Angel investment at record highs

Angel investors plugged a record amount into New Zealand start-ups last year, with software companies taking the lion’s share.

The latest Young Company Finance Index, compiled by the New Zealand Venture Investment Fund, shows angel networks and funds invested $55.9 million across 118 deals in 2014, with $26.2 million going to software companies.

Food and beverage companies attracted $4.8 million of investment, much higher than the $900,000 of 2013. But investment into health sector companies declined, with $2.2 million of investment last year compared with $8.4 million the year before.

New investment was much higher – $21.3 million compared with 2013’s $10.3 million, and 2014 saw a slightly smaller average deal size of $490,400 compared with $505,600 the year before.

When the index first measured angel group investment activity in 2006, just over $20 million was being invested annually. This is the first time there has been consecutive $50 million-plus investment years, after $53.1 million was invested in 2013.

The NZ Angel Association estimates the number of angel investors involved in networks has grown from 370 to 730 in the past two years.

The growing interest in angel investing is being fuelled by “incredible growth” in new technology, NZVIF chief executive Sarah Pierce says.

“All that innovation is being started by entrepreneurs and the world is changing – in New Zealand, there’s a vibrant technology market. The way you get these companies started is almost always through third party capital, and you also need people’s experience and judgment to help build these companies.

“New Zealand angel investors are encouraged by the good track record of a number of successful entrepreneurs. The economy is healthy and investors have money in their pockets and are looking for growth opportunities. Interest rates are low and investors are looking for alternatives to property.”

There are about 20 angel investor groups in New Zealand, 15 of which NZVIF works with, such as Ice Angels and Sparkbox in Auckland, Powerhouse in Christchurch and Angel HQ in Wellington and Enterprise Angels in Tauranga.

There is a wide variety in how much an angel investor would invest or how much net worth they have, Ms Banga says.

“The amounts are smaller than people would think. Often people get put off angel investing because they think they’re not wealthy enough.

“If a company were looking to raise half a million, NZVIF might put in $250,000 from 10 investors, so often the individual will put in $20,000-$100,000. But they must have the capacity to put in follow-up investments as companies invariably need another funding round.”

Often the angel investors are entrepreneurs who have already had success with their companies – such as Sam Morgan, Phil McCaw and Stephen Tindall – and decide to give a leg up to those just starting out.

But angel investing is inherently risky and the rule of thumb is half the companies invested into “fail outright,” Ms Banga says.

“It’s a high risk area – just 20% might be successful, and not only continue to grow but return capital to investors. Investors tend to de-risk the portfolio by putting in small amounts spread across a number of different companies, and not put all the eggs in one basket.”

Equity crowdfunding, first licenced in New Zealand in July last year, attracts a slightly different segment of the market but can work alongside well with angel investment, as it does in the US, Ms Banga says.

“Crowdfunding works very well for companies where business opportunities are transparent. It is generally focused at a less sophisticated retail investor. Angel investors look for deals that have significant intellectual property. The business opportunity may not be so apparent. But both equity crowdfunding and angel investing are at the high-risk end of the market.”

One company currently running an equity crowdfunding campaign, which has received angel investment in the past, is cystic fibrosis drug developer Breathe Easy. The company is attempting to raise the final $500,000 needed to start clinical trials, after previously raising more than $1 million from Pacific Channel, Ice Angels and NZVIF.

The majority of the capital raised for New Zealand companies is from New Zealand investors but in some instances is raised outside New Zealand.

“Often, if a company can attract the interest of US investors, then it can open up a much wider market,” Ms Banga says.

“If you go back 12 years, nobody thought there was any reason to come to New Zealand to look at tech companies. Now New Zealand is very well connected to the west coast of the US in particular. A number of New Zealand companies have attracted significant US support.”