This report presents the findings of the Cabinet-mandated evaluation of the Escalator programme. Escalator was established in November 2003 as a New Zealand Trade and Enterprise (NZTE) delivered initiative that endeavours to enhance business growth by assisting innovative firms to raise capital through providing a training and brokering service. The period of the evaluation is from November 2003 until June 2005. However, financial data is also included from the 2005/06 financial year to show what Escalator is currently appropriated (i.e., $2.395m1 for 2005/06). Additional information on targets for the 2005/06 financial year is included to provide insight on how Escalator is currently doing.
The rationale for the Escalator programme is to provide capable individuals and small and medium enterprises (SMEs) with skill-based assistance to develop their ideas to a point where others can invest in them. This consists of training services to up-skill the investment ready capability of SMEs and innovators, and brokering/deal making services.
This rationale is based on a market failure problem identified as being what economists describe as an asymmetry of information essentially an information constraint to market entry for individuals willing to invest and for SMEs seeking external capital. Entrepreneurs seeking to grow their business may require additional capital to that which they can themselves provide. But they often don’t know how to prepare their business case, where to look for an appropriate source of equity or how to negotiate a good result. Such information and knowledge may not be available from the market or be at a cost that is too expensive for the individual firm. Equally, in the absence of these investor-ready SMEs, potential investors don’t know where to find opportunities to invest. They may also over/underestimate the risk.
Purpose
The purpose of the evaluation was to assess the effectiveness of the programme and inform NZTE’s upcoming tender round. The objectives of the evaluation are as follows:
• To provide accountability to the government for the performance of the programme; and
• To provide those involved in policy development and delivery with an assessment of the overall effectiveness of the Escalator Service against policy objectives; and
• To inform NZTE’s upcoming tender process for contractors within the context of the current environment. The request for proposals (for the tender round) is scheduled for May 2006; and,
• To provide insights on possible links between Escalator and related government programmes that contributes to the raising of capital by SMEs.
Key Results
Policy, programme delivery, efficiency and effectiveness
• Escalator is consistent with the policy intention of providing assistance to SMEs and entrepreneurs to grow their businesses. The capital raised in 2004/05 was $18.775m, indicating that seven times more capital was raised, relative to government expenditure during this financial year. At the end of January 2006, $14.275m of capital had been raised, indicating that six times more capital was raised, relative to government expenditure in the current financial year (2005/06).
• The investment readiness of participants was enhanced by attending Escalator. 69.1% of participants (who did not broker a deal) felt that they had improved their understanding of the capital raising process. 71% agreed that the workshops were relevant to their business needs. 80% of the case studies (participants that did go onto raise capital) agreed that their understanding of the capital raising process increased as a result of Escalator.
Matching expectations of the SME and broker
The evidence from this evaluation suggests that there is some misunderstanding in Escalator between SME expectations and the brokers (e.g., of the 55% of surveyed participants who responded, 85% of them felt in some way that their expectations were not met by the service provided by the brokers). This may reflect a lack of investment ready capability on the part of SMEs and entrepreneurs applying to the programme, as well as the mis-match with brokers (i.e., it may reflect the limited skill-set of brokers to address SME needs, given the small number contracted to the programme).
• Escalator is addressing the market failure problem. The average monthly application rate from SMEs has increased each year since Escalator began (see below):
• - 2003/042: 29/month
• - 2004/05: 32/month
• - 2005/063: 36/month
Programme linkages
NZTE delivers several other programmes that complement Escalator (i.e., Enterprise Training, Enterprise Development Grant, and Connect New Zealand). The Government has also made a substantial investment through VIF Ltd, a crown company, in the Seed-Co Investment Fund to stimulate angel investment development. A more integrated approach with these programmes will enhance Escalator’s effectiveness through, for example, educating SMEs (in terms of investment ready capability) and investors (in terms of supporting the development of New Zealand SMEs). Additionally, these linkages enhance the possibility of bringing together SMEs and investors. In establishing these programmes, the government has recognised that New Zealand’s capital raising market is in its infancy compared to other OECD countries.