Issue 4 of Young Company Finance (PDF download – 533K) is now available. There are interesting articles on the Angel Association NZ, TracPlus, Ponoko, (all outfits that we’ve covered before) and Pacific Channel, as well as the ever fascinating list and analysis of private financing deals done this year.
It’s particularly interesting to note that there have only been 15 deals done so far this calendar year, as compared to 27 done in the first half of calendar 2007.
This gives some validation to the assertion that there’s a capital crunch on for startups at the moment.
Election year is upon us, and this week we’re starting a series on the Politics of Investment and Innovation. Over the last two months, we’ve canvassed the positions of the significant parties in parliament on their approach to investment and innovation.
The Greens, ACT, NZ First, Labour, and National all happily provided their best spokespeople on these subjects, which in some cases left us with with the impression that they were pretty thin on the ground in these areas. The Māori party were a no-show, despite numerous attempts to connect with Dr Pita Sharples.. The interviews are presented in the chronological order in which they were conducted.
We’ll be releasing one party interview each week over the next five weeks, so that you can contemplate how well each party grasps the core issues and engage in lively and informed discussions with your colleagues. This will be followed up with a summary podcast at the end of the series.
This week we start with Russel Norman, co-leader of The Greens. As you know, Russel is new to the leadership game, and the Greens being a small party with an agenda focussed on sustainability issues, they don’t have well-developed policies in this area. For all of that, I was struck by Russel’s openness and willingness to incorporate new thinking into the Green agenda. After the interview was over, he said that he was seeking assistance from interested investors to help The Greens with policy formulation.
Key positions:
To encourage innovation in the “right” areas:
The right pricing structures need to be put in place
The right tax incentives need to be in place
Publicly funded science research should be shored up
The Green Revolution is where the future of business should be.
The broadband backbone should be publicly owned as a key piece of national infrastructure; National and Labour haven’t gone far enough with their current policies
The Greens support a capital gains tax, excluding the family home, and possibly investment into “higher risk R&D-type investments”.
Foreign Direct Investment is good, but not where it results merely in the extraction of dividends overseas. The Overseas Investment Office says “yes” too often now, and would be encouraged to look closely on the net benefit of each investment to the NZ economy.
His core theme is that ”Like most things in life, being clear about your goals and having a plan to achieve it is pretty much the only way to maximise your chances of success.”
Greg argues that like any sales process, it’s a good idea to start developing relationships with potential partners well before you intend to bring them into play, and being able to prove your ability to deliver on commitments.
That’s excellent advice for entrepreneurs, and we look forward to reading the rest of the series!
An industry-led taskforce has been set up and tasked with producing a blueprint and action plan to develop New Zealand’s capital markets. The Capital Market Development (CMD) Taskforce will look at the current state of our capital markets, the international context, future risks and opportunities and key changes necessary to deliver the best possible financial system for New Zealand.
The taskforce will hold its first meeting on 31 July 2008 and has approximately a year to develop and prepare its blueprint and action plan.
For more information, see the Ministry of Economic Development’s CMD website.
You probably read the recent announcement about the establishment of the Angel Association of New Zealand. Andy Hamilton, the CEO of The Icehouse and founder of the ICE Angels in Auckland, is now also the chair of the Angel Association’s Council.
We caught up with Andy and asked him to tell us more about the association’s plans, including:
Andy’s vision for the angel space in NZ
Providing a single voice to government
Help with education of new angel investors
Promotion of angel investing
Enabling better syndication, both local and international
If you’re interested in more information about the Angel Association of New Zealand, you can contact Andy at ahamilton@theicehouse.co.nz, or ring him at The Icehouse on +64 9 308 6200 or 0800 ICEHOUSE (0800 423 468)
As world equity markets look increasingly anaemic, local angel investment looks all the better.
The credit crunch has resulted in significant equity losses for a number of investors, and caused people to be more generally more risk averse. However there are a significant number of savvy investors who cashed out of listed equity early on in the cycle, and haven’t overexposed themselves in property. I know a number of investors in New Zealand who are currently sitting on larger-than-usual cash holdings.
Angel investment is a real opportunity for such investors in that they can take a rain-check during the storm in global equity markets, invest in businesses in which they can have a direct influence, and still have the potential upside that results from being able to deliver smart money into startups.
Economic turbulence doesn’t stem the flow of ideas from clever entrepreneurs, and can even be a stimulus for game changing ideas and technology.
In Wired Magazine’s recent article “Credit-Crunch Angels: They’re Still Out There“, they say that in this environment, angels might be “asking tougher questions, choosing later-stage companies, or investing smaller amounts” … and of course, applying more pressure to valuations.
Bottom line: the current dynamic environment is still full of opportunity for entrepreneurs and angel investors.
Email security is a perennial concern, and OpenID is an up-and-coming technology that’s set to become universal over the next few years. Jeremy Wyn-Harris has come up with LiquidID. an innovative way to marry the two technologies, and has successfully built and launched the service. He is looking for investment to complete his patents and market LiquidID.
The Pitch:
LiquidID is a unique and innovative extension to single sign on (SSO) systems (such as OpenID) that provide guaranteed email protection. OpenID allows a user with a single identity to logon to any OpenID enabled sites (“consumers”). LiquidID is an extension to OpenID which seamlessly distributes unique email aliases to OpenID consumers. The LiquidID server forwards received emails to the real user. If however it is determined that the alias has been compromised then the LiquidID server will reject the email.
Since LiquidID is a portal for each and every login, significant revenue can be generated by presented targeted advertisements specific to the users interests and the sites they are logging into.
This concept is protected by provisional patents but requires investment to fund full filing. Furthermore, additional provisional patents have been submitted for an alternative but similar idea in which email aliasing is applied to any outgoing email message from a standard email client or web based service to provide absolute unsolicited email protection. More information can be found online at http://liquidid.net and a business plan is available upon request.
Accomplishments to date:
Patents filed
Site developed and launched
Development plans:
To further the provisional IP protection with a PCT patent and market the service using online media. Extensions and refinement to the service are planned.
Key Challenges:
The main obstacle for LiquidID will be mainstream adoption of SSO (OpenID) by the general public. However assuming OpenID becomes mainstream, the primary challenge for LiquidID is ensuring people are aware of it and how it is differentiated from other OpenID providers. Alternatively if the IP is to be licensed then appropriate parties need to be made aware of the benefit and understand it’s value proposition.
Principals & Previous Experience:
LiquidID has been developed solely by Jeremy Wyn-Harris, under the privately owned entity of Epic Digital.
Jeremy has 10 years experience with start-ups. In 1998 he co-founded Epic Digital which developed an intelligent standalone Internet camera for low end security applications that was mass produced (10K units) in Australia and Singapore. Joint ventures with Hills Industries (forming Epic World Australia and SingTel (forming Epic World Singapore) were established. This was accomplished in all within 4 years and began on a shoestring budget from a garage setup. Since 2003 Jeremy has established three other significant ventures, namely The OpenSauce, Builderscrack, and UpStartGo. Builderscrack is a commercial venture that has rapidly become a profitable business, whereas The OpenSauce is a non-profit venture that has received international media attention from BBC World.
Jeremy has three published patents and one recently submitted PCT application and holds a Bachelor (Hons) and a Master degree in Electrical Engineering.
What they want from an investor:
NZD 25K is required to in the near future to further intellectual property protection. Overall a total investment of NZ$100K is being sought.
Dave’s Commentary:
If you’re keen on this kind of technology, $25K is a low buy-in price to take part in a company that has protected IP, an up-and-running product, and an entrepreneur with a track record. Jeremy seems a personable chap with a good mix of technical and business skills. From my conversations with him, he seems focussed on the desired outcomes, not afraid of hard slog, and willing to take risks.
Angel Association New Zealand
Media release
1 July 2008
Angel investor groups have formed a new industry body – the Angel Association New Zealand – to advocate for and to promote best practice within the fastgrowing investment sector.
The association’s members consist of 15 angel groups from around New Zealand. Andy Hamilton, CEO of business growth centre The ICEHOUSE, is the inaugural chairperson of the association’s council.
“Angel investing – individuals and groups investing in early stage businesses – is an emerging industry which has the potential to be a key asset class and a very influential player in commercialising New Zealand innovations,” says Andy Hamilton.
“Overseas, we have seen national angel bodies formed once the sector reaches a critical mass. Establishing a national body in New Zealand is a sign of the recent growth of angel investing in our local market.
“The Angel Association New Zealand will set a national vision for the sector, and help to raise the capability and knowledge of angel groups, many of which are at relatively early stages in their maturity and mainly focused on their own issues and challenges.”
Clyde Rogers, from Auckland regional economic development agency AucklandPlus and a member of the establishment board, says a key role for the Association will be to advocate for initiatives which will assist the sector’s growth and development.
“To date, in New Zealand, much of the growth in early stage investing and the formation of angel investor groups has been organic and informal, rather than market-led.
“As an investment class looking to attract more investors, it is important that newcomers to angel investing have confidence in the practices and methods which make this type of investing unique from others. The Association will develop ‘best practice’ models and training for business angels and entrepreneurs.
“It will also provide greater visibility and promotion of the sector, so that entrepreneurs with innovative ideas can more easily find potential investors.”
Andy Hamilton says the United States is the most developed and advanced angel investment market, and may of the current trends there bode well for the sector’s development in New Zealand. In the US, for example:
The number of accredited investors who are entering the angel world is increasing each year by over ten percent.
There is an increase in the number of investors per deal with an average of four to five investors joining together to fund an entrepreneurial venture.
The number of angel groups has grown, as have the number of ventures receiving investment from angel groups.
Angel groups fund over thirty times as many entrepreneurial companies as the formal venture capital industry, investing three to five times more money in total.
Angels continue to be the largest source of seed and start-up capital, and there has been a dramatic increase in post-seed funding by angels.
“While angel investing in the US has been a feature of its economy for a considerable period, it is the significant formalisation of the asset class over the last ten years – and the subsequent significant growth – which is most striking. “The trends occurring in the US are also occurring in Europe and the Asia- Pacific, which are more advanced than New Zealand in terms of the maturity of their angel sectors, and in having established national angel associations.
“The establishment of a national body will provide fresh impetus to the growth of angel investing in New Zealand,” Andy Hamilton said.
Background
The Angel Association New Zealand’s establishment is being supported by the NZ Venture Investment Fund and AucklandPlus, the economic development agency of the Auckland Regional Council. Law firm Minter Ellison has provided legal expertise.
The inaugural council members are: Andy Hamilton, Phil McCaw, Mark Houghton-Brown, Richard Palmer, Dean Tilyard, Steve Hampson, Norman Evans, Greg Sitters, Clyde Rogers, Mark Robotham.
Questions and Answers
What is an angel investor? An angel investor is an individual who provides capital and, often, expertise to early stage businesses which can’t source traditional sources of business funding. Angels typically invest their own capital, and often provide valuable management advice, mentoring and access to important contacts and markets.
What type of people become angel investors? Typically, angels are ex-entrepreneurs and successful business people looking to add early stage companies to their investment portfolio. By taking an active role in their investments, they provide not only governance by serving on boards, but also assisting companies with relationships, strategy, team building, and future fundraising.
What are angel groups or networks? Increasingly, angel investors are forming angel networks and groups to share research and pool their investment capital. They can operate as a collective of private investors who band together to increase their ‘deal flow’ (the number of investment opportunities they see). These groups connect high-potential start-up ventures, with willing investors to facilitate the funding and success of emerging companies.
What are the returns on angel investments? Angel investors are exposed to high risks and expect that some investments will fail. If an angel invests in ten companies, the rule is that four will fail, three will tread water, two will return 2-5 times the initial investment, and one will result in a return of five to ten times the original investment over a 5-10 year period. Investors typically invest in a portfolio of prospective firms in the hope that 10-20 percent of the investments will be significantly successful, generating an overall healthy return across the portfolio. Each investment will have a defined exit strategy, such as plans for an initial public offering or a trade sale of the business.
Is there a large angel investing market in New Zealand? The angel market in New Zealand has long been predominantly informal. Over the last 2-3 years it has become increasingly vibrant with the launch of several angel networks modelled on similar organisations offshore. The New Zealand Venture Investment Fund’s Seed Co-investment Fund has been a catalyst for the formation of formal angel networks and evolving practice standards – the Angel Investing Guide is an example.
What sort of businesses are suitable for angel investing? New Zealand is producing world class intellectual property in a number of areas such as ICT, life science and niche manufacturing. This intellectual property is behind the creation of a significant number of early stage companies that need angel involvement to succeed. Angel investors are enabling these companies to grow in scale and to become an increasingly strong and positive force for New Zealand’s economic growth. Angel investors usually seek businesses with innovative products or solutions that have international market potential. Management capability is another key factor and founders often need to bring in experienced executives to take the business to the next level.
How many members does the Angel Association New Zealand have? At its establishment, the Association has 15 member groups. [Note: we are an association representing angel groups rather than individual angel investors. To be involved with the Association, an individual needs to be a member of an affiliated group.]
What is the next step for the Angel Association New Zealand? The Association is now an incorporated society. It has an establishment board. Members will be encouraging other angel networks to become involved in the sector, and promote the sector to potential new angels and entrepreneurs.