Romancing the venturous
Source : NZ Business magazine
April 2005

You have a great business idea, or product to develop, but insufficient backing to fund the process? Sounds like you need to talk to a good venture capital company. Mark Peart reports.

Venture capital companies in today’s economy have their work cut out shaking off stereotypes.
Their popular image, at the extreme end of the spectrum, is of money-hungry speculators who want to get into a company, and then at some predetermined point, get out again, having made a killing in the meantime.

They also, supposedly, have little or no regard for the welfare (financial and otherwise) of the people they went into business with in the first place. A fairer characterisation would be of a company that wants to extract a commercial return from it’s investment (otherwise why would they be in business?), but altruistically, sees the value in giving an entrepreneur a helping hand to bring his or her hitherto unrealised pipe dream to a commercial fruition.
Endeavour Capital founder and chairman Neville Jordan squarely fits into the latter category. In 1975 he founded MAS Technology, a telecommunications microwave company, and he has been on boards of the Foundation for Research, Science & Technology and Technology New Zealand.

MAS Technology was listed on the NASDAQ national market and then was successfully merged with US company, Digital Microwave Corporation.

Long term investment

Endeavour Capital invests with a long-term view, holding positions in companies for up to eight years. Traditionally it takes an equity position of between 20 and 40 percent and requires board representation. Jordan now chairs Endeavour Capital, and the company operates with a licence from the government’s Venture Investment Fund. In this role he has several investments in New Zealand-based science and technology companies, including co-founding the drug discovery company Protemix, based at Auckland University.
Jordan says there are a lot of people up and down the country with great entrepreneurial ideas. “They’ve been working away in their back rooms, and sometimes they get swept away with their own technology or idea, and they haven’t given much thought to how this idea could be funded to develop it and take it to the market.”

Contrary to popular opinion, says Jordan, it’s not so much the shortage of capital that can inhibit a would-be project. Rather, it’s a lack of thought about how to take the plan to the next level and beyond.

Jordan says entrepreneurs sometimes fail to grasp the concept that their project needs sound financial backing to succeed. “They try to get by with a very, very small amount of money and they’re forever destined to be really, really struggling.”

He says there is no shortage of would-be sources of information about venture capital in this country. New Zealand Trade and Enterprise (NZTE) has well-resourced small business group, while banks and accounting firms can also point people in the right direction.
Research, he says, is critical. “Quite often the budding entrepreneur just quietly sweats away without actually raising their head up and going and seeking advice.

“ Quite often someone starting up (business) or trying to develop an idea will get money from friends and family. If the idea is fairly solid and quite well-rooted in science and technology, then venture capital can provide funding at that stage.
“ At Endeavour we’ve provided money for quite early stage ideas and start-up companies. We have to be very careful that we recognise risk. We also have a responsibility to our investors to make sure that we give them a good return. That includes the Government’s contribution for venture capital.
“ We’ve been quite careful to build a portfolio that spans everything from really early stage seed money through to later stage companies – on a timeline of company growth.”
Endeavour’s investments to date have centred around biotechnology, IT, and aircraft.

The Company is currently partnering with Otago University to commercialise a novel laser system which has been developed within the university’s department.

When NZBusiness spoke with Jordan in February, a company had not yet been formed. We’ve put money into the market research and to help scientists and technologists understand the kind of markets that might be open for this new laser,” he says.
“ If we find there looks like good application, then we’ll put more money in and start a company. That’s a good example of outstanding science at a university which is hopefully going to be further developed.”

At Waikato University, Endeavour has also invested in technology associated with degree courses for distance learning.
Jordan says budding entrepreneurs commonly raise that own cash by mortgaging personal assets. Venture capital companies like Endeavour have their own benchmarks for assessing such people if they are approached. He says whether people seem to have integrity, know what they are talking about in a particular area, and understand the kind of market that they are trying to get into, are all important considerations. “A lot of it at that early stage is: do these people seem to be good people to do business with? After a while you develop a certain intuition about the integrity of people.

“ They do need to understand the size of the market they are trying to address and what might be the rate of demand in that market. They also need to be able to very clearly state what is the unmet need that they are trying to address.

“ There are occasions when there are products or technologies developed that really don’t seem to fit anywhere and quite often that can proceed to a certain stage, but at some point you need to know that sort of area the market to going to address.
“ Risk analysis is important, particularly in science and technology. Does it depend on technology to be developed, or is it based on very old technology? We need to know that the risk is in developing it if it’s a product. If it’s a service, have we got enough people around, and the right kinds of people, to develop it and at an early stage, to convince people to put money in?”

Other questions Jordan and his team ask include: Does there seem to be a good advisory group around the person or people doing it (the business)? Do they tap into facilities like CRI’s (Crown Research Institutes)? Are they using NZTE, and are they doing sector analysis with information from the banks?
“ In other words,” says Jordan. “do they seem to have their heads screwed on?”

Good communication

One pre-requisite, says Jordan, is almost an attribute. “The people involved in the new idea need to be very good communicators. This is not to be able to make flash Powerpoint presentations but to succinctly describe what they are all about.”
“ If, as quite often happens, they can’t do that, then really, they will never convince anybody about the idea.”
Venture capital companies, says Jordan, have difference investing styles.

“ We’re coming at our investment from folks who have been there and done it, and who have started companies from nothing and have taken them through listing on the Nasdaq, so we have earned our stripes. “That gives us a different outlook to others who haven’t had any direct involvement in the risk or haven’t had their own ‘soft parts’ on the line.
“ Some people do see us as a charitable organization and when we explain that we too have responsibilities to investors and shareholders, sometimes that comes as a surprise.”

Initially, Jordan says he was driven by the need to find others who were starting out, particularly in science and technology-based companies. “I wanted to see those companies flourish and get offshore and add to the economy as my company had done. It was very much a philanthropic thrust.

“ Now that I’ve seen a lot of small and medium-sized companies up and down the country, I get very excited. Technology is in my blood. There are very good returns in this area if you know what you are doing and you get it right.”

Nothing ventured, nothing gained

Professional director Bryan Mogridge, a former Tourism Board chairman and managing director of Montana Wines, says he doesn’t think people really do misunderstand what venture capitalists are about.

“ The thing about venture capital as opposed to private equity is that you are going to have a higher failure rate at venture capital, so clearly you most probably need 10 venture capital investments for every private equity investment – from a success ratio.”
Like Jordan, Mogridge says he loves the “intellectual buzz of making it work, the thrill of the reward, and the thrill of the threat of failure.”
In Auckland, he says, the areas of opportunity are centred around biotechnology, education, marine, the movie industry, food and tourism. “Those would be Auckland’s seven big potential activities – along with importation. Someone comes along and says I want to bring this product into New Zealand, but I need some working capital. You would call that venture capital. There are a lot of people who have done very well out of that type of thing.”

Mogridge operates these days as a one-man investment fund. “The request will either come for me to be a director of a firm, or chairman of a firm, or to be an investor.”

His current directorships include Marac Finance Ltd, Pyne Gould Corporation, Mainfreight Ltd and West Auckland Trust Services Limited. His chairmanships include Guardian Healthcare Ltd, Enterprise Waitakere, Designworks-Enterprise, IG and the Starship Foundation.
Mogridge has also been a strategic partner to Rob Berman, owner-operator of the successful online DVD rental business Fatso. Berman, who coined the tag-line for the business: “All the DVD you can eat” says venture capital brings along with it a lot of responsibility, particularly in the level of information you have to provide.

“ On the other hand it allows you to grow the business in a way and at a rate that would be far harder if the additional funds were not available. One of the greatest benefits can be gaining access to expanded networks which can help to drive business growth,” he says.
“ The first thing I did was realise that this was not a small operation that I could run out of a back room – it was not something I could adequately fund myself or through family and friends.
“ Those sources were great for seed funding but more serious capital was required beyond that. We did have early discussions with a bank but although they found the idea interesting, they weren’t willing to lend money on a startup business with no solid assets with which to secure their investment against. We didn’t have any land or buildings for instance, so that wasn’t an option. Raising capital seemed the obvious choice.

“ The first thing is you have to believe in what you are doing and be prepared to demonstrate a full commitment to the process,” says Berman. “Be prepared for some disappointments and make sure you are focused on achieving your goal, it is only your own drive that will get you through to the end point, nothing arrives on a plate.
“ At some point you have to commit everything, and that means burning your bridges and giving up your day job. That was the turning point for me, Just diving into the water – as that point you’re either going to sink or swim. Investors look for that commitment, people like and respond to confidence and commitment – they want you 160 percent committed.”
Berman says having had a venture capital partner involved as opposed to other types of financing will allow Fatso to fund faster-than-expected growth.

“ The business has grown quite a bit faster than we thought it might, and I think we are well positioned now to go forward. The brand is getting some really good exposure and we fell it is starting to get some good penetration into the market. We’re looking to be a household name within the next year or two and perhaps expand into parallel markets.”

Berman says a good marketing and business plan is very important for all businesses, particularly it they are raising capital.
“ You need a well thought out, professional looking plan and you need to be able to talk confidently to it. There is nothing more compelling than having to explain yourself in front of a group of people – and that is also what really gets you thinking about “have you done it right?’ So the first time you do it you work hard to get it right,” he says.

“ Then invariably the second time you do it you have picked all the little bits that you actually missed out the first time. That concept of having to talk to a group of people and explain what it is you are doing and why you do it and what the outcomes will be, is very powerful.” Berman also believes that the same principles should be applied to capital raising whether it’s from friends or family or some other source. “If you were raising money from your family you should still apply that discipline because it ensures you check out the flaws. The worst thing is to raise half a million from your family, mortgage homes, and then have the thing go belly up because you haven’t thought it through.”