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Verona Mustagal |
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Record angel investment but lack of follow-on money
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A record $54 million of investments by New Zealand angel investors in 103 deals last year disguises a lack of follow-on capital investment options, says the Angel Association.
"The angel investment community continues to go gangbusters, which is amazing given the financial crisis in the world in 2009 and 2010," said association chairman Phil McCaw.
Angels will continue to work on growing the size of that investment over the next couple of years."
"What we're really worried about is where we're going to get the follow-on investment money," said McCaw. "There's only so much capacity in the angel investment scene."
He said venture capital investment funds have all but dried up.
Four or five funds, including Movac Fund Three, Endeavour, I-Globe and Pioneer are trying to close their capital raising deals over the next three to four months, McCaw said.
"Once you get past the two or three major institutional New Zealand investors, there aren't a lot of other operations compared to the private money out there," he said.
McCaw said that once start-up companies have received angel investment money, which usually tops out at $1 million to $2 million, there is a tremendous lack of venture capital funds to enable follow-on expansion.
This commonly requires a $3 million to $10 million investment.
"That's about the amount that in our experience is required for an averaged sized company to get itself in a position for a global acquisition by an offshore corporate," he said.
Using a biotechnology company as an example, McCaw said such funding is necessary to properly establish its intellectual property protection and product positioning, prove that the product produced has demand and clear any regulatory hurdles.
Getting past these requirements puts a growing company in good shape to be able to partner with an offshore organisation or to be acquired further down the track.
"If they can't raise that money at the venture capital stage, they either fail or grow very slowly and underperform," said McCaw.
He said that one possible alternative is groups of angel investors syndicating their money, allowing a larger overall amount to be put into a start up.
"We have some work to do with the angel investor network to get them comfortable in being part of a portfolio under a venture capital fund," McCaw said.
"They tend to want to follow their own money, which is understandable, but doesn't necessarily allow us to take things to scale."
The 2010 angel investment tally was a 5.3% lift on 2009's $52 million, 76 deal total.
The average investment declined to $522,000 compared to $672,000 in 2009, with a rush of deals towards the latter have of 2010.
There were 25 deals in the third quarter and 41 in the fourth.
A notable trend since 2006 has been an increase in syndicated deals involving different groups of investors.
In 2010, 47% of deals were syndicated and 53% were not; compared to 27% syndication in 2006.
Of the 2010 deals, 38% were structured as convertible loans, 43% as ordinary shares and 19% as preference shares.
Of the 303 deals completed since 2006, software and services make up 26%,
pharmaceuticals 23%, technology, hardware and equipment 16% and food and beverage 10%.
By region, since 2006, 51% of angel investment has been in Auckland-based companies, 17% in Wellington, 11% in Christchurch, 7% in Dunedin and 4% in Palmerston North. |
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