In our last podcast for the year, we talk to NZVIF’s Richard Palmer about the recently announced Halo Fund.
The Halo Fund is a new product put together by the Government’s NZ Venture Investment Fund, and was specifically designed to provide a diversified portfolio of a range of early-stage investments to qualified investors. For those of us who lack the time, resources, connections, and/or industry-specific knowledge to adequately cover the entire early-stage scene in New Zealand, the Halo Fund is an easy way to expose yourself to the full range of opportunities that are in the market, leveraging the aggregated wisdom and experience of other NZ angel investors.
In this podcast, Richard tells us about how the Halo Fund is structured, how to subscribe, some of the investments to date, and gives us some insight into the longer term outlook for early stage businesses in the current economic climate.
The New Zealand Venture Investment Fund is committing up to $20 million to an Annex Fund to support existing venture capital backed portfolio companies which are seeking growth capital.
NZVIF chief executive Franceska Banga said the Annex Fund is designed to assist companies which have previously received investment from NZVIF backed venture capital funds and are looking for follow-on funding for their next stage of growth, such as establishing an export base offshore and developing international markets.
“A number of highly promising venture capital fund portfolio companies are at the stage of needing more capital to fund further growth. At the same time, four of the six venture capital funds which NZVIF has backed are close to fully invested. The Annex Fund will provide further capital which the fund managers can draw on to fund the next stage of growth for their companies.
“In the current investment climate, it is difficult for any company to raise capital. It is especially difficult for young growth companies. In the past they might have attracted funding from US investors at this stage of their growth, but in the current market that source of capital has dried up.”
Fund managers will be able to invest on a 1:2 ratio of NZVIF capital to private capital, meaning that this initiative could see as much as $60 million invested into highly promising New Zealand companies.
“NZVIF remains an arm’s length investor, and the decision to invest further capital into a company will be made by the venture capital fund managers, based on a range of criteria including the requirement for private capital,” Franceska Banga said.
“The Annex Fund is our response to a challenging investment climate. We have been talking with our venture capital fund managers about what could be done to provide further investment support – we think this capital boost will assist our fund managers to support well-performing portfolio companies expanding into global markets.”
Two reports have come out in the last few days providing some interesting direction for angel investors, as well as the general NZ economy.
The US Angel Capital Association’s Angel Group Confidence Report shows that US angels are planning on reducing activity by about 10% in 2009. That’s not too bad, considering the backdrop of economic chaos.
Interesting factoids:
72% of angels expect a liquidity timeline of at least five years post-investment
In 2008, groups closed on average 4.82 deals worth USD 1.3M, or about USD 270K per deal
Roughly 50% expect deal quality to increase next year, with another 35% expecting it to stay the same
Syndication is common and becoming pervasive in the US, with 72% of groups co-investing with other angel groups in 2008, and 90% planning on doing so in 2009.
Some of the comments are also instructive:
“The ability to syndicate deals to fill out the round will become a competitive advantage, making angel groups a significantly more attractive source of funding than lone wolf angels (who therefore might decide to join groups).”
“Any portfolio company currently trying to raise money is having a hard time. We will need to have follow on money to protect our investments, yet members may decide to risk their initial investment rather than liquidate public market stock at current valuations. Portfolio companies must tighten their belts immediately.”
“Valuations are down; opportunities can be found in a variety of sectors (e.g., software, therapeutics, diagnostics) with seasoned mgt teams that have weathered similar recessionary periods. “Grey hair” around the Board tables will be more valuable than ever.”
As we know, angels tend to be optimists…
So moving from the microcosm of US angel investment to the Entire Economy of New Zealand (guess which is bigger), pour yourself a long drink before sitting down to read the The New Zealand Institute’s essay, “The end of the golden weather: The financial crisis, global recession, and what this means for New Zealand”.
The author, Benedikte Jensen, does an excellent job of of summarising recent global economic events from a New Zealand perspective, and teasing out some of the implications.
It is not a happy story. She says,
Overall, it is likely that this recession will be protracted and the recovery will be weak and subdued – an L shaped recession – both for the world, but also for New Zealand… The challenge for policy makers is to ensure that the problem is properly recognised (i.e. not seeing this as simply a business cycle) and that an appropriate set of policy responses is put in place to ensure that there is an appropriate pathway back to sustained growth.”
The specific risks for NZ are identified as:
The end of the commodity boom creating vulnerabilities due to NZ’s reliance on commodity exporting
NZ’s high external indebtedness makes us vulnerable to sudden shifts in the sentiment and risk profile of overseas investors
Difficulties in attracting foreign investment due to our insignificance and investors’ risk aversion
The resulting likely retrenchment of local investment nobbling our ability to grow when we need it most
Jensen also notes that “the US is looking increasingly like Japan in the 1990s and an alternative engine of growth for the global economy is not apparent”.
Ouch.
This paper is the first in a six-part series. Paper 2, due out in January will address the implications of the global crisis for New Zealand. Further papers will be released during the next few months, concluding with paper 6, “New Zealand’s place in the world”. We look forward with some trepedation to reading the whole series.
I was invited to the Institute of Directors‘ First Generation Governance Workshop last week. Run by Marie-Claire and Frances from Vault Consulting, the session was meant to survey the SME landscape for attitudes toward governance for companies who either didn’t have a board, or had recently established one.
The participants at the workshop were an interesting mix, who thanks to Chatham House rules will retain their anonymity, covering a range from professional directors, startup entrepreneurs, people in industries servicing the sector (insurance, accounting, consulting etc), and most importantly, managers at the Institute of Directors.
There is some pretty strong recent New Zealand research suggesting that high-growth companies with boards yield significantly higher returns than those without boards, including:
Managing High Growth Ventures: A survey of governance practices in New Zealand’s fastest growing companies, (Deloitte 2008)
And Yet … many companies are either unaware of the benefits of establishing good governance, or unwilling to expend the resources or effort required to get decent directors and/or advisors on board. Why is this?
The participants raised a number of hypotheses, including:
Good advisors are too expensive and/or difficult to get
People have heard horror stories about companies who had the wrong people on their boards
Founders can be self-centered, and don’t want to be distracted by others whose vision might not be fully aligned with their own
Boards can get bogged down with compliance issues, resulting in the foot being placed on the brakes rather than the accelerator
Directors are seen to be “pale, male, and stale” – a significant disconnect with the diverse go-ahead high-growth scene
So what’s the solution to the problem? One of the participants suggested that IoD’s Marketing Manager be sacked, but as they’re mainly a subscription-driven organisation with elected branches, I would have thought that IoD’s existing members (myself included) are at least as much to blame. Nevertheless IoD management does deserve a rark-up, or at least a wake-up – unless more is done to make IoD membership more attractive to a younger audience it will find itself facing demographic heat-death.
The deeper problem is getting the message across to high-growth companies that good governance is a critical tool to survive and thrive. Yes, compliance is a box that needs to be ticked, but the real value of good governance comes from setting a strategy and driving the CEO to achieve it, supported by the experience and networks that a good board can bring to bear.
A number of people suggested rebranding governance (eg the “board room” becomes the “ideas room”) but twee semantics don’t address the real problem.
It was also suggested that “someone” (ie gummint) run a series of networking evenings to bring high-growth companies up to speed with buiding a great board. That’s a good idea, but the gummint has done to death educational opportunities for entrepreneurs. And shouldn’t entrepreneurs and investors take responsibility for the things they can control?
I believe it’s time for the IoD to reinvigorate themselves, building new services for new companies under a new sub-brand, using new networks to create a new generation of new directors. As an example, I offered to help IoD start and manage an IoDNZ LinkedIn group to begin creating a such a new network, and suggested to her that they run a significant number of loss-leader spots on excess capacity on existing IoD courses for new directors. This two-pronged attack provides a good combination of education, knowledge transfer from old hands to young upstarts, leverages an old network into a new network, and would cost little. The result would benefit all concerned.
Sure, sex sells, and sexing up governance might make it more interesting, But the bottom line is…
Companies seeking angel investment, listen up: you’re much more fundable, will attract a significantly higher valuation, and have a greater chance of achieving your dreams with an appropriate board directing your company.
If a company isn’t willing to take that advice, they’re probably not worth funding.
High growth driven by a great board with an excellent strategy executed by a brilliant management team — now that’s sexy!
He argues that the VC model is broken, one of the main causes being that the focus is on ever-larger investments. (I believe it’s possible that with the current Great Deleverage happening before our eyes, that the trend could reverse.)
His bottom line:
This necessity for venture capital firms to invest more and more in each company has profound implications for entrepreneurs and angel investors.
For most startups it means that venture capital firms probably aren’t the best source of funding – or that they aren’t even a desirable source of funding.
Do you know many NZ startups (as opposed to early stage) that are delighted that are delighted with their VC experience?