KEY POINTS:
A network of seasoned business people is on hand to inject cash into startups and mentor them to success, but the challenge is to match companies with investors writes Christine Nikiel in her second article on angel investors.
* * *
Expat Canadian Paul Minett reckons his internet-based
carpooling technology is a sure-fire money spinner.
His company, Trip Convergence, has patented the idea and he claims it would have turnover of $100 million in 10 years. Minett and business partner John Pearce believe they are on to a winner, but they need more cash.
Enter the ICEAngels, a network of experienced business people who invest in and mentor young companies.
Minett, a business consultant, and Pearce, a management consultant, last month pitched their idea to the ICEAngels - the investment arm of start-up incubator ICEhouse - seeking $500,000. The ICEAngels premise is similar to that of the Dragon's Den reality TV show: entrepreneurs or "founders" pitch ideas to, and field questions from, a panel of local investors.
About 55 ICEAngel members turn up to hear Minett, Pearce and several others pitch their ideas. Conversation topics between the mingling investors vary: the upcoming Crosby, Stills and Nash concert, the pros and cons of investing in Australian stocks, the silver Maserati parked outside the building. One younger member is discovering the hazards of the job. "A few of my friends are starting to tell me about how they've got this friend who has a company or this friend who has an idea ... "
Pearce works the computer slideshow while Minett presents. He is relaxed, but slightly rushed. He has 15 minutes to explain a rather complex idea and to convince investors how it will turn a profit. To the strains of U2's Where the Streets Have No Name, Minett shows a video of a car pulling up beside a pedestrian. "Real people do this!" says a banner. "[Carpooling] is good for society and the environment," says another pedestrian. Minett intervenes - "but that's not what we're doing this for, we want to make money". The pair want $500,000 from the ICEAngels to develop their concept, and project "explosive growth" once they can prove it works.
Minett finishes. The questions begin: how will the company protect its IP? What is the exit strategy for investors? What is the time frame for getting the concept up and running? How long is the sales cycle? How would the company ensure the supply of drivers? What is the drivers' return on investment? How far will the $500,000 go? Someone jokes, have you talked to Helen [Clark] about this? After about five minutes, ICEAngels chief executive Mike Murphy intervenes and the session is over.
Afterward, most investors objected to the amount of local authority involvement required. "It's a great concept but you'd be dealing a lot with the Government and transport authorities and it's long, hard work getting anything out of government," one told the Business Herald.
"The biggest reason not to get involved would be because you're dealing with politicians and they're not rational," another said. They thought Minett's presentation was good, if complex, and that he answered the questions well. None were willing to say whether they thought the numbers would stack up without reviewing them.
Just three investors agreed to meet Minett the following week to discuss the proposal but once there, decided to reschedule to February. It has been difficult to arrange a meeting so close to Christmas, and the concept is "in limbo" until next year, Minett says.
The ICEAngels investments involve far more in-depth research than the "snap investments" made on Dragon's Den, Murphy says. The hundreds of companies that apply each year go through several screening processes before they even get to pitch. Murphy, a former software entrepreneur, meets each one to get an idea of the people involved. Some companies work with the ICEhouse, or other incubators such as Masssey University's e-centre and the AUT Tech Park to get their business plan up to scratch.
After the pitch investors fill out a form indicating their level of interest. If three or more are interested enough to start due diligence on the company, they meet a week later. Some of the more recent deals have had up to 12 ICEAngel investors. Following due diligence, a term sheet or brief financial description of the company and what it needs is offered to investors, their last chance to be actively involved in due diligence. Getting investors and companies together is the most difficult part, Murphy says, meaning some deals can take ages.
"Everyone's got different schedules, you've got these CEOs trying to run their companies and the founders trying to set up their business. But if we can get the right angel interested in a deal at the right time, it can be good."
A third of the investors are expats who have returned to New Zealand in the last five years such as ICEAngel chairman Trevor Smith, previously a senior director for British American Tobacco Holdings, or have recently emigrated, such as Italian entrepreneur Carmine Masiello, chief executive of eBus, which transports TV commercials digitally between production houses, regulators and broadcasters.
ICEAngels sign confidentiality agreements before each investment evening. To join the organisation they must prove they have net assets of a minimum of $2 million, provide references showing their experience as a successful entrepreneur or a senior executive, understand and accept the risks involved in angel investing, and be approved by the ICEAngels board.
They also have to be able to work with people, says angel and ex-Vertex managing director Paddy Boyle.
"Few founders understand what a deal with angel investors will actually involve, and a lot of what we do is explaining that. Typically they struggle then because of dilution - their shareholding and their level of control gets diluted because the [angel] investors come in and they want other people on the board too."
ANGEL INVESTORS
* Invest in and mentor young companies.
* ICEAngels network is the investment arm of Auckland start-up company incubator ICEhouse.
* To join the network angels must prove they have net assets totalling a minimum of $2 million.
* Provide references showing their experience as a successful entrepreneur or a senior executive.
* Understand and accept the risks involved in angel investing.
* Be approved by the ICEAngels board.
THE INVESTMENT PROCESS
* A company applies to the ICEAngels.
* If accepted, it meets ICEAngels chief executive Mike Murphy.
* If accepted by Murphy it pitches its idea to angel investors at an investment evening, held every two months.
* After the pitch investors fill out a form indicating their level of interest in the company.
* If three or more are interested in doing due diligence they meet the company a week later.
* After completing due diligence, investors are showed a term sheet or brief financial description of the company and offered one last chance to invest.
* The deal is completed.