Cash and kind help R&D

When it comes to getting assistance for the R&D phase of software development, it pays to think in broader terms than just finding money to fund it.

When it comes to getting assistance for the R&D phase of software development, it pays to think in broader terms than just finding money to fund it.

There is a wide range of resources to be tapped into, from special prices on software tools and licences to business mentoring or government funding.

But of course there’s nothing quite like cash, and if you’re willing to give up a share in the company, venture capital might be the way to go -- if you have a sound business proposal, that is.

Venture capital firm Endeavour i-cap has approximately $40 million to invest and wants to hear from people with ideas or proposals for investment, says chairman Neville Jordan.

Endeavour is part of New Zealand Venture Investment Fund (VIF) -- a crown-owned company that is investing $100 million alongside private sector co-investors in a series of venture capital funds. Other VIF fund managers are TMT Ventures, No 8 Ventures and iGlobe Treasury Funds.

Endeavour is close to investing in two New Zealand software companies, taking a shareholding in each company of between 20% and 40%. Jordan says the amount invested will be well over $1 million in each.

Endeavour is approached by around 40 companies a month. On average, one every two months will stand out as worthy of a closer look.

Jordan says it’s critical a company looking for investment understands its market or the nature and scope of the problem it’s solving with its technology.

“It’s not good enough to have a whizz-bang piece of software. The VC industry wants to see a connection between the technology developed and a sizeable and growing market. We’re looking for a clear route to a defined need.”

Ultimately the target market has to be international.

“We have a responsibility to our investors to provide at least a 20% return on their funds. We can’t provide that return if a company is only going to be selling into New Zealand.”

Jordan says VCs also want to be sure they’re not dealing with a one-product-only company.

“As they grow, what other products will they develop and how will they take these to market? There are plenty of companies who have a single idea but we want to look beyond that.”

VCs also want to see good management or potential management.

“We don’t need a cast of thousands but we do look for one or two people in the company who are going to spearhead the operation. That may be a founder of it or it may not.”

Chris Twiss, head of the NZ Venture Capital Association (NZVCA), says if a company thinks it will need VC funding at some stage it should try to engage with a VC manager as soon as possible.

He advises people to use their contacts and network as much as possible and not to go to a VC manager for money needed tomorrow or in six months' time.

“You should make contact a lot earlier and even if you don’t get cash out of that first conversation or meeting, there’s the possibility of striking up a relationship where the VC manager can provide some basic advice or mentoring, especially if your idea parallels with some investment they’ve already got.”

Jordan says even when companies are rejected they are encouraged to come back once they’ve developed the project more or put better governance in place.

“We take a very consultative and collaborative approach with companies. Endeavour is unique amongst the VCs in that the partners have been involved in starting and building technology companies so we understand the problems they face and want to be supportive.”

Twiss says people seeking VC funding should also do due diligence on VC managers. Find out what sectors they’re investing in and what sort of investments they’ve made.

Middle-aged angels

But VC is only a small part of the funding story. In more mature capital markets such as the UK and US it’s informal investment that provides the bulk of investment money. Research released in February has found that New Zealand is similar.

Informal investment accounts for 99.20% of total investment in New Zealand compared to 0.8% from venture capital according to the Global Entrepreneurship Monitor Report.

“I think this report is timely,” says Twiss, “because it puts the professional VC market in some perspective. VC is only a small part of the equation and it pays to look at as many sources as possible.”

The report, written by Professor Howard Frederick of Unitec, found that 39% of informal investors in New Zealand put their money into a relative’s business, 34% into a friend’s business and 8% invested in a work colleague’s business. The average amount invested is $20,533, with sums ranging from $10 to $10 million.

The older a person is the more likely they are to invest. Informal investors aged 55-64 years invested $45,000 per year on average while 25-34 year olds only invested $11,620. Peak investing years are 35 to 44 at $46,160 and 45 to 54 at $78,350. A third of these angels are business managers/executives, self-employed people and professionals, while 10% are superannuation beneficiaries.

The report concludes that informal investment is a key driver for the growth of entrepreneurial firms and a crucial ingredient in the development of New Zealand’s economic growth.

Twiss says software developers should also avail themselves of mentoring services of which there are a ready supply in New Zealand. Economic development agencies, which are usually attached to local councils, will usually put people in touch with business mentors.

“There’s a lot of experience in New Zealand that’s not being utilised. Local business associations can put you in contact with mentoring and good advice based on commercial experience.

“There are also plenty of industry bodies such as the Software Association. Some very successful software companies have been built and are being built in New Zealand. Get out and get circulating and get their advice. That’s a great thing about our culture -– if you go to people they’re helpful. It’s not just about money.”

Working with vendors

Software and services vendors are also keen to lend an ear, give advice -- and maybe more.

The d>zone programme, which Telecom runs for mobile wireless data developers, has about 500 registered members.

For developers building services to be delivered across the CDMA network, the programme provides access to the latest wireless technologies and information, support from a Telecom developer manager and wireless equipment at reduced rates.

Telecom Advanced Solutions’ Hugh McKellar says Telecom has also paid to have software developed for particular devices or to have an application tailored for its specifications.

Microsoft has rolled out several formal programmes in the last year to assist the developer community.

At the tertiary level is MSDN AA (academic alliance, which provides software and academic teaching material to university departments.

Empower is aimed at graduates wanting to start a company. It provides them with a one-year non-renewable subscription for five software licences (worth about $40,000) for $810. Microsoft regards Empower as an on-ramp to the Microsoft certified partner programme and the gold certified partner programme.

Microsoft’s developer and platform group manager, Doug Pratt, says within these programmes are application testing labs, which enable developers to verify their products work with Microsoft platforms such as Server 2003 or XP.

Under the Smartclient Campaign developers can get software code and tools, newsgroups access and developer training materials to help them build applications for tablet PCs, PDAs, smart phones and extensions of Microsoft Office.

CRM Readiness is a programme for getting information on Microsoft CRM, and resources to help developers extend, embed and connect Microsoft CRM to their applications. There is also a major training initiative to get developers ready for the release of the next Windows operating system, code-named Longhorn.

Pratt says apart from formal programmes, informal assistance is also available on a case-by-case basis.

“A lot of this is delivered through incubators and we are working with Canterbury, Auckland’s Icehouse and Waikato to provide software licences."

Microsoft might also lend a helping hand to a developer whose product matches a Microsoft product release. Such was the case of Auckland-based Keylogix, whose ActiveDoc’s added workflow capabilities to Office 2003.

Public coffers

Auckland document management software company Anuva has tapped into government funding to help with the development of a linking engine. This will enable companies to share and update common data sets across the various database products within the business.

The company has received Technology New Zealand R&D funding of $100,000 to enable it to come up with the first stage of the linking toolkit.

Technology New Zealand general manager Suki Siriwardena (pictured) encourages companies seeking funding to work with a Technology NZ investment manager right from the start. Managers will help prepare proposals and provide advice and coaching on R&D strategies.

Technology New Zealand is effectively a set of government-funded business support schemes encouraging R&D in business, run by the Foundation for Research, Science and Technology. Around $40 million is available each year to help companies develop new products or processes, increase staff and provide access to information and expertise.

Its four main funding schemes are: Technology for Business Growth (TBG), Grants for Private Sector Research and Development (GPSRD), SmartStart and Technology for Industry (TIF) fellowships.

TBG is targeted at projects that move companies towards high added-value, high-margin, technology-based products. Under TBG funding the company receives up to 50% of eligible project costs. Typical projects range upwards from $20,000 (total project cost) up to large projects exceeding $800,000. An example of a recipient is Auckland-based AuthorIT Software, which received $240,000 to help develop technology to track and manage the translation and localisation of source content into any single- or double-byte language.

The GPSRD scheme will fund 33% of R&D of a qualifying project to a maximum of $100,000.

GPSRD investment manager John Gibson (pictured) says GPSRD funds technical R&D but not marketing or commercial activities. The key to GPSRD funding is that the company must be taking a technology risk. R&D that’s business as usual won’t qualify, he says.

”We have to see a transformation in terms of their risk-taking and an ability to harvest an economic benefit from it.”

“We look for technical risk but we want to see that the companies are mitigating business risk relating to the project. We ask them whether they have an adequate vision of how to market the product and have they got the appropriate skill sets lined up.

Smart Start is a new scheme gives small amounts of money to allow businesses to get a consultant in to help with early stage R&D barriers. TBG funding is done on a 50/50 basis.

Smart Start is being piloted with 11 agents throughout the country but the plan is to have 20 by the end of the year. Agents are able to approve funding of up to $5000 within 48 hours if the application meets all the requirements.

Technology for Industry fellowships provide 100% funding for students from undergraduate level to post doctoral to work on projects within industry.

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