Entrepreneurs in Australia?
MASTER THESIS
by
Tom Roetgering
Faculty Economics & Business Administration
MSc Business Administration
Entrepreneurs in Australia?
MASTER THESIS
Tom Roetgering
Studentnumber: 1280120
RIJKSUNIVERSITEIT GRONINGEN
Faculteit Economie & Bedrijfskunde
MSc Business Administration
Small Business & Entrepreneurship
17 Barker Avenue
Como, WA 6152
Australia
+61433760774
+31647900616
tomroetgering@gmail.com
Supervisors:
Drs. B.W. Mintjes
Dr. C.H.M. Lutz
Company:
Zernike Australia Pty Ltd
Dhr. A.J. Stroobach
Suite 4, 3 Brodie Hall Drive
Technology Park
PO-Box 392
Bentley, WA 6102
Micheal E. Gerber quoted: “The five essential entrepreneurial skills for success:
Concentration, Discrimination, Organisation, Innovation and Communication.” But he forgot that entrepreneurs need money to start their business! An investor with the money!
There are great high technology entrepreneurs in Australia but they have one problem that they share, this is funding of their entrepreneurial activities. Zernike Australia is operating on the technology parks in Brisbane and in Perth, and they are confronted with these
entrepreneurs every day.
In this master thesis study, executed within the framework of my study business
administration, at the Rijks Universiteit of Groningen, I have examined for Zernike Australia how the number of deals between venture capitalists and entrepreneurs can be increased. The period in Australia turned out to be a great experience professionally and socially and a perfect way to improve my english! For the research I spent most of the time in Perth, but Zernike gave me the opportunity to visit Brisbane for five weeks to do interviews over there, what was really fantastic! My specialisation Small Business and Entrepreneurship is really what interested me from the beginning, I wasn’t very common with the venture capital market but this really changed after an intensive period of interviews and research.
Before you can start reading the report, first I want to thank Zernike Australia, especially Arnold Stroobach for the opportunity to examine the venture capital market in Australia, the time and effort to support and help me with my research. I want to thank all my colleagues at Zernike Australia who helped me and made me feel at home. Besides that I want to thank Drs. Bernd Mintjes for his criticism, advice and evaluation of this report. Last but not least I want to thank Louise Evans, Gill Laird Portch, Brian Saunders for giving me feedback on my english. Of course I want to thank my parents, family and friends for their support and their interest in me all the way from the Netherlands.
Australia is well known for their resource based economy. The resource industry won’t last for ever, sooner or later the resource industry have to change into a knowledge economy with a dominant high technology industry. To manage, accelerate and to change this environment from a resource based economy into a knowledge economy with a dominant high technology industry, there should be a active capital market with sufficient liquidity.
A part of this capital market are the venture capitalists who invest in high technology companies. The last couple of years a change in Australia already is recognised. For the venture capitalists who are investing in high technology it is at the moment a buyer market. The investors only select the best deals and have carte blanche in regards to what investments they make. The resource question: “How can the number of deals between venture capitalists and entrepreneurs in high technology small companies in the startup and growth phase be increased?” is developed to change this environment.
This research has been undertaken for Zernike Australia for the purpose of growing market share in the area of the deals made between venture capitalists and entrepreneurs. For this research there is spoken in total with twenty respondents in the venture capital business located in Perth and Brisbane. In this research three different sorts of respondents are interviewed; investors, entrepreneurs and experts.
Five subquestions are answered before answering the main research question, this is done to have a clear understanding of the overall market.
The conclusion of this research; the high technology sector is renown for its potential high return. But has also a reputation for high risk for investors due to the failings of past inventors to succesfully commmercialise their inventions into products. These inventor-entrepreneurs don’t know how to present their technology (in a proposal or pitch) to the venture capitalists. An environment has to be created were the number of deals between venture capitalists and entrepreneurs are increased. To increase this, entrepreneurs need education. They need to know how to approach venture capitalists, how to write a business proposal, how to pitch etc. Entrepreneurs fail to realise that they have a deficit in regards to entrepreneurial skills especially in the area of business presentations.
Also many entrepreneurs within Australia prefer to secure capital from an investor but are generally not interested in the free advice and services that are available. Entrepreneurs believe that they have an in depth knowledge of their company, companies sector and the associated industry. However what the entrepreneurs fail to realize is that the majority of venture capitalists were formerly experienced entrepreneurs who possess relevant
Chapter 1: Research Structure and Methodology __________________________10
§1.1. Problem Statement __________________________________________________ 10 §1.1.1. Research objective______________________________________________________ 10 §1.1.2. Research question ______________________________________________________ 10 §1.1.3. Sub questions__________________________________________________________ 10 §1.1.4. Research limitations_____________________________________________________ 11 §1.1.5. Explain research limitations_______________________________________________ 11 §1.2. Research Framework ________________________________________________ 12 §1.3. Methodology _______________________________________________________ 13 §1.3.1. Research approach______________________________________________________ 13 §1.3.2. Data collection_________________________________________________________ 14 §1.3.3. Scientific correct _______________________________________________________ 16Chapter 2: Theoretical background _____________________________________17
§2.1. Link problem statement at the theoretical background ____________________ 17 §2.2. The Venture Capital Market in Australia _______________________________ 18 §2.2.1. The Venture Capital market investing in high technology companies _______________ 19 §2.2.2. Doing business in Australia under the British Common Law______________________ 20 §2.3. Firms in high technology _____________________________________________ 21 §2.3.1. Small firms: How Small is Small? __________________________________________ 21 §2.3.2. High technology firms ___________________________________________________ 22 §2.3.3. Types of firms _________________________________________________________ 22 § 2.4. Money asked by the entrepreneur _____________________________________ 22 §2.4.1. The financial problems of the entrepreneur ___________________________________ 22 §2.4.2. Amount of money ______________________________________________________ 22 §2.5. Venture Capital ____________________________________________________ 23 §2.5.1.Venture Capitalist _______________________________________________________ 23 §2.5.2. Entrepreneurs__________________________________________________________ 23 §2.6. Intellectual Property (IP)_____________________________________________ 24 §2.6.1. What is IP? ___________________________________________________________ 24 §2.6.2. Protect the High Technology ______________________________________________ 24 §2.7 Information about the company________________________________________ 24 §2.7.1 Organisation profile of Zernike Australia _____________________________________ 25 §2.7.2 Zernike Australia _______________________________________________________ 25 §2.7.3 Entrepreneurs in Residence (EIR)___________________________________________ 26Chapter 3 Results ____________________________________________________27
§3.1. Which factors lead to a deal?__________________________________________ 28 §3.2. What is the role of Zernike Australia in the deal making process? ___________ 29 §3.3. Who are the venture capitalists in high technology companies in the start-up and growth phase in Australia and what kind of activities do they have? ______________ 30 §3.4. What do the venture capitalists and the entrepreneurs of high technologyIntroduction and problem definition
This research is focused on Australian start-up and expansion stage companies that are active in the high technology sector. This research was performed at the Zernike Australia Pty Ltd. Zernike’s main activity is providing management and funding services to Australian
technology companies, who are planning to penetrate the European and US markets with their services and products.
Accordingto the Zernike, a lot of entrepreneurs in the high technology sector experience difficulties in finding venture capitalists when they have reached the start-up and the
expansion phase. This phase is after a business has past the seed phase and the initial business concept emerges. Models of the products are researched, planned and developed. The
companies need to establish a steady flow of customers and a reliable revenue stream. However, this was not a problem when they were looking for seed capital.
In the research conducted by Lülfesmann over the last four years, he witnessed a surprising upsurge of startup enterprises from hightech industries like biotechnology,
telecommunications and the internet (Lülfesmann, 2003). In this modern economy venture capital plays a key role. According to the survey of Thomson Financial & the Australian Venture Capital Association Limited (AVCAL) in 2007 the total amount of private equity raised by fiscal year is (in A$ Millions) 8,944.30, of this was (in A$ Millions) 572.30 that was raised at the total of 18 venture capitalists that are connected to the AVCAL in Australia (Cortez et al, 2007). Venture capital is a unique source of funds for entrepreneurs at early stages, long before they gain access to public capital markets and for projects that banks will not finance (Hall and Woodward, 2007). So the founders do not have the funds to start the firm, and stage financing is required at certain threshold dates where the firm enters a new phase of its build up (Lülfesmann, 2003). According to venture economics (Needham, 1998) one-third of the start up firms are shut down before they complete development of their products and enter the market. Access to external finance, such as bank loans or trade credit, is a key determinant of a firm’s ability to develop, operate, and expand (FRBSF Economic Letter, 2007).
The access to other external capital like the public stock market is precluded to the vast majority of smaller businesses because of the high fixed cost involved (Buckland and Davis, 1989) while reliance on debt finance leads to dangers of undercapitalization, which is the most frequent cause of business failure (Binks and Vale, 1992). The expansion of venture capital activity in most developed countries during the past 10 to 15 years has provided a new source of long-term investment capital, which has contributed to the closing of an equity cap. Venture capital can be defined as an activity by which corporate investors provide long-term equity finance, supported by business skills, to unquoted companies with the potential to grow rapidly with the aim of making an eventual capital gain commensurate with the high risk and illiquidity involved in the investment rather than interest income or dividend yield. The venture capital industry is therefore characterized by a high rejection rate as very few businesses can demonstrate that they have the potential to provide annualized rates of return of 30 to 60 percent, which are typically sought (Mason and Harrison, 1995).
and mentions the financial intermediaries that are suited best to serve these needs. In all stages venture capitalists can be involved, the start-up and the expansion phase is important for this research and this investment phase is also used.
Table 1 Investments stages and financial intermediation (Scholtens, 1999)
In Australia the informal venture capital market, comprising high net worth non-institutional private equity investors (or ‘business angels’) provides risk capital directly to new and growing businesses and has shown to be considerably more significant than institutional providers as a source of finance for entrepreneurial businesses (Hindle and Wenban, 1999). Also according to Vitale (2006) the informal capital markets play a fundamental role in national innovation systems. Start-up companies rely heavily on informal capital; studies in the US suggest that informal investment is more than twice as large as formal venture capital investment. Similar findings appear to hold for the UK and Europe. Although knowledge of the Australian situation is less complete, it would appear likely that in this country as well, angel investors are a very important source of capital for early-stage businesses. Relatively little is known about Australian angel investors. The angel sector operates informally, and many angels are reluctant to divulge information about themselves or their investments. Studies of angel investing have been carried out recently in the UK and America, but the last major academic study undertaken in Australia was in 1995. The 2006 Department of
Communications, Information Technology and the Arts (DCITA) study on business angel networks found that business angels represent an important source of capital in Australia and recommended additional fiscal and regulatory measures to stimulate angel investment. Estimates of the size of the angel sector in Australia vary widely. Bygrave (2003) estimated the amount of informal investment in Australia in 2003 to be US$2.55 billion, seven times the amount of classic venture capital invested in that same year. Hindle and Wenban (1999) declined to estimate the size of the sector, noting that the temptation to extrapolate from the data gained from 36 interviews must be resisted. Peacock (2004) gave a ballpark estimate of total informal equity investment in Australia in 2004 of A$1 billion, lower than Bygrave (2003) but still larger than the amount of formal venture capital investment. According to Vitae (2006) the angel sector is active, important, and growing.
From the literature from Sherman (2003), he concluded that ‘business angels’ invest more in the seed stage and the early stage, because there is more risks and the investment need is lower ($25,000 to $500,000) than in the growth phase ($500,000 to $3,000,000) see table 2.
Table 2 Stage of growth and the amount of money needed (Sherman, 2003)
This research will look at the level of financing the start-up and growth phase. According to Sherman (2003) the start-up phase is generally for completion of product development, recruitment of a management team, refinement of the long-term business plan and
commencement of marketing efforts. The growth phase, which is needed for increasing the production capacity, market or product development, provide additional working capital and build a track record. The investment in these phases needs a huge amount of money
($500,000 to $3,000,000) (Scholtens, 1999). Financing for companies at the starting point in their growth and development is very difficult because these companies are at the highest risk of failure. Also according to Zernike, a lot of entrepreneurs in the high technology sector experience difficulties in finding investors when they have reached the start-up and the growth phase.
Chapter 1: Research Structure and Methodology
In this chapter the structure of the research will be explained. The problem statement is defined, which is divided in a research objective and a research question. As this research question is to vast to cover on its own, it will be split up in various sub-questions to enhance the clarity and ability to answer the problem. At least the research limitations will be defined. §1.1. Problem Statement
According to De Leeuw (2000), a problem statement ought to comprise three elements: the research objective, the research question and the research limitations. In this paragraph the problem statement for this research will be given:
Zernike Australia identified that not many deals are made between venture capitalist and entrepreneurs in the start-up and growth phase.
§1.1.1. Research objective
The research objective defines for whom the research is carried out, what the outcome will be for them and why that is important for them (Leeuw, 2000).
According to Zernike and the literature, a lot of entrepreneurs in the high technology sector experience difficulties in finding capital when they have reached the start-up or growth phase. They want to investigate the opportunities of a better match between investors and
entrepreneurs in the start-up and the growth phase of high technology companies. As a result that Zernike can create value in the future. The following objective for this research has been formulated:
Providing recommendations to increase the number of deals between venture capitalists and entrepreneurs of high technology small companies in the start-up and growth phase. §1.1.2. Research question
The research question formulates the main question of the research (Leeuw, 2000). The following research question is formulated:
How can the number of deals between the venture capitalists and the entrepreneurs of high technology small companies in the start-up and growth phase be increased?
§1.1.3. Sub questions
This research question will be divided into several sub-questions. Before answering the main research question, it is important to have a clear understanding of “the deal” between the venture capitalist and the entrepreneur. This question will be answered by making use of existing literature and use case study.
Sub question 1: Which factors lead to a deal?
To answer the research question, you need to know who the capital suppliers are. To answer this question, an academic literature study will be performed and sub question 3 has to be answered.
Sub question 3: Who are the venture capitalists in high technology companies in the start-up and growth phase in Australia and what kind of activities do they have?
To increase the number of deals between the venture capitalists and the entrepreneurs you also have to look at the side of the entrepreneurs and the investors (also known as the venture capitalist). Therefore sub question 4 is formulated and will be answered with the literature and with a case study.
Sub question 4: What do the venture capitalists and the entrepreneurs of high technology companies in the start-up and the growth phase in Australia want?
To answer the research question, sub question 5 is a question, which shows how the entrepreneurs and venture capitalists find each other at this moment.
Sub question 5: How do entrepreneurs of high technology companies and venture capitalists fulfill their needs at this moment? And why?
§1.1.4. Research limitations
All the definitions of the conceptions and reason for limitations are put in §0.1. at the end of this research.
• Venture capitalists
• Start-up and expansion phase
•
High technology companies•
Australia•
Deals between > 0,5 mln and < 5 mln•
Employees of the start-up and growth phase companies < 50 employee §1.1.5. Explain research limitations§1.2. Research Framework
This research framework is developed to reach the goal of this research. This research framework has been used for the reader to get a clear understanding of what the research involves and what steps were taken.
Introduction and problem definition
Introduction of the research, setting the scene for research development and process
H4 Checking with the literature
H5 Discussion
H1 Research Structure and Methodology
• Problem Statement; research objective, question, sub questions, limitations
• Methodology; research approach, data collection, correct
H2 Theoretical background Literature reviews and practitioner views
• Review literature on venture capital and entrepreneurs • Situation and environment description
• Initial research questions
Questionnaire of Case study’s
§1.3. Methodology
How is the research question answered? That’s a good question! The choices of which methods to use have great influence on the final result of research. (Zwaan, 1990). This paragraph explains the research methodology used for this research. It details first the research approach, this will be spoken in §1.2.1; three different issues in their choices for the case approach. Secondly, in §1.2.2 the data collection for this research will be discussed. And thirdly in §1.2.3 how the research can be scientificly correct.
According to Proimos et al. (2005) in their research only four of the ten firms were willing to participate. The competitve nature of the venture capital market in Australia appears to be the basis for this poor response rate, which is a common problem in the literature. To ensure the same problem is not encounted and to have the research completed in fixed time, the director (dhr. Stroobach) gave me names of people he is working with or worked with in the past. So the data was gathered from a large amount of participants inside the Venture Capital business. They know dhr. Stroobach and have a good relationship with him and they all were keen to cooperate with the research.
The questionnaire for this research is based on the questionnaire of Proimos et al. (2005). After the questionnaire was made for the Venture Capitalists, Entrepreneurs and Experts, my supervisor from the Rijks Universiteit Groningen in the Netherlands dhr. Mintjes and dhr. Dijk from the Zernike Group in the Netherlands inspected the questions and gave feedback. Also my supervisor in Australia dhr. Stroobach inspected the questionnaire and gave feedback.
Before the interviews took place the questionnaire was sent to the participant, to be sure that the participant was prepared for the interview. The reason for this was that the participant could think about the questions, so they could gave relevant answers to the questions. The interviews were all recorded and written down, see appendix 2.
§1.3.1. Research approach
The information needed to answer the sub questions and in the end the research question, is coming from the investors and the entrepreneurs. But besides these two, interviews will also be taken from experts who are also familiar in venture capital business. To gather the information a case study approach for this research is chosen. Yin (2003) identifies three different issues that aid researchers in their choices for the case approach.
1. Type of research question
The type of research question determines the method of study that is used. According to Yin (2003) there are 5 kind of questions: “who”, “why”, “what”, “where” and “how”. The main research question in this research start with “how”, the case study approach is the preferred method.
For answering subquestions 2 and 4, “what” questions has to be answered, according to Yin (2003) these questions will be answered with relevant literature that is available to analyse “What is the role of Zernike in the deal making process?” and “What do the venture
capitalists and the entrepreneurs of high technology companies in the start-up and the growth phase in Australia want?” There is not much literature available about this subject in
During the collection of the data the case study approach is most justified because we finally want to know; “How can the number of deals between the venture capitalists and the
entrepreneurs of high technology companies in the start-up and growth phase be increased?” 2. The depth of analysis
In this research three different sorts of respondents are interviewed; venture capitalists, entrepreneurs and experts. This research will look from three different ways of perspective to the market of deals between venture capitalists and entrepreneurs. “In depth” means that for all people who are interviewed, this research finally looks to answer the question: How can the number of deals between the venture capitalists and the entrepreneurs of high technology companies in the start-up and growth phase be increased?
3. A process perspective
The case study approach lends itself for the description of deal making processes at the market. The respondents all had different perspective on the market and gave their experience from their point view.
§1.3.2. Data collection
For this research, data were gathered from a total of 20 participants inside the Venture Capital business located in Perth and in Brisbane. The question how the number of deals between venture capitalists and entrepreneurs can be increased in the start-up and growth phase will be answered by interviewing investors, entrepreneurs and experts. In Perth 11 participants are interviewed, details about these persons are in table 3. Also in Brisbane 10 participants were interviewed, details about these persons are in table 4. The interview took place from april 2008 until july 2008, the exact date, time and place are shown in the tables.
Nr Name Date Time Place Mail Function
1 Hans Groot 30/04/’08 09:30-11:00 Waterford, Perth hans.groot@promit.com.au Entrepreneur, Ericsson Australia 2 Stuart Hope 30/04/’08 11:15-12:00 Bentley, Perth stuart@autumncare.com.au Entrepreneur,
Autumncare 3 Larry Lopez 30/04/’08 13:00-14:00 City, Perth ll@reddogcp.com.au Venture Capitalist,
Red Dog Capital 4 Andrew Birch 01/05/’08 10:30-11:45 City, Perth abirch@mcgrathnicol.com Accountant, Mc.
GrathNicol 5 Richard Bashem 04/05/’08 09:30-11:00 Claremont, Perth greenticker@msn.com.au Accountant, Grant
Thornton 6 Marc Collins 12/05/’08 15:30-16:30 Esplanade, Perth mark.collins@williambuck
wa.com.au
Accountant, William Buck Business Adviors Chartered Accountants 7 Adam Levin 14/05/’08 10:30-11:30 City, Perth alevin@jacmac.com.au Lawyer (IP),
Jackson McDonald Lawyers 8 Guy le Page 08/05/’08 14:00-15:00 City, Perth gtlepage@rmcapital.com.a
u
Venture Capitalist, RM Capital 9 Rob Lister 22/05/’08 11:00-12:00 West Perth, Perth Rlister@prllawyers.com.au Lawyer (IP),
Pullinger Readhead Lucas
10 Hermina Burnett 23/05/’08 10.00-11:30 Murdoch, Perth h.burnett@murdoch.edu.at Lecturer, Murdoch University in Entrepreneurship 11 John Rothwell 11/06/’08 09.00-09:45 Henderson, Perth caroline@austal.com Entrepreneur, Austal
Nr Name Date Time Place Mail Function 12 Dr. John Kapelaris 27/06/’08 9:00-10:00 Brisbane Technology Park John.kapeleris@ausicom.c om
Expert, Deputy CEO Australian Institute for Commercialisation 13 Anne-Marie Birkill 2706/’08 14:00-15:00 Brisbane Technology Park
a.birkill@ilab.com.au Expert, CEO of i.lab
incubator 14 Chris Burnett 27/06/’08 16:00-17:00 Brisbane
Technology Park
chris.burnett@mesaplexx.c om
Entrepreneur, Mesaplexx 15 Michael Finney 02/07/’08 9:00-10:00 Level 1, 123
margaret street, Brisbane city m.finney@qutbluebox.com .au Expert, CEO of Bluebox QUT 16 Steve Lane 03/07/’08 10:00-11:00 Level 4, 167
Eagle Street, Brisbane city Steve_lane@cmcapital.co m Venture Capitalist, Partner CM Capital 17 Brian Smith 04/07/’08 13:00-14:00 Griffith
University, Kessels Road, Nathan griffithenterprise@griffith. edu.au Expert, Acting director of Griffith Enterprise 18 Ian Gilbert 09/07/’08 15:00-16:00 Level 24, 111
George Street, Brisbane city Ian.Gilbert@dtrdi.qld.gov. au Expert, Government Department of Tourism Regional Development and Indurstry 19 Andrew Davis 16/07/’08 15:00-16:15 Level 7,
Cumbrae-Stewart Building
a.davis@uniquest.com.au Expert, Uniquest, Technology Commercialisation, The University of Queensland 20 Shane Lawrence 18/07/’08 11:00-12:00 Level 22, 345
Queen Street, Brisbane city
shane@nbccapital.com.au Venture Capitalist, NBC Capital, equity capital for growing companies Table 4 Participants Brisbane
All the data was collected by conducting face-to-face interviews. From this research in 3 different questionnaire lists were made (see appendix 1), all the interview questions are based on the article of Proimos and Wright (2005). This research will be carried out in the form of interviews with 3 different respondents. The interviews took place at the entrepreneurs company or house, the venture capitalists company and the experts company. According to Yin (2003) visiting a company will generate more information and explain more about the company. Zernike Australia provided a car for me to visit the companies, for the respondents it was also easier to stay at the office instead of coming to the office at Zernike.
1. Entrepreneurs
To find out the needs of the entrepreneurs, it’s important to understand the entrepreneur. What were the reasons for receiving the investments or for not receiving the investments?
2. Venture Capitalist
To find out what the venture capitalist exactly want, it’s important to understand the venture capitalist. What were or are the reasons for investing in a company of an entrepreneur?
3. Experts
§1.3.3. Scientific correct
The result of this research is knowledge (Leeuw, 2003). This knowledge can be used when: 1) this research is correct, and verified as correct.
2) And if the results of the research are relevant. This suggests that their is a connection with the business problems.
The criticism of casestudies is the quality of the research. Given there were only a small number of case studies undertaken therefore universal conclusions can not be committed. The number of case studies is small, so can we generalize the outcomes of this research? Yes, this research is scientific correct and in this situation it’s the best option. (Leeuw, 2003, Zwaan, 1990).
Chapter 2: Theoretical background
The objective of this chapter is to give an overview of the theoretical concepts that will be used to develop and understand the conceptual model. This chapter is structured as follows. The first paragraph §2.1, in this part, the problem statement will be linked to the theoretical background. In §2.2 the venture capital market in Australia and doing business in Australia will be explained, the reason for this is because you’ll get a better understanding of the market where Zernike Australia is located. §2.3 is looking at firms in high technology. §2.4 contains what the entrepreneur wants for example the amount of money. §2.5 contains the literature that was available about Venture Capital, and the venture capitalist and the entrepreneurs in Australia. Paragraph §2.6 explains the Intellectual Property. The last paragraph, §2.7 gives information about Zernike Australia.
§2.1. Link problem statement at the theoretical background
The following problem statement for this research will be linked to the theoretical background.
Problem statement:
Zernike Australia identify that not many deals are made between venture capitalists and entrepreneurs in the start-up and growth phase.
In the research of Scholten (1999), he uses the investment stages (table 1), in this research the same investment stages/phases will be used, because his paper is focused on financing alternatives for small business enterprises (SBE’s). This focus is warranted as the financial conditions of small business differ from those of large business. Small and young firms often have difficulty in signaling their creditworthiness. Small firms tend to be disadvantaged over large business in terms of access to bank loans and they are very limited in the potential to issue stock. Scholten (1999) analysed this problem and focused on the alternative financing mechanisms and capital suppliers. According to Scholten in a recent survey, the OECD distinguishes (and defines) the following investment stages in this life cycle. Seed: The initial business concept emerges. Models of the products are researched, planned and developed. Start-up: Funds are provided for product development and marketing. The firm has not yet sold its product commercially. Expansion: The firm grows and expands and is building up a track record. Mezzanine: Preparation for the (initial) public offering. Buy-out (buy/in): Exit phase or acquisition; a buy-out involves incumbent managers acquiring a significant equity stake, a buy-in involves external managers acquiring control of the firm. These funding stages resemble those of the venture capitalist and are quite normative. Most firms that survive the seed and start-up stages will end up somewhere in the beginning of the expansion stage and hardly expand merely survive.
According to Zernike not many deals are made between venture capitalists and entrepreneurs, this means that the entrepreneurs have difficulty estalishing new companies or growing them to the next stage. So this research will look at how to survive and mostly how to expand succesfully in the future, the investment stages and the financial intermediation of Scholten will be used in this research. However, there are many alternative ways to sketch the life cycle and the various stages are hard to define exactly, but each research will have to make a decision which life cycle model you’ll use.
institutional venture-capital industry: They welcome the money and management support they desperately need for growth, but they fear the loss of control and the restrictions that are typically placed on the company by the investment documents. What exactly do entrepreneurs want? How do they raise money? And do the entrepreneurs fulfill the needs of venture capitalists?
According to Sherman (2003) raising capital at any stage/phase of a company’s growth is challenging and requires creativity and tenacity, but these hurdles are especially difficult to conquer at the earliest stages of an enterprise’s development. The start-up and the growth stage are highlighted in this research and are at the stages that this research will look at, the reason for this is because according to Zernike not many deals are made between venture capitalists and entrepreneurs in the in the start-up and growth phase. For more details and to have an indication about the amount of money asked by the entrepreneurs, in table 2 in the introduction there are the stages of growth mentioned with the probable amount of money needed. This table gives also an impression of what is the most likely and affordable source of capital that is available on the capital market.
§2.2. The Venture Capital Market in Australia
Before the market of Venture Capital in Australia can be described, a clear understanding of the definitions is needed. Also the Australian Bureau of Statistics mentioned that definitions of venture capital varied across users and data providers (Australian Bureau of Statistics, 2007). These definitions are described in §0.1 at the end of this research. The financial year in Australia ends the 30th of June and starts at the 1th of July.
According to the Australia Venture Capital Association Limited (AVCAL) (2008) venture capital firms typically source the majority of their funding from large investment institutions such as superannuation funds and banks. These institutions invest in a venture capital fund for a period of up to ten years.
To compensate for the long term commitment and lack of both security and liquidity, investment institutions expect to receive very high returns on their investment. Therefore venture capitalists invest in either companies with high growth potential or in companies which have the ability to quickly repay a high level of debt - as in the case of a leveraged management buyout.
Venture capitalists typically exit the investment through the company listing on the stock exchange, selling to a trade buyer or through a management buyout. Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically between three to seven years after the investment. Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital.
business person and financial analyst. The VC&LSPE manager provides assistance and advice to the investee companies. The usual relationship between the investors, managers, vehicles and investee companies is shown below in figure 1.
Figure 1 Relationships between investors, managers, vehicles and investee companies
In the overall venture capital market there was growth in funds committed to VC&LSPE investment vehicles during 2005–06. As at 30 June 2006, investors had $10.9b committed to investment vehicles, an increase of 9% on the $10.0b committed as at 30 June 2005. Investors had $6.8b of committed funds drawn down at 30 June 2006, an increase of 25% on the previous year end ($5.5b at June 2005). Most of the committed funds were sourced
domestically, with 94% of commitments from Australian investors (up slightly on June 2005). As at 30 June 2006, there was $4.1b of committed funds yet to be called on, down 11% on the $4.6b of unused (undrawn) commitments as at June 2005. The $4.1b of undrawn
commitments can be classified by preferred stage of investment, with only $0.7b undrawn by funds which prefer to invest at the early stage. The value of investments by VC&LSPE investment vehicles ($4.3b in 902 investee companies) increased by 22% on the $3.5b reported at the end of June 2005. Investments in these 902 investee companies were reported by 229 vehicles (210 in 2004–05). The increase in the value of investments, derived after exits and other decreases was due mainly to the contribution of new and follow-on
investments during 2005–06 ($1.4b, up 37% on 2004–05). During 2005–06, the net value of all exits through trade sales, IPOs and buybacks amounted to $721m.
The total of 157 venture capital managers reviewed 6,688 potential new investments during 2005–06 and conducted further analysis on 724 of those, with 201 being sponsored for VC&LSPE. These managers spent a total of 186,000 hours with the investee companies (163,000 in 2004–05), advising and assisting in the development of the enterprises (Australian Bureau of Statistics, 2007).
§2.2.1. The Venture Capital market investing in high technology companies
Before we can describe the market of Venture Capital investing in high technology companies in Australia, you need a clear understanding of the definition; high technology companies. These definitions are described in §0.1 at the end of this research.
were in total 497 deals in high technology were they invested A$ 1,472 mln, see table 5. The different stages of investment is not available for high technology companies.
Nr of deals Amount Australian $
IT, Media, Electronics and Communications 260 $ 681 mln
Biotech, Pharmaceuticals and Health 199 $ 553 mln
Energy 38 $ 238 mln
Total High Technology 497 $ 1,472 mln
Table 5 Number of deals and the amount of Australian dollars in the High Technology Sector
§2.2.2. Doing business in Australia under the British Common Law
Each national system of company law is different, and so all arrangements vary from one economy to another. In Australia they have adopted the general framework of the Bristh Common Law. Commerce in Australia can be conducted using a variety of organisational forms. The focus of this research is on companies registered under the Corporations Act. A company limited by shares, also known as Pty Ltd, is by far the most common form of company in Australia.
Once a company is registered, its separate legal status, property, rights and liabilities continue until ASIC (Australian Securities and Investments Commission) deregisters the company. This research will only look at companies who are limited by shares. The following functions can appear by deals between investors and entrepreneurs:
1. Shareholders 2. Director(s)
3. Board of directors: 1. Non-executive directors 2. Executive directors 4. Chairman
Ad 1. Shareholders
The shareholders of a company own the company, but the company has a separate legal existence and the company’s assets belong to the company. Shareholders can make decisions about the company by passing a resolution, usually at a meeting. Shareholders of a company are not liable (in their capacity as shareholders) for the company’s debts. As shareholders, their only obligation is to pay the company any amount unpaid on their shares if they are called upon to do so.
Ad 2. Director(s)
The director(s) of a company are responsible for managing the company’s business. A director of a company may be liable for debts incurred by the company at a time when the company itself is unable to pay those debts as they fall due. As a matter of commercial practice a bank, trade creditor or anyone else providing finance or credit to company may ask a director of the company:
- For a personal guarantee of the company’s liabilities; and
- For some form of security over their house or personal assets to secure the performance by the company of its obligations.
directors. Sometimes the board will appoint one of its members to be the chair or chairperson of the board of directors, traditionally also called chairman or chairwoman.
Theoretically, the control of a company is divided between two bodies: the board of directors, and the shareholders in general meeting. In practice, the amount of power exercised by the board varies with the type of company. In small private companies, the directors and the shareholders will normally be the same people, and thus there is no real division of power. In large public companies, the board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executive directors (such as a finance director or a marketing director) who deal with particular areas of the company’s affairs.
Ad 3. Board of directors
1. Non-executive directors 2. Executive directors
Directors are divided into executive directors and non-executive directors. Broadly, executive directors tend to be persons who are dedicated full-time to their role in relation to the
management of the company. Non-executive directors tend to be "outsiders" brought in for their expertise, and to lend a more impartial view in relation to strategic decisions.
Ad 4. Chairman
A chair is selected by a company's board to lead the board of directors, preside over meetings, and lead the board to consensus from the disparate points of view of its members. The chair is the presiding director over the other directors on the board. Directors have a high level of fiduciary responsibility for overseeing the operation of a corporation. (Woodward et al, 2003) §2.3. Firms in high technology
§2.3.1. Small firms: How Small is Small?
There is no wide spread agreement about how to define a small firm. Definitions of small firms typically revolve around the number of employees. In chapter 6, the research
methodology, the research will define how many employees are regular for small businesses. Small firms have other special characteristics, which influence the way they are managed. Two characteristics stand out: the influence of the founder or founding team, and the firm’s lack of resources. First a high proportion of small firms, particularly young firms which are predominant in high-tech sectors, are still managed by their founders or founding team. In some instances the founders may have relinquished management responsibility but will still exert influence through their equity control. Founders typically take executive roles in top management and exert a strong influence on the direction and success of the firm. With small firms the goals of the founder are usually the same as the corporate goals.
Besides the founder(s), the second characteristic of small firms is the firm’s lack of resources, both financial and human. Small firms rarely have strong balance sheets. Many are
undercapitalised, either because the founders do not wish to give up equity or because capital is difficult to obtain, particularly for very young firms who have yet to prove that they have a winning business. Resource constraints are not only financial. Human resources are also constrained. Managerial resources are generally thin and the firm’s capabilities rather narrow. Resource constraints can show up in all areas of the business, both at the strategic level, where the firm drifts along not knowing how to control its own destiny, and at the operational level, where many technical, marketing, production and financial skills may be absent
§2.3.2. High technology firms
Small high-tech firms are important to a nation’s economy: many of them are innovators and developers of tomorrow’s industrial technology on which future economic progress depends. When these firms grow fast they rapidly become glamour companies and the focus of attention for the press and the business community.
High-tech industries are those built on exploiting new scientific advances that have been developed over the past 20 years. They are industries, which are growing rather than declining, and above all they are industries where the firms within those industries are using product (or process) technology as a major source of competitive advantage. High tech means different things to different people. The commonly used criteria to define high tech are product or process sophistication, research and development intensity, and the proportion of technical employees within the work force.
The rapidly changing technology and market conditions mean that the firm’s speed of response is critical to its success, something that is endangered if the cumulative learning within the firm is dissipated (Slatter, 1992).
§2.3.3. Types of firms
Small high-tech firms can also be classified into product and service firms, and then further classified in the categories according to product or service characterisation, such as the degree of product or service characterisation, the degree of product or service standardisation, software versus hardware products, industrial products versus consumer products, capital goods versus consumable items, products for OEMs (original equipment manufacturers) versus end users, etc. In practice, however, any classification is usually arbitrary since the activities of many small firms span more than one classification (Slatter, 1992).
§ 2.4. Money asked by the entrepreneur
Already mentioned in the introduction of this research, this research looks at financing the start-up and growth phase. According to Sherman (2003) the start-up phase is generally for completion of product development, recruitment of a management team, refinement of the long-term business plan and commencement of marketing efforts. The growth phase, which is needed for increasing the production capacity, market or product development, provide additional working capital and build a track record.
§2.4.1. The financial problems of the entrepreneur
Entrepreneurial small firms can be distinguished from other small firms in that they have a much stronger growth orientation. They require funding that takes into account not only the inherent risk of the venture, but also the need for future flexibility so that the financing can adapt easily to the changes that will occur as the firm grows. Because entrepreneurial firms have a growth focus, they face a set of particular financing problems that are not associated with firms that are not growing rapidly (Osteryoung et al., 1997).
§2.4.2. Amount of money
needs around $500,000 to $3,000,000 (Scholtens, 1999). The table gives also an impression what the most likely and affordable source of capital that is available on the capital market. Zernike believes the amount of money asked by the entrepreneur depends on the business. The limitations in this research are deals made between > A$500.000 and < A$5.000.000, the currency difference brings the amount of money around the same range.
§2.5. Venture Capital
During the past decade, the Australian venture capital market has experienced considerable development, in terms of its size and the number of participants. At 30th June 2003, the Australian venture capital market had A$4.4Bn invested in 850 companies. Nevertheless, it remains largely underdeveloped compared to the North American and Western European markets (Proimos and Wright, 2004).
§2.5.1.Venture Capitalist
The venture capital market plays a unique role by providing capital to new ventures that frequently are refused financing from conventional sources. To ascertain whether resources are allocated efficiently by venture capitalists (VCs) to the most profitable investments, it is necessary to understand the methods by which VCs make investment decisions (Proimos and Wright, 2004).
All new firms are risky. But high technology poses special challenges and dangers for investors. It often takes longer for such firms to develop and commercialise their products; this implies that once the investment decision is made, VCs need to be more `patient’ in terms of the timing of the returns, compared to investments in non-tech industries (Sapienza and Clercq, 2000). Quoted in the introduction the investment in the expansion stage need huge amount of money ($500,000 to $3,000,000) this is needed for increasing the production capacity, market or product development, provide additional working capital and build a track record (Scholtens, 1999). Illiquidity, volatile returns and lack of information are sources of the high risk that characterise the investments made by VCs. The specific source of risk examined is information asymmetry, which is caused by lack of information on the part of the VCs, and which can lead to the added risks of adverse selection and moral hazard (Proimos and Wright, 2004). VCs have high risks in investing their money.
§2.5.2. Entrepreneurs
According to Zernike there should be a better match between investors and entrepreneurs in the start-up and growth phase of high technology companies. This is a problem for a lot of entrepreneurs in the high technology sector; these entrepreneurs experience difficulties in finding investors especially when they have reached the start-up or growth phase.
Entrepreneurs are specialised in detecting new opportunities in the environment and combining resources to exploit these opportunities in an original fashion. High-tech entrepreneurs will also possess specialised technical knowledge and skills difficult if not impossible to replicate (Sapienza and Clercq, 2000). Entrepreneurs must ask themselves if their goals and needs are congruent with those of potential investors. For the entrepreneur of a fledgling company, goal congruency may be as important as receiving the funding itself. (Williams et al, 2006)
entrepreneur should also find the right investors, secure the right amount of money, and obtain a deal structured in an equitable manner. Just getting the VC to spend time seriously evaluating a deal is often a challenge for the entrepreneur. The VC starts with a limited knowledge of the deal. To gain the level of knowledge necessary to make a positive
investment decision requires time, yet VCs’ time is limited and many potential deals vie for it. VCs want to invest only in the very best of deals. Investing in a mediocre deal is a bad
decision from the VC’s point of view. On the other hand, the entrepreneur of a mediocre deal has great incentive to get the VC to invest. Furthermore, the quality of a deal is uncertain and highly subjective. VCs experience a high variance in returns from their investments. What the VC in good faith views as a weak deal, the entrepreneur may in equally (and often very passionate) good faith view as a great deal (Clercq de et al, 2006).
There are several examples an entrepreneur can do to increase his or her chances of attracting venture capital. (Clercq de et al, 2006)
§2.6. Intellectual Property (IP) §2.6.1. What is IP?
Intellectual property (IP) is a legal field that refers to creations of the mind such as musical, literary, an artistic works; inventions; symbosl, names, images, and design used in commerce, including copyrights, trademarks, patents and realted rights. Under intellectual property law, the holder of one these abstract “properties” has certain exclusive rights to the creative work, commercial symbol, or for this research high technology invention by which it is covered. Intellectual property rights are a bundle of exclusive rights over creations of the mind, both artistic and commercial. The former is covered by copyright laws, which protect creative works such as books, movies, music, paintings, photographs, and software and gives the copyright holder exclusive right to control reproduction or adaptation of such works for a certain period of time.
The second category is collectively known as "industrial properties", as they are typically created and used for industrial or commercial purposes. A patent may be granted for a new, useful, and non-obvious invention, and gives the patent holder a right to prevent others from practicing the invention without a license from the inventor for a certain period of time (website; http://www.wipo.int, 2008).
§2.6.2. Protect the High Technology
A patent is a set of exclusive rights granted by a state to an investor or his assignee for a fixed period of time in exchange for a disclosure of an (high technology) invention. The procedure for granting patents, the requirements placed on the patentee and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however a patent application must include one or more claims defining the
invention, which must be new, inventive and useful or industrially applicable (website; http://www.wipo.int, 2008).
§2.7 Information about the company
technology including the management of capital funds. Internationally Zernike has established over 400 successful start-ups with a very low failure rate. Zernike Australia doesn’t manage capital funds, this research is being undertaken to identify opportunities for Zernike Australia.
§2.7.1 Organisation profile of Zernike Australia
According to Zernike, the organization profile of Zernike Australia Ltd Pty is:
“Zernike is an international business consultancy and management company providing an integrated business development service to both private and public sector clients in technology commercialisation; new venture investments; technology parks and sales and marketing”
§2.7.2 Zernike Australia
Zernike Australia Pty Ltd is located at Technology Park in Perth and in Brisbane. Zernike was established in 1999 and have two offices in Australia and are a joint venture with Zernike Group from the Netherlands, located and founded in Groningen.
Overall Zernike Australia provides an integrated service of technology park management, incubation, function centre management, event management, investment, technology transfer and export connections. Their principal focus being to:
- Provide an environment conducive to creativity and innovation; - Enable the growth of the start-up enterprise;
- Provide and foster meaningful linkages and networks between government, academia and industry.
-
Facilitate, develop and transfer knowledge and innovation.In Perth Zernike has been the incumbent service provider to the Technology Park and the function centre project from February 2001 till 2007. In Brisbane, Zernike is the service provider of the Brisbane Technology Park and the function centre since August 2002. In Brisbane, Zernike started a building called, Level One by Zernike. This is a new
development for companies who seek to locate and grow their business amidst like-minded industries at the Brisbane Technology Park. In this building they offer these businesses helpful support services like; telecommunication services, reception services, meeting rooms, printing services, food services. More information is available at:
www.brisbanetechnologypark.com.au.
Through the network Zernike Australia is active in both exploring the European market entry strategies for a number of Australian companies. The last 9 years, Zernike has been involved in Australia and internationally in commercialising technologies and building companies from pre-seed stage to mezzanine stage. In Australia, they have assessed over 340 emerging technology businesses and via direct investment participated in 23 businesses. They have collaborated with these businesses to attract co-investment private equity capital,
§2.7.3 Entrepreneurs in Residence (EIR)
Entrepreneurs in Residence was a privately held company established in Perth in June 2000. It was initially set up to be Western Australia Manager of Federal BITS program (2000-2004). And they had a follow up agreement as the Western Australia manager of Federal ICT Incubator Program (2004-2008).
Chapter 3 Results
It is important firstly to understand how the venture capital economy itself works. This includes how the Australian economy is doing and how do the entrepreneurs access funding for their companies.
Australia has a long history of world-class technology development capabilities mostly stemming from high-quality universities, world-class scientists and engineers, supportive government R&D grant programs and innovative entrepreneurial populations. But Australia has been under-resourced when it comes to accessibility to investment capital. The
government in Australia is a supportive one and channels allot of resourcing and money into the economy, nurturing entrepreneurs that develop a new idea or technology.
In these instances it is relatively easy for entrepreneurs to access funding (grants programs) for their company, the government also instigated programs to stimulate entrepreneurship for example the program: Mentoring for Growth. The government is in the process of
transforming the economy from being resource based to an innovative high technology economy. The government’s goal is to shift Australia from being dependent on a resource based economy. This practice shows that a lot of entrepreneurs in the preseed phase use the money to develop their idea within a proven concept, resulting in the government's funding being utilised to develop their new technology more. However a problem that is now beginning to surface is that a lot of entrepreneurs neglect to commercialise their product, in other words they forget to bring this new technology to the market. They believe that when the product is well developed, it will sell easily. But having a proven concept is only one part of forming a company, to bring the idea to the market is the next step. This step is known as the “Death Valley Curve” or the “Valley of Death” This term is a slang phrase used in venture capital to refer to the period of time from when a preseed or startup firm receives an initial capital contribution to when it begins generating revenues. During the Death Valley curve, additional financing is usually scarce, leaving the firm vulnerable to cash flow requirements. This chapter will provide answers to the sub questions raised and how companies may survive the “Death Valley Curve”. How can the number of deals between venture capitalist who are looking for “good” deals and entrepreneurs who are “desperately” looking for money be increased?
Zernike Australia are a company who has found that in practice it’s very easy for
entrepreneurs to obtain start up government funding but during the following phase; the so called start-up and growth phase funding is not so forthcoming. Companies with a proven concept that are ready to commerialise their product or service then encounter a huge “investment wall” or fall into “the valley of death”. In Australia investors are reluctant to invest in high technology companies preferring the traditional secure and sound profit companies, which in Australia are found mostly in the resource industry.
§3.1. Which factors lead to a deal?
The majority of the respondents advised that every deal is different and it is dependent on the investor and the entrepreneur, which factors lead to a deal. The other factors are spoken underneath in every respondent’s own perspective. All the comments/quotes of the respondents are available in appendix 0, the raw data is available in appendix 2. Investors
The venture capital market in Australia is a very immature one and there remains space within it for new market players according to the investors. For the entrepreneurs it is very hard to receive capital especially when you look at the number of deals that are made. A large venture capitalist located in the heart of Brisbane is CM Capital, CM Capital invests only in high technology companies and receives 400 venture proposals per year. Of these 400 proposals they invite about 80 companies to present their concept to them of which they only finance about 5 companies. CM Capital is only investing in the best companies that they select, but CM Capital believes that there is enough space for another venture capitalist within Brisbane. According to another investor it’s better to consider the question: How can entrepreneurs improve their chances of securing VC funding? Investors state that the VC market within Australia is an unsophisticated one and has room for other players. So it’s hard to increase the number of deals without additional VC’s or without more money available in the market. So if an entrepreneur wants to fund their company they need to know what a VC requires. Another reason which could result in a deal is that currently there is a lot of entrepreneurs approaching VC's unprepared, they may have a great technology but they do not present good business plans and have major gaps in the management team. This is because they have not developed a strategy of how their idea would be taken through to market and to become a market leader. Entrepreneurs generally need to do a lot more work to get themselves ready to present their concepts to the would be investors, only the entrepreneurs who have developed sound business plans and know how they are going to commercialise their technology will be successful with their dealing with VC’s.
If venture capitalists within Australia are truly interested in a technology then they will assist the company to find an experienced entrepreneur with a proven track record in that field. These entrepreneurs are mostly sourced from their personal networks and can add to the reasons to invest in the company, because they know the person well and know their capabilities. But introducing an entrepreneur to a company doesn’t always mean that the venture capitalist are investing directly in the company, this is because the entrepreneurs first need to do their research to ensure that the company is in the right conditions to make it appealing for the venture capitalist to invest in.
Entrepreneurs
Entrepreneurs in Australia are divided into two types. One type of entrepreneur is
knowledgeable in regards to the requirements when dealing with VC's whilst the other type being the entrepreneur (mostly the inventor) doesn’t have a clue what a venture capitalist requires of them. The entrepreneurs need of course a great idea and a big market for their product, but lack the skills themselves to bring their idea and proven concept to the market. For venture capitalists it’s important that the entrepreneur has experience with
commercialising a proven concept to a company, as it will greatly increase the chances of the company becoming successful.
the most important factor also according to the investors. The professional skills of venture capitalist, their experience, their knowledge and contacts (well connected) are seen as being invaluable in the success of any new venture. New entrepreneurs overlook that most investors were successful entrepreneurs in the past, and as such are able to draw upon a wealth of experience, which they share without charge.
Experts
There are more important factors, which could lead to the success of a deal, but the following factors are considered really important: it’s definitely all about the entrepreneur, an
entrepreneur can “make it or break it”. An entrepreneur needs a realistic view of the company, with a realistic valuation, have to be able to explain the company properly to an investor (They have to know how to pitch!).
For this research there was as well as the universities, which were very important for leading to deals. The universities like the Griffith University have a department called the Griffith Enterprise. For example the Griffith Enterprise provides assistance to the University's staff conducting work for persons or organisations outside the University. The Business
Development Managers will assist staff in developing, costing and pricing of proposals. The QUTBluebox and Uniquest provided the same services.
When universities publish a new technology or invention globally, a large number of entrepreneurs approach these universities to assist in bringing the new technology to the market. From this practice it is evident that the entrepreneurs lack the finance to invest in the company and as a result these entrepreneurs are approaching venture capitalists to invest in the companies that they wish to form with the idea that originated from the university. This proves to often be unsuccessful because for entrepreneurs it’s hard to negotiate successfully with two parties being the university and the venture capitalist both of who seek to maximise the profit that they can gain. One of the main factors in this is due to the ownership of the idea/invention belonging to University. Another contributing factor is often that the three parties having different views and objectives hence it is difficult for the entrepreneur to satisfy the requirements of all of the different parties.
§3.2. What is the role of Zernike Australia in the deal making process?
This sub question is important because it’s important to know what the role of Zernike is in the deal making process at this moment. Zernike Australia have identified that not many deals are made between venture capitalist and entrepreneurs and they want to increase this. Zernike Australia does not currently have a reputation within Australia in relation to deal making and does not play a role in the venture capital business. All of the 20 respondents were asked if they were aware of who Zernike is and none were able to identify Zernike as an intermediary. Some respondents, especially the respondents in Perth were aware however of the Zernike Group in the Netherlands and that they have their own fund, in Brisbane, Zernike were only associated for their presence in managing the Technology Park in Brisbane and formerly the Technology Park in Perth.
Investors
At the moment Zernike Australia is not involved in the deal making between investors and entrepreneurs. They also don’t mention an exact role for Zernike in the deal making process. A problem for Zernike could be that venture capitalists want to speak with the source, they don’t like to speak with intermediary. So they prefer to speak directly to the entrepreneur or the inventor who wants to start the company and who is looking for funding. When you look from the perspective of a Venture Capitalist, it will be difficult for Zernike to become an intermediary, because the VC’s don’t like to pay for intermediary and prefer to speak directly with the entrepreneur who is looking for money.
Entrepreneurs
From the practice there are about 100-120 entrepreneurs approaching Zernike in Perth with their business proposals a year. The entrepreneurs are very busy with looking for funding so they try all kind of resources to get the capital. Most of the entrepreneurs know that Zernike established the EIR (Entrepreneurs In Residence) on the technology park in Perth and some also know that the Zernike Group is in Europe a kind of VC and an intermediary where entrepreneurs can get funding. In Brisbane no one of the respondents associate Zernike as an intermediary or an investor.
Experts
The respondents in Perth that were spoken for this research knew that Zernike was one of the founders of EIR see §2.6.3 for more information and a couple of them worked for this project. So they were aware what Zernike is doing and they know of the connection between Zernike Australia and the Zernike Group globally particularly in the Netherlands. A couple of experts stated that EIR has a negative reputation within the market. Zernike = EIR, so their reputation in regards to deal making is not a good one within Australia. Some respondents in Brisbane are aware that Zernike has performed strong in managing the technology parks in Queensland and Western Australia but most of them are unaware of the role of the Zernike company and the nature of their business. In summary according to the 20 respondents Zernike Australia does not have a presence within the Venture Capital market in Australia.
§3.3. Who are the venture capitalists in high technology companies in the start-up and growth phase in Australia and what kind of activities do they have?
There are different kinds of investors, venture capitalists are the group of investors whose business is in investing in other companies. All the respondents agreed that there aren’t enough venture capitalists that are investing in high technology companies and there is still room for other players within this market. There are a lot of startup companies and companies in the expanding phase which have great opportunities but they can’t fulfill these
opportunities because they cannot source funding. The reason for this is that the boom in mining is attracting the investors attentions rather then the opportunities that are developing in the high technology small businesses. All the comments/quotes of the respondents are
available in appendix 0, the raw data is available in appendix 2. Investors
best management teams and the best business models. These activities are additional to their investments; they have to reconsider and change strategies and give corporate advice. Entrepreneurs
The venture capitalists possess professional skills, experience and an invaluable network of contacts available to them. The entrepreneurs are able to utilise these skills at no cost, which can be invaluable to a company in the startup or growth phase. Most investors invest in sectors where they have worked in previously and have experience in to best utilise these skills and experience in the company where they are investing. Many of these entrepreneurs are only looking for capital from the investor rather then the additional advice offered as a service. Investors are difficult to find according to entrepreneurs and as a result some entrepreneurs are investing in their own companies if they can fund it from their own financial resources or from the resources of their FFF (Family, Fools and Friends). Experts
In Australia the number of companies that are in the startup phase with their proven concepts and companies in the growth phase looking for money provide a great challenge for the resources of the small number of venture capitalists in Australia. The government is attempting to encourage venture capitalists to expand their investments by creating a favorable environment for them to operate. But according to the government the results of their efforts have been disappointing with regards to attracting new venture capitalists to Australia. As a result of this the government has responded by providing more attention to the Business Angels to increase the number of completed deals between investors and
entrepreneurs. They have accomplished this by focusing on the Business Angel network, which is accessible by the entrepreneurs. In Queensland there are pitching sessions held by the following four initiatives; Founders Forum, Brisbane Angels, First Tuesday and Angels Institute. You can find more information in regards to their activities via their websites see the websites in the literature list.
Besides these BA networks (which are still very young, Brisbane Angels 2006) the
government in Queensland (Brisbane) also initiated a program called Mentoring for Growth program, this program enables successful business people to share their experience and expertise. These meetings have proven to be very successful and result in the establishment of many contacts that that are of value to the individual parties. The experienced business people involved also often have a cash surplus, which they are looking to utilise in making good investments and it is often during these meetings that investors and entrepreneurs find each other.
§3.4. What do the venture capitalists and the entrepreneurs of high technology companies in the start-up and the growth phase in Australia want?
All the comments/quotes of the respondents are available in appendix 0, the raw data is available in appendix 2.
Investors
