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It's time for venture development partnerships

It's time for venture development partnerships

It is serial entrepreneurs that we currently lack in New Zealand. These are the guys who know how it is done

Situations vacant: commercialisation coach wanted New Zealand venture development company seeks entrepreneurial managers skilled in taking companies through the commercialisation stages of turning a seed venture into a successful business. Your background may be in law, finance or marketing BUT you will have experience in taking an idea and turning it into a business — for yourself or someone else. Backed by the New Zealand Government VIF Fund, remuneration is commensurate with the senior level of this position and will include a share portfolio in the companies you coach. Complete confidentiality guaranteed Contact Serial Entrepreneurs Employment Agency today.

My friend Chris sold his first company to IBM in 1985 and made a lot of money. When I met him in 1998 he was looking to sell his sixth company — a Y2K-based consultancy. To establish the company he initially needed money and contacted 20 Silicon Valley venture capitalists. Fifteen expressed interest — he short-listed 10 and ended up selecting three. Why were these VCs queuing up and competing to invest? Chris had already started five businesses before and had made money for investors — why wouldn’t he be successful with number six? To the VCs it was as good as money in the bank. It is serial entrepreneurs, such as Chris, that we currently lack in New Zealand. These are the guys who know how it is done. When you have started and exited half a dozen companies there is fair chance you know what you are doing. Growing a new technology company is like walking through a minefield when you haven’t done it before — there are plenty of opportunities to get blown away. When you’ve done it a few times you know what to look out for — when to take evasive action.

Serial entrepreneurs are battle-scarred; not always successful, but experienced. Not only can they do it for themselves but they can also make other companies successful by coaching them through the commercialisation minefield.We have precious few entrepreneurs who have been through the process once, let alone two or three times. With the quality and experience of the management team being the number one criteria for backing by a major offshore VC firm, it is little wonder that very few New Zealand ventures have attracted funding. Yet, without financial backing, our fledgling IT industry will not survive.It is horrifying to think that there has been no new venture capital investment made in New Zealand’s software industry since last September. According to AVCAL, the Australian VC association, there has been a “massive collapse” in VC investment in the last quarter, from $A527m to $A76m, with only $A11m going into the entire IT sector both here and in Australia. The government’s VIF venture fund appears to be partly to blame for the freeze in local funding and the word now is that its contractual terms are causing a problem.The VIF fund was designed to inject $300 million capital into the local VC market. One reason it is having problems coming to fruition may be because the government wants investment to be made at the early “seed” stage of a business’s life. This can be a problem for a VC which, prior to investment, must undertake due diligence to ensure the venture is sound. That costs a lot of money in lawyers, accountants and specialist fees, probably at least $100K per potential investment. VCs look to invest no less than several million dollars at a time so that due diligence costs don’t gobble up their fund. But if you are a seed venture you are probably only looking for around $200K-$400K. If that money is delivered as a result of due diligence — for every $1 invested it has cost another 50c to 25c for the vetting process. Not something investors will put up with. It has been suggested to me that if government insists on funding seed ventures the VCs will just take a million dollars and distribute it to the first through the door. It simply isn’t worth investing in due diligence at that stage and there is currently no other way to assess a company’s market worthiness.Hence the advert for venture development coaches — employing people like my friend Chris, on either a full- or part-time basis — to coach seed ventures through the commercialisation process. When a venture needs seed funding it invariably needs skill and knowledge more than the money itself. It usually falls to an angel investor to put in the time and effort, as well as capital, to support the venture.Here then is our opportunity:* New Zealand start-ups lack commercialisation skills.* Companies — like children — enjoy the biggest impact on their potential for success in the first years of life. * Instead of spending money on due diligence, spend it on commercialisation coaches who can train a seed venture team to succeed.People have been providing support for start-up ventures for some time now from the “all care and no responsibility” free mentoring service of BIC (Business in the Community) to a large number of independent consultants who charge for their services, so how is what I am suggesting any different?The problem is that free services, at best, can provide only limited support. Yet early-stage ventures don’t generally have the money to pay for the time of successful serial entrepreneurs, who would be unlikely to get involved unless they believed in the venture and could see a good return from their efforts. How can a start-up venture commit precious financial resources to someone with nothing to lose if they fail when the venture’s founder(s) lose everything?The answer is to commercialise the commercialisation process itself — provide a vehicle through which serial entrepreneurs can get paid, at their own discretion, yet benefit from the fruits of a successful commercialisation — without having to bleed a start-up’s limited funds. Venture development partnerships would be formed by seasoned entrepreneurs who could inject their experience, knowledge and network connections into early-stage ventures in return for equity in the ventures. They would be self-regulating as no one could afford to partner with a dodo in a business where the returns are directly related to the quality of their skills and the ventures backed. VDP firms would then be loaned $2m-3m million of seed money from the VIF fund in the same way the VIF’s VC funds are being applied. The VDP would then match this $1 for $1 from private investors, doubling the funds available and providing a pool of money to be used solely for developing seed companies to the point they are ready for VCs to invest in them — or to float on a public market.The problem we have with the US venture capital model is that it is based on the assumption that for every thousand ventures reviewed they will invest in 10 and one will be a success. We in New Zealand just don’t have the luxury of volume. We don’t even have 1000 potential investments from which to obtain the winner. Therefore we must do what the Swedes did with their successful venture development in the 90’s — assume that every potential investment is flawed, seek out the least flawed and have the resources available to plug the holes.Instead of a VC completing due diligence, finding flaws in the business plan and dropping the idea altogether, venture development partnerships would work on fixing the flaws and giving the good idea a chance of becoming a global success. A VDP would work with VC firms to ensure that they were steering their charges to the point at which VCs would themselves invest in the venture. At this point the VDP could liquidate part of their shareholding to top up their finances and so carry on their good works. At some point the VDP would repay the government on the same basis as the current VIF terms.By liquidating only part of their holdings in a venture — with the VC’s agreement — the VDP partners would retain their interest in ensuring that the venture someday hit the big time and they could reap windfall profits on their initial investment. There are many people I can think of off-hand who would make suitable partners in a VDP, which would also become a crystallisation point for focusing the skills of others in areas such as design, advertising, branding, patenting and export. The VDP’s investment in its charges would allow for such experts to be paid. Another party that should be interested in this concept is the Stock Exchange. The NZSE needs fresh blood, and supporting VDPs to provide commercialised, profitable businesses that could be floated would be one way to reinvigorate the exchange.I am doing more than flying a kite. The venture development concept is viable, workable and easily implemented. It would create a win/win solution for everyone involved, including the government and private investors. Not long ago there was no such thing as the VC firm (which are actually investment partnerships) — today it is a global industry. Venture development partnerships and commercialisation coaching may be no more than an idea at this stage — but if any industry can take a good idea and turn it into a multimillion-dollar business, this should be the one. John Blackham can be reached at ajb@xsol.com.

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