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Dieter Tröss |
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Good and bad investment news for start-ups
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The good news for start-ups is that there is money around to invest in fledgling companies.
When Bill Payne, one of the United States' best-known investors, was based at the Icehouse incubator as entrepreneur-in- residence last year, he noted that angel investing in New Zealand was extremely healthy, with no shortage of start-up capital for entrepreneurs.
That was demonstrated last week with the release of the Young Company Finance Index, which noted that a record $53 million was invested by angel investors in 2010 in young companies.
That is up from $51m in 2009 and $32.6m in 2008. And the number of deals last year was encouraging - 103, up from 76 the previous year. It has to be good news for the sector that investment in start-ups and the number of deals have both gone up.
Of that $53m, $23.9m went into first-round investments and $29.9m was invested in follow-up rounds in existing companies. Angels wouldn't reinvest unless they liked what they saw in their initial investments. So it could be a sign of a maturing market.
But it may also be a sign that angels are being asked to dig deeper due to a lack of early expansion money, says Angel Association chairman Phil McCaw.
Also worth noting is that software and services took the largest chunk of angel investment (26 per cent), followed by pharmaceutical start-ups (23 per cent). Mr Payne reckoned our best chance of developing global companies lies in cloud computing, and it makes sense that software companies, with their weightless approach to exporting, stand a better chance of scaling quickly in a global economy.
The bad news is the serious lack of venture capital in the $2m to $5m space. It doesn't make much sense to spend taxpayer dollars on research and development, commercialisation of research, and start-ups if these young companies are going to hit a cliff early in life.
We have some good programmes like New Zealand Trade and Enterprise's Escalator programme in place to help start-ups through the first couple of years and become investment-ready, but the Government has only so much money to spend on programmes like Escalator. There has been some talk of NZTE changing course to fund slightly larger companies in the hope of picking winners.
Angel groups such as Ice Angels are funding start-ups coming to market by other avenues, and partnerships between angel groups are increasingly popular - last year investors syndicated 47 per cent of their deals.
But there is a major problem in raising venture capital to continue to develop global companies. A similar gap in the United States has fed the rise of super angels and smaller funds to bridge the gap. These are often three or four angels who raise, say, a $30m fund for early-stage investing.
It's a trend that Angel Association director Colin McKinnon thinks is worth studying - although in the US it has been fuelled by market need and the amount of investment dollars swirling around.
So while it may be a good time to launch a start-up, sooner or later you will run into a huge chasm in funding if you want to expand your company.
New Zealand isn't alone in this dilemma, says Mr McKinnon. But it means companies looking for further rounds of capital to fund growth often have to look overseas, or limp along on revenue. Finding finance overseas can be expensive, although there have been notable exceptions such as Lanzatech, which secured $20m in funds offshore.
But if you limp along funding growth through revenue, and can't get financing, you are unlikely to build a successful company. And growth companies boost jobs and the economy.
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