Idealog Magazine this month provides an entrepreneur’s perspective on VC and angel investment, headlining with “New Zealand venture capital desperately needs a hit—an investment that pays back, big time. Without it, our venture capitalists struggle to fund creative Kiwi companies. Mike Booker discovers why we’re sadly used to hearing ‘no’”.
Um. Guys, we need more than one hit … otherwise we start looking like the NZ cricket team from the 1980’s – you know, Richard Hadlee and Everyone Else.
The article describes the bind that VC firms are in since the original NZVIF series A funds were fully committed, and the implications of the dearth of local institutional investment.
NZVCA’s Colin McKinnon is right on the money, when he asserts
… the most important ingredient for the future health of the VC industry in New Zealand will be its people. The industry needs funds managers who will inspire investor confidence through the quality of their investment choices and ability to nurture young companies through to a successful exit from their funds. These managers should be part of a vibrant network that includes capital markets, serial entrepreneurs, serial institutional investors and a financially literate public.
The industry is improving, albeit slowly, but that’s only natural given the level of resources at New Zealand’s disposal. Our investment ecosystem is developing, both in breadth and depth, as well as connectedness and transparency. So good on Idealog and its interviewees for being so open about the state of play.
Rob Cameron is the Executive Chairman of Cameron Partners, who describe themselves as “New Zealand’s leading investment bank”. Rob also heads the Government’s Capital Market Development Task Force, and is a well-respected business leader with a reputation for thorough lucid critical thinking and a low tolerance for bullshit.
Last year Rob gave a presentation to the Angel Association conference in which he said that the current financial turmoil would result in conditions that would be “worse than anyone alive today has seen”, and was later quoted in the Business Day as saying “We’ve had about 60 financial crises in the western world since 1700 but nothing of this scale or contagion ever”. Rob has never been seen cavorting with Chicken Little before, and so I caught up with him on Christmas Eve to explore what was behind his thinking.
Key points:
Previous crises have affected small numbers of markets or investor groups, but the current crisis is global and systemic
We currently have previously unknown levels of leverage; eg in the 1930’s crisis private sector debt hit at 275% of GDP, but recently reached 380%.
A depression of the scope of the 1930’s is unlikely, due to the speed and scale of recent government intervention. We’re unlikely to see a 20% drop in output or 20% unemployment. Nevertheless, the global recession is likely to last 2-1/2 to four years.
Perceptions of uncertainties have increased, rather than the uncertainties themselves — the uncertainties have always been there, we’re just recognising them now.
Rob also offered specific advice for angel investors:
Focus on having adequate financial flexibility, eg strong balance sheet ratios and access to funding.
Be ready to seize opportunities as they arise. Opportunities in crises are unprecedented, and in recessions we are more likely to see game-changing moves.
Recessions cause huge changes in industry leadership; structural changes in patterns of demand lead to new market opportunities.
And his bottom line: These are unusual times that call for unusual measures.
Here’s something you won’t read about in the papers: More people (like me) get their news from the Internet than from newspapers, and more people under the age of thirty get their news from the Internet than from television, as reported by the US-based Pew Research Centre.
This fact has far-reaching implications for the media, how we conduct democracy, and how we are all involved in creating, telling, consuming, and ultimately mashing up the stories that become history.
I applaud the trend, and am delighted to be part of it, as I have become increasingly weary and wary of the traditional media’s approach to generating news. Having low or no barriers to entry empowers anybody to become a reporter tell their story; competing against free services, established news enterprises are on a hiding to nothing to maintain their markets and revenue streams. At the same time, the lack of recognition and respect for the authority and provenance of information means that it’s all to easy to conflate opinion and fact and get away with it.
The trick for media entrepreneurs and investors will be to develop business models that deliver information that’s of a high enough quality to drive a real value exchange between the information consumer and producer … in other words, how to make a buck out of delivering quality.
The Angel Association (in conjunction with NZTE Escalator) is a running a basic training course called “The Power of Angel Investing” in Auckland, Hamilton, Wellington, Christchurch and Dunedin in February and March (see the course schedule for details). Based on the Angel Capital Education Foundation’s course of the same name, it promises to provide an overview of the angel investment process. The course is aimed at:
Successful entrepreneurs who have exited from their businesses and have an interest in staying involved in early stage companies.
High net-worth individuals with senior business experience who now have the time and interest in investing in early stage companies.
Angel investors who have done from one to three deals.
Community leaders and entrepreneurial support professionals who are interested in promoting angel investing in their communities.
It’s an all day course, and the cost is between $300-$400 depending on whether or not you’re a member of an associated angel club. It will be interesting to see whether the penny gap or time elasticity of demand (a whole day is a lot of time to be sitting in front of an instructor) effect attendance.
SanLu Chairwoman Tian Wenhua was sentenced today to life in a Chinese prison, and two of her suppliers were sentenced to death for their part in melamine contamination cases. According to the China Daily, Tian “was convicted for her failure to stop producing and selling milk products even after she was informed that they were contaminated. She was fined about 25 million yuan (US$3.7 million), too.”
We’re fond talking about how a director’s primary responsibility is to act in the best interests of the company (Section 131 of the Companies Act), and it goes without saying that a director must not break any laws while exercising their responsibility.
But I’m left wondering if it might not be prudent to be more specific in the Companies Act about the company’s relationship to its consumers and the general public.
In any case, it would be good for company directors to specifically acknowledge their responsibilities as part of their induction process. Speaking the words of a public promise, with witnesses, that one can easily recall, sharpens the focus and would encourage better self-awareness of a director’s actions, as well as promoting public accountability.
I propose the following “Hippocratic Oath” for company directors:
In the exercise of my duties as a company director:
I will not deliberately harm our shareholders, other directors, company staff, our suppliers, customers, end-users, or members of the public.
I will always act within the law, and ensure that the company acts within the law. Where I am unsure of the law, I will seek professional advice.
I commit to act in the best interests of the company, ensure that the company meets its obligations, and strive to make the company responsibly successful in achieving the strategy that is collectively set by the Board.
I will not seek to derive unfair personal gain from any transactions with the company or its personnel.
I will communicate clearly in a respectful and professional manner with my colleagues, being diligent and timely in my record keeping and reporting.
I will model behaviour as a director that I would expect from any company personnel.
I will not betray the confidentiality of information that has been properly given to me in confidence, nor will I seek personal gain from such information. Likewise, I will disclose without hesitation any information that that is required to be made available to government agencies, other directors, stakeholders, or the general public.
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?