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Extract from Cabinet Paper DEV-18-SUB-0316: Deepening New Zealand's Early Stage Capital Markets
1. This paper proposes investment in New Zealand’s early stage capital markets to enable more innovative, knowledge-intensive, high value firms and start-ups to grow and scale within New Zealand.
2. The opportunities and challenges arising from the 4th industrial revolution are well known. The Future of Work programme is grappling with many of the challenges. The opportunity lies in lifting productivity and broadening the mix of goods and services New Zealand offers to the world by investing in new points of comparative advantage. Many of these will add value to volume, many will result from developing sectors of our economy adjacent to existing capability, and some will be new.
3. We need to shift investment from our excessive focus on property towards longer-term investments that lift productivity and create positive spillovers by encouraging efficiency or growing capability of benefit to other parts of the economy.
4. The development and commercialisation of disruptive innovation and technology requires particular skills and a business environment that large established corporates typically do not have. We need young fast growing firms operating in a healthy, wellcapitalised start-up ecosystem.
5. In New Zealand many start-ups struggle to fully develop because of the shallowness of specialised domestic early stage capital markets, and in particular, a lack of venture capital (VC). This leads to excessive reliance upon foreign investment to overcome this gap, and the earlier than necessary selling of a greater proportion of New Zealand innovation to overseas interests, who then capture a greater share of the enterprise value.
6. I propose that we commit $300 million of public money to be invested through a fund-of- funds model to support New Zealand’s venture capital markets. This could include $60 million from the New Zealand Venture Investment Fund’s (NZVIF’s) available assets. Options on how to do this are outlined in the paper.
7. The contracted private sector managers of those VC funds would seek funding from other institutions in New Zealand and abroad. These VC funds would substantially deepen New Zealand’s early stage capital markets.
8. The role of large institutional investors like the New Zealand Superannuation Fund (NZSF) is key to shifting investment patterns, including that of smaller institutional investors like KiwiSaver funds. These investors exert control over most managed funds in New Zealand, and provide signals to smaller and overseas investors on where to invest. Currently most have no exposure to venture capital. I would like to see more active involvement of our institutional investors in early stage capital markets.