Business
The missing link
by Rebecca Macfie
A new angel investment network aims to make a tough job a bit easier.
It might be a stretch to say angel investors do God’s work, but there’s something saintly about their mission. Angels go where venture capitalists, banks and sharemarket investors fear to tread, backing start-up companies with unproven products that won’t turn a profit for years – if at all.
Out of a typical angel portfolio of 10 investments, four will fail, three will be “living dead” (they won’t necessarily collapse, but they won’t go anywhere either), and two will return between two and five times the investor’s money. Just one will be a blockbuster success, returning five to 10 times the initial investment.
Despite these risks, New Zealand’s formal angel sector (as distinct from the “friends, fools and families” who are often the first port of call for young companies) pumped $30 million into 33 start-ups in the past six months alone.
Why do they do it? In the hope of making money, of course – investing early in a disruptive concept like Trade Me can generate rewards unparalleled in safer forms of investment. But angels are often driven by more noble objectives, too. The investors who backed Sam Morgan’s online auction company have since funded many more start-ups through their company Movac, saying their goal is help boost New Zealand’s GDP. The Warehouse founder Stephen Tindall – who has invested in more than 100 young companies through his company K1W1 – has a similar motivation.
But angel investing is tough work, and not just because it requires nerves of steel and the patience of Job. It’s hard to identify ground-breaking science and technology with commercial potential, and it can be hard to keep up with the money demands of capital-hungry young companies.
Angels also need to be actively involved with their investee companies, helping to solve technical problems and open up market opportunities. Enthusiastic amateurs who lack industry knowledge and deep business connections can be more of a hindrance than a help.
A new national angel investment network, launched this week, aims to minimise these problems and streamline the angel industry. AngelLink will screen science, engineering and computer technology start-ups – many of them spun out from university research labs – and match them with suitable angel investors. Each deal will be structured around a “lead” investor who will get first dibs and be responsible for building a hands-on relationship with company founders and managers.
Six experienced early stage investors – including Movac, Tindall and Endeavour Capital’s Neville Jordan – will play this role. If a deal doesn’t suit any of AngelLink’s lead investors, it will be put before regional angel groups such as Auckland’s Ice Angels or Christchurch’s Powerhouse Ventures.
“This is about finding the right people and the right money for each deal, and giving all of the deals the best chance of success,” says Mark Stuart, chief executive of WaikatoLink, the commercialisation arm of the University of Waikato, which will manage the network and screen potential deals.
About 30 other angels have joined the network, and they will have the opportunity to swing in behind “lead” investors on deals that appeal to them. Because
AngelLink aims to generate a steady flow of deals, investors will be able to spread their risk across a broad portfolio of start-ups, increasing their chance of making a good rate of return.
Stuart says the idea is to create a community of skilled investors who know and trust one another, and who are able to meet follow-on funding needs.
Venture capitalists – who don’t usually invest in start-ups until sales revenue has started to flow – will be shown details of AngelLink companies from an early stage so they know what prospects are coming down the investment pipeline.
Stuart points out that young high-tech companies can fail for lots of reasons: the science doesn’t stack up, someone else gets to market first, company management isn’t up to the task. But for New Zealand start-ups, the biggest barrier is money, he says.
“I am aware of so many early-stage companies that are probably going to leave New Zealand simply because they have to pursue the capital markets … My hope is that we can keep more of those companies in New Zealand.”
He expects the network to have about $8 million available for investment, including matched funding from the Government’s Seed Co-investment Fund. It’s a modest sum – but it’s the sort of smart money that could nurture a new generation of clever, high-value companies and help break New Zealand out of its low productivity trap.
