I’ve been asked recently to comment on the “state of the early stage investment scene in New Zealand”.  Despite the fact that the fog is yet to lift in terms of the global outlook,  I’m very enthused by what I see going on in NZ Inc. at the moment, but some big challenges are coming.  In summary:

  • Deal flow and quality is excellent
  • Angel investment is buoyant
  • Venture / growth capital is sick and that might just prove to be a problem
  • We need to speed up / get hungrier

Deal flow and quality

We’ve been investing informally since 1998 and formally since 2005.  On average we see 150+ opportunities a year and invest in two or three.  This year has been a stand-out in terms of quality:  more experienced teams (a couple doing their second or more venture); more advanced propositions (that have gone beyond planning, are up and running and market tested); and more founder or family cash risked earlier.  Opportunities presented with these characteristics get our attention and are much easier to assess.  We’ve made five investments of this nature this year.
It’s clear that the work that has gone in over the last decade to develop the sector through:

  • the creation of formal Business Incubators;
  • the government support for the New Zealand Venture and Angel communities;
  • the research and market development grants available from FRST and NZTE; and
  • the support of the CRI’s to early science based ventures

have collectively contributed enormously to the creation of a vibrant entrepreneurial community.  In addition, outstanding business and investment successes like  Trade Me, 42 Below, IceBreaker, HyperFactory, to name a few, have provided motivation and inspiration for aspirational young New Zealander’s.

Angel investment

NZ Young Company Finance reported that more than $31m was invested into approximately 30 young companies in the first half of 2010.  $50 million went into 63 new businesses in 2009.  This is an outstanding number for a country of 4 million people and demonstrates that Angel investors have remained very active coming out of the global recession.  With the formalisation of Angel groups up and down the country private capital for starting new companies is the most accessible it has ever been in New Zealand – IMHO.

Venture / growth capital is sick

Today, we have one Venture firm left in the market that is actively investing and they’re getting towards the end of their fund.  5 groups that i’m aware of including MOVAC are attempting to raise new funds but are finding it tough to achieve meaningful scale.  From what i see it’s likely that three of these (including MOVAC) will have modest size funds from the 2nd half of 2010 – i hope that we see more.  We need Venture firms to provide the funding to scale businesses that have been started in the Angel community.  The scale of funds does not need to be enormous, particularly if we focus on capitally efficient industries.  Our view is that we can get companies to decent exit points for between NZ$2 million to $10 million post early angel rounds.  There are few outliers to these numbers but this is the range that New Zealand can manage.
If we don’t have a vibrant Venture community I see a potential train wreck coming for Angel Investors.  Here’s the math, 60+ companies have received Angel funding since 2009, all require follow-on funding rounds.  To this stock we’re adding about 30 per year.  From this, assuming a rolling stock of 20 companies deserving of a growth round of approx $3m+, then we need $60m per year in organised growth funding to support the best companies being created.  WE DON’T HAVE THIS CAPITAL IN NEW ZEALAND TODAY.
The New Zealand Venture Investment Fund is doing its bit by calling for new applicants to create funds in 2011.  The process of raising a fund, though is slow and time consuming.  The challenge is compounded by a lack of institutional investor support, not helped by the poor performance of the venture investment market over the last 10 years.  Unfortunately while we wait to address this problem we’re losing the capability built up in the investment teams over the last 10 years.  I suspect that the government will need to do more – alongside private capital – if this problem is to be addressed and a sustainable early stage investment market created for NZ Inc.
The response from the Angel sector in 2011 is likely to involve a re-look at the nature of what is invested in, with a move to opportunities that are capitally efficient and can be built and exited quickly within a NZ$1 – $3million funding envelope.

We need to speed up, get hungrier

I had a great conversation with a Silicon Valley investor a couple of weeks ago who regularly travels through New Zealand.  While being thoroughly enthused at how buoyant the entrepreneurial sector was in New Zealand he was very critical of what he saw as lack of hunger, and slow pace in the development of New Zealand businesses.  He noted a tendency we have to protecting or hiding our toys before sharing them with potential offshore partners – a desire for perfection and a general risk aversion.  I’ve worked in the US and understand what he’s referring to.  In fact all of you reading this who have spent time working overseas in places like London or parts of the US all know that when you’ve returned home you’ve had to apply the breaks / slow down the pace that you used to work at.  It could be that due to our isolation we don’t see our competitors sitting next to us and hence we lack urgency.  We need to change this if we’re going to compete globally, we need to get offshore early, we need to partner with others who know more than we do with access to much larger markets, we need to network and get good at doing deals.  Intsilling this sought of passion, hunger and demand for quick results is one of the roles that investors must play.
I’m really excited at the prospects for 2011, particularly from an investors perspective.  There’s a great pool of exciting and maturing businesses emerging that are going to prove to be great investments for those who have cash to invest.
Take care and have a very merry Christmas.