Angels need to get stuck in: expert

Bill Payne says businesses that pass the start-up phase lack funding options to enable further growth. Photo / Steven McNicholl

Some New Zealand angel investors are being "spoiled" and "spoon-fed" opportunities by business incubators taking too big a role in the running of their investment groups, says a US expert.

Bill Payne, a well-known US angel investor who spent five months in New Zealand as Entrepreneur In Residence at the University of Auckland Business School, said some Kiwi angel groups linked to business incubators weren't contributing enough to group management and lacked post-investment opportunities.

"What we find in some - but not all - [New Zealand] angel groups organised by incubators is that the incubator managers do all of the due diligence and tee-up the deals such that the angel investors, as members of the group, are really passive investors.

"Very little is asked of them except to come to meetings and write cheques," Payne said from his holiday home in the US state of Montana.

He added, however, that New Zealand angels were right-minded and their motivation to invest came from the possibility of financial as well as philanthropic returns.

Leaders of New Zealand angel groups needed to move quickly to engage their members in decision making, deal flow management and the monitoring process of portfolio companies, Payne said.

He said the effect of that not happening would be a "substantial under-utilisation" of angels, who usually had years of experience in business that could be used to mentor start-ups.

New Zealand Venture Investment Fund (NZVIF) chief executive Franceska Banga, whose organisation received Payne's report, answered "yes and no" when asked if she agreed with the American's views on incubator involvement in angel groups.

"It's been natural for [incubators] to want to pull together angel investors in order to ensure that the companies they're supporting get the capital they need.

"That was the original driver of getting these networks together. I think we're past that stage now where you need [incubators] to do ... that spoon feeding," Banga said.

She said it was good Payne had raised the issue rather than "anyone inside the [New Zealand] market".

Andrew Hamilton, chief executive of Auckland business incubator The Icehouse, said he believed Kiwi angel investors always become heavily involved in businesses they invested in.

"The difference is where the angels in the US will be working on deals, on screening and on networking two or three days a week ... here they are not doing that."

In his report, Payne also highlighted a "capital gap" in New Zealand that meant companies requiring $2 to $4 million in funding often struggled to secure the cash.

Kiwi angel groups generally invested $200,000 to $1 million in businesses entering their embryonic, start-up stage.

Businesses that successfully passed through that first stage - around 15 to 20 per cent, according to Payne - often needed to enter the realm of venture capital for more funding. VCs frequently invested as little as $1 million to $2 million in businesses in the 1980s and 1990s, Payne said.

"But today few VCs invest in rounds smaller than $4 million."

Payne suggested that NZVIF not encourage the development of any new conventional VC funds with the aim of raising over $100 million, typically funding investment rounds of $4 million or more.

"I would propose that NZVIF and others focus instead on creating two to five new, smaller VC funds, each targeted at raising a total of $60 to $80 million.

"Typical investment per round for these funds would likely be in the $1.5 million range. Targeted companies for these investments should include deals funded in early rounds by Kiwi angel groups."

Banga acknowledged the gap and said NZVIF was trying hard to fill it.

The funding gap, which existed in this country and overseas, was stifling the expansion of potentially high-growth firms, Payne said.

But he was positive about the future.

"I think the awareness in New Zealand of this problem is very high and we're going to see, in the next couple of years, two or three new funds with a focus on this $2 to $5 million financing raise."

Funding options

Angel groups:

* Groups of wealthy individuals, often successful entrepreneurs, who band together and pool their capital and knowledge to invest in start-up companies.

* Angel groups generally invest between $200,000 and $1 million in individual start-ups.

* Angel investment in New Zealand is now at about the same level as in the Boston metropolitan area - regarded as second only to California in scale of angel investment.

Venture capital:

* Once a start-up company is through its initial stages it may need to approach venture capital (VC) funds to secure capital.

* In New Zealand, VC funds are typically run by investment professionals with a proven track record of investing in high-growth companies.

* VC investments into companies are larger than those of angel groups, usually between $4 and $10 million, sometimes more.

* VC funds usually steer the companies they invest in towards an eventual public listing, or sale, that will provide investors with their return.