Capital crunch for IT start-ups

The economic downturn is dampening venture capital investment in New Zealand, according to industry figures.

Mark Robotham, general manager of New Zealand Trade and Enterprise's Escalator Service - which helps young companies raise funding, says more firms are struggling to raise capital as a result of the downturn.

Government-backed Venture Investment Fund chief executive Franceska Banga says companies looking to expand beyond New Zealand may struggle to raise the required capital.

"For those companies that received initial rounds of investment in the New Zealand market now looking for the next $10 or $15 million to grow into global companies, the global market is quite challenging in the short term."

The combined total of private equity and venture capital investment in 2007 rose to $1.225 billion from $1.209 billion in 2006, but investment in information technology dropped.

The majority of the investment occurred in the first half of 2007, with just $99 million invested in the second half as the international credit crunch took hold.

Venture capital firm No 8 Ventures director Jenny Morel says the downturn will have an impact on start-ups' ability to raise funds.

The Australian venture capital market has slowed down, she says, and less money is available.

"People are taking a wait-and-see attitude and there's been a flight to cash and fixed interest investments."

But New Zealand Venture Capital Association executive director Colin McKinnon believes the slowdown in venture capital investment is due to the fact that most of the six venture capital funds that receive co-investment from VIF are no longer investing in new companies.

Those funds have passed the five-year mark after which they can no longer make new investments. "We are not affected by economic cycles as much as we are affected by the evolution of the industry in New Zealand."

Angel Association chairman Andrew Hamilton says angel investment tends to be less affected by market conditions as it is longer-term investment, but funding figures are slightly down because the market has become more cautious and deals are taking longer to work out.

There were 14 angel investment deals in the first half of this year, compared with 19 in the first half of last year, he says.

"We're finding that good deals still get done. What's not happening is the more marginal deals, which are not getting through."

Venture capital investment in IT in the United States fell 26 per cent to US$2.6 billion in the second quarter of this year compared to the same period last year, according to a National Venture Capital Association and PricewaterhouseCoopers report.

- © Fairfax NZ News