Great deals have just a handful of individuals involved, with say one or two placing $300,000 or more, and perhaps one or two smaller yet smart investors there for the ride.
That's what happened with Xero and Vend, and even with GeoOp.
So the deal flow that angel clubs get is skewed towards firms that have failed to get funds from these other investors, and for now I'll let the angel club track record speak for itself. It varies by region, but it's generally not good.
The final thing investors need are the smarts and understanding of what they are investing in and how to invest. These are often quite different areas of expertise and knowledge than the investor already has, as few really understand the early stage or technology sectors, and few understand investing in private companies. It's possible to educate people, and we need to, but we need more professional investors in the sector.
Something that's been very bad for both investors and founders are the pretty nasty term sheets mandated by the presence of Seed Co-investment Funds, the early stage co-funding provided courtesy of the NZ Government-owned NZ Venture Investment Fund. I strongly recommend both founders and investors read the markup of their term sheet by Andrew Simmonds from Simmonds Stewart.
Did you have many high net worth investors interested in the Punakaiki Fund?
We had quite a few, but we failed to get any across the line for more than $200,000. We really needed a few million from one or two individuals. One alternative available to us now is a fund targeted at just high net worth investors.
Some of the feedback we got for lack of or low investing for the fund was lack of a track record - sadly while I estimate over 70 per cent returns per annum in my own early stage investing, I could not talk about that -, as well as not listing on the NZX immediately, not identifying investments which we were not allowed to do, and no broker support.
Would you describe yourself as an angel investor?
I really dislike the term to tell the truth. I regard myself as an investor and advisor to both early stage companies and larger ones, and have reached my own definition of an angel -$100,000 a year - several times.
What is your motivation for investing in other companies? What sort of skills do you offer to fast growing small businesses with potential?
It's really enjoyable helping people and their companies grow, especially when they are trying to make things better for their end users, their customers and by extension for all of us. It's fun to watch people take on increasing responsibilities and for my own advice to be less and less required. I've helped a number of people and companies make a huge amount of money, and the motivation for the fund was to continue to do so on a larger scale.
Do angel investors necessarily want a return and to take their money out at some stage?
It's hard to believe that any investor doesn't want a return, but I'll mention first something that a high net worth individual told me about 10 years ago: "If you have a friend with a business in trouble, then let the business fail and then bail out the friend. It's a lot cheaper as a poor business will keep requiring funds for a lot longer." So always invest for a return.
The smartest angel investors realise that their funds work best when they are invested for the long term. At the very least early stage investors generally have to keep their money in the company until there is liquidity, such as through a listing or sale.
Where have you seen angel investment work well?
Early stage investing works well when the investors know the space and have deal flow, know and can judge the people involved and know about investing and how to strike a simple great deal that's founder-friendly. It's best when there are less than five investors in a deal - one is best - and when the investor can help, but also knows when to get out of the way.
The need for sizeable funding from smart investors with simple contracts to the premium founders, remains.
Next week: A while back, I looked at companies set up by men and women who had set up new businesses after their main careers. I recently profiled a young company founder who started up his company straight out of university. He had already been taking on work, so why not? I'd like to hear from young things of 25 and under and hear what you are achieving. Lack of experience can be a good thing. Perhaps you are braver.
