2005 issue of Unlimited Magazine, "Venture capital and private equity investors throughout the world have the same mantra: there is never a shortage of funds to invest (his italics). The greatest challenge . . . is finding a viable recipient or product for the funds - whether it's in New Zealand or somewhere else. Putting it bluntly, they are hard-pressed to find companies that have achieved critical mass (i.e. that have compelling business propositions and meet their investment criteria)."

So what constitutes a 'compelling business proposition'? Surely there are many great ideas and products around the garden sheds of New Zealand? Of course there are. But there is also a fundamental misunderstanding of what capital providers are looking for. What interests venture capitalists is not clever products, but clever ways of meeting a clear market need.

What's the difference? Consider these scenarios confronting a 19th century venture capitalist:

  • Proposition 1: I've invented this amazing thing called a car. It has a black metal chassis, rubber wheels and a combustion engine.
  • Proposition 2: I've invented this machine that gets you around as fast as a horse and buggy but never gets tired.
  • Proposition 1: I've invented this amazing thing called a light bulb. It is a glass tube with a filament inside powered by electricity.
  • Proposition 2: I've invented this thing that provides 10 times more light that a candle and lasts 100 times as long.

Which one would you have invested in? It sounds silly, but some New Zealand entrepreneurs will describe their valuable investment commodity in terms of what it is, rather than what it does for people. They expect investors to somehow divine what the market opportunity is. As the classic US business writer Napoleon Hill said "There is always plenty of capital for those who can create practical plans for using it."

Lenders want to invest in a market opportunity that you are developing, not your product. Of course there are many other important factors such as quality of management, financials and intellectual property protection. But it is this fundamental marketing concept that is often the missing element in compelling business propositions.

So how do you create an investment-attractive company?

  • By getting 'outside' your business - you need to understand intimately what your product does for someone. For example, you haven't invented the best accounting systems, but the best way of helping companies make decisions around resources.
  • By getting targeted - you need to select and understand your market. Where is the market, how big is it, what are the names of the companies in it, what technology are they using now, what is their buying cycle.
  • By building a complete picture for the investor - make sure all of your fundamentals are there and focussed on your market: the right people, channels to market, business processes, pricing, support, promotional strategy, intellectual property protection and so on.

The problem with venture capital in New Zealand is less about the lenders than our ability as business people to provide compelling investment propositions. Understanding the market you are in is the first step to creating the magic formula that will attract the capital to help you realise the potential of your great idea.

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