The NZ Angel Association held its annual conference in Queenstown last week. It was a great chance to meet up with old friends, get the good goss on what’s going locally in other regions, and trade war stories hopefully learning to avoid painful mistakes others have made.
There were a few recurring themes from many of the talks:
It’s all about people. When you invest in a company, you’re investing in a combination of ideas, resources, capacity to execute, and people. Of these, by far the most important is the people.
Failure is a great teacher. We tend to underrate previous failure as an experience. No one starts a company with the intention of failing, but we should appreciate and seize the learning opportunities presenting by failure.
The Kiwi Diaspora is ready and willing to help. Kiwis are everywhere, and most of the overseas speakers with Kiwi connections laboured the point that the Kiwi Expat Association (KEA), NZTE and others are generous with their connections and networks. You’re silly not to use them.
Stephen Tindall was presented with an Archangel Award, recognising his contributions to the angel space.
It was announced that Colin McKinnon has taken on the position of Executive Director of the Angel Association. Given that he spends the rest of his time as the Executive Director of the NZ Venture Capital and Private Equity association, hopefully he’ll be able to encourage follow-on investment for successful early stage companies.
Some choice quotes from the summit:
Alan McConnon (Upstart Angels)
The rule of Five: It always takes five times longer, five times as much money, and yields one-fifth of the expected rewards.
The five P’s of due diligence: People, Punters, Portion, Profitability, and Plan.
A good idea is only 20-30% of the value of a company.
Sir Eion Edgar (Sinclair Investments Limited)
Never do anything you wouldn’t want to see on the front page of the papers.
My aim in life: To be sure that everyone owes me a favour
Jim Connor (Sand Hill Angels)
If you want a higher valuation, go get some customers
We love cheap penny-pinching entrepreneurs!
Don’t invest in R&D, only invest in execution.
Bridget Liddell (Fahrenheit Ventures)
NZ companies generally have surprisingly weak digital and internet marketing strategies
Large US companies have become incapable of growing, except by acquisition
All up, the summit was useful, although the ratio of angel investors to others was disappointingly low (my guess would be around the 50% mark); it would also be great to have more time to mingle in structured and unstructured settings. I might respectfully suggest that (for some people, anyway) lunchtime wine tastings are not the best way to get people to focus on key issues. That said, I’m glad I went and will be looking forward to next year’s summit.
New Zealand startups have typically followed a high-growth strategy, but Tom McKaskill argues that in many cases a strategy to building for a strategic trade sale is more appropriate.
Tom suggests:
“If we plan the exit from the outset, the manner in which the business is developed continually keeps the exit in mind and this ensures that we don’t veer off track in terms of meeting our major objective. Some Angels and VC investors do this but they are in the minority.
Now lets get even more radical. Why don’t we change our investment criteria to only focus on investments where we have a high probability of a premium exit. In order to do this, we have to have a very good idea of what creates premium exit conditions, that is, what do we have to do to set up the conditions where a premium exit is highly likely, whether this be an IPO or a trade sale? What would we have to do to make this happen?
INVEST to EXIT is a highly pragmatic strategy for Angel and Venture Capital investors which focuses the investment, business development and harvest activities on strategic value. Investment decisions are targeted towards those ventures which can create a strategic buyer exit. The period of investment is often shorter, operational execution risks are lower and return on investment is higher.
What people are saying about the book:
“Tom McKaskill’s insights into the ‘art of the exit’ provide a great roadmap for all Angel and Venture Capital investors. In a misguided investment world that relies too heavily on IPOs, mega-exits and too much quantitative analysis, McKaskill has taken an enlightened and straightforward approach to a topic that should be foremost on startup investors’ minds.”
Joe Platnick, Pasadena Angels, USA
“For the professional Angel and Venture Capital investor, Invest to Exit is the first book to succinctly capture the importance of aligning the combined interests of inves- tor, management and shareholder when making the investment to produce an optimum result on exit regardless of underlying economic conditions. Commencing exit plan- ning much earlier in a company’s development, combined with planning and then flawless execution will always produce an outcome better than starting later and hop- ing a buyer “will be just around the corner”.
Dr. McKaskill has captured the essence of the issue, providing examples which clearly highlight the challenges and issues faced along the way.
This is compelling reading for investor and companies alike as they work collabora- tively to achieve a superior result when they sell.”
Greg Sitters, Sparkbox Investments Limited, New Zealand
Table of Contents
Preface
Acknowledgements
1 Begin with the end in mind
2 High growth – high risk
3 Spot the IPO
4 Financial vs strategic exits
5 Threats and opportunities
6 Identifying strategic value
7 Finding strategic buyers
8 Enabling the opportunity
9 Reducing risks to the buyer
10 Setting up the exit deal
11 Evaluating potential investments
12 Executing the exit strategy
13 Structuring the trade sale deal
14 Selecting professional advisors
15 Conclusion – impatient capital
Download it now – it may be the most valuable thing you’ve read in a long time.
It’s time to share some love – I’ve added a blogroll block to the right column of the nzangels.com website. The sites listed will provide visitors with useful links to angel groups, blogs, and other organisations that support the angel and start-up ecosystem in New Zealand. I would be glad to include additional links, so long as I consider them to be generally aligned to the interests of angel investors in NZ. If you do have a site you’d like me to include, just drop me a line.
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.
The New Zealand Venture Investment Fund (NZVIF) published their 2008 Annual Report today. It’s an interesting read, and provides a good bird’s-eye view of the sector from the point if view of a publicly accountable organisation that has to “walk the talk”.
According to the numbers, the walk has been a relatively pleasant one amidst considerable turbulence, although the outlook is uncertain. The good news is that the aggregate value of their investments has increased by $3.42M, compared to the SOI forecast of $1.67M. Given that at the end of the day valuations are very subjective, this might or might not mean much, but it’s nice to see it written on paper. After all, this is the NZ Government speaking, not Enron.
Other items that leaped off the page:
With respect to VIF,
They haven’t invested in any new VIF funds in the last 12 months, and are now willing to talk to anyone about potential fund investment at any time without a rigorous EOI process.
VIF-backed funds made eight new investments in the last 12 months.
Most of the existing funds are now nearly fully invested; only two funds are seeking new invesment opportunities.
Software and biotech combined account for 50% of the invested capital.
To date, a total of $175M of combined NZVIF and private capital has been invested in 45 different portfolio companies.
SCIF has been an area of activity and growth, and this is really positive for the angel space:
There are now eight SCIF partners, compared to four at the beginning of the year
NZVIF’s focus for the next year is growing the number of angel investment partners and investments
SCIF invested $5M between 18 investments (that’s an average of $277K per investment by SCIF)
So, all up it’s quite a good story for the low-end, but shows signs of coming trouble at the top. Given current economic conditions, without NZVIF-backed funds sloshing more cash around in the VC-space, will there be enough expansion funding to get NZ companies offshore? It looks like we’ll have to rely increasingly on organic growth, outstanding value propositions, private equity, and overseas sourced capital. C’est la vie – let’s keep growing our Angel-backed businesses, so that when the market turns we’ll be ready for prime time.
The book is “… aimed at young, early stage New Zealand companies looking for funding to help them grow, and focuses on attracting ‘rocket fuel’ or angel and venture capital investment.”
Colin says that he hopes the book will prompt prospective investors to approach the venture capital association. He continues, “Angels are more informal, philanthropic and are more about being involved in a community of common interest. Venture capital is professional, about fund management and about having a good track record so it can attract more people to the fund.”
I can’t say I’ve ever met an angel investor who thought they were being philanthropic by investing! And we might even eventually forgive the Herald for showing a picture of Colin against a map of the world that excludes New Zealand, worthy of NZEDGE’s now-defunct collection.
I look forward to reading the book once it hits the shops, and will enjoy Colin’s take on the debate on “Why VC’s and Angels Must be Wed Locked” at the upcoming inaugural Angel Association summit. The love’s gotta flow in both directions, sweetie!
After the depressing Sequoia “RIP Good TImes” slideshow did the rounds last week, I couldn’t help but think that the situation is somewhat different here Downunder. We’ve never suffered from the same level of irrational exuberance that seems to grip North America in vertigo-induced nauseating cycles. We may be crashing, but it will be from a lower altitude – of course if you’re still dropping at terminal velocity then the initial height may not have mattered so much.
And yet, from what I’ve seen there’s still plenty of angel investment cash about – the trick for angels is to find investable businesses who are likely survive economic hard times and build their businesses organically until expansion resources free up, as they inevitably will in the future. So for the local Angel scene, the reality is that we are living in interesting times full of challenge, but the I believe picture is far rosier than what Sequoia might paint.
And the Australian Association of Angel Investors concurs. They published the following article (reproduced with permission) in their most recent newsletter, which is among the most sensible summaries I’ve seen.
The global financial crisis triggered by the USA sub-prime disaster continues to spread and deepen. The question is being asked, “How are angel investors affected?”
Answers are offered here in three parts, being for angels, for angel-backed companies and for the community at large.
For Angels:
Angels predominantly invest in early-stage companies committed to high growth over a period of 3-6 years. Early-stage investing is inherently counter-cyclical. In other words, when times are hard and the ‘market’ is depressed early-stage investors are eager and active. Witness the marked activity of those quality VC firms around the world who already have their investment funds. VC who do not have their funds probably won’t be raising new funds any time soon.
In down turns valuations are lower and the quality of entrepreneurs is often higher because the market is not cluttered with me-too guys and gals attracted by the successes that appear in the early days of the up turn in the cycle. Those very successes are the ones nurtured by investors who invested during the down turn.
It usually takes 2-3 years to build a business to the point where it is best equipped and positioned to take advantage of an upturn in the market. Further, a business developed and refined during lean times is more likely to be an efficient, responsive operation able to optimize margins and adapt rapidly to market change.
At the personal level, angels have a choice about where to place their funds. In down markets the decision to put their discretionary funds in the hands of brokers and bankers who live off transaction fees is less appealing. The decision to invest in angel deals is a vote of confidence in themselves and their ability to use their own skills, experience and networks to build and harvest value.
For Portfolio Companies:
From the entrepreneur’s perspective money is never easy. In the years ahead raising investment capital will be even more challenging. Around the world early-stage investors (angels & VC) are advising their portfolio CEOs to batten down the hatches and plan for a prolonged period of self-sufficiency.
As always for young businesses, cash is king so, unless a company has over 12 months of cash reserves, it should raise funding as soon as possible and raise as much as possible.
If a company’s market position is weak and/or the target customer segment is severely impacted then cash requirements will be going up. In those cases aggressively examine and pursue M&A opportunities. Remember, everybody will have lower valuations and now might be the perfect opportunity to combine with one or two competitors to ensure that, together, there are resources to weather the crisis and to ensure critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.). Or consider getting closer to corporate partners as investors, or even as acquirers.
Hopefully, entrepreneurs already know how much cash they have, their expenditure at the current “burn rate” and when they will run out of cash. They need to cut costs, even if it means staff reductions, fewer features and lower general expenses. This is equivalent to raising an internal round through cost reductions to buy more time before the need to raise money again. Losing staff is hard and often emotional but, consider services for their higher capital efficiency.
Re-evaluate development plans, customer acquisition timelines and revenue milestones to achieve more with less. Sounds like blood out of a stone to most entrepreneurs but, this is essential to survival. The lesson learned from the Tech Wreck and other down turns is that the winners are those left standing.
First to market means bearing the brunt of market education and other front runner costs that demand deep pockets. Speed to market remains critical but, aim to be the last one standing.
For the Community:
High growth SME are a key driver of our economy. These businesses drive product and service innovation thus lowering costs for customers while driving their own growth of revenues, staff and profits.
Small, agile businesses backed by experienced, successful business people can rapidly address the changing needs of the distressed markets. While large firms struggle to adapt through mass lay-offs and other unproductive cost cutting efforts they become more aggressive acquirers of innovative technologies and services that improve their productivity. The interplay of angel-backed businesses can sustain, or introduce key capabilities for the competitive advantage of Australia.
A vital, active angel community applying its resources to fostering, mentoring and funding commercially successful innovation while working in partnership with inspired government leadership and initiatives can underpin the rapid evolution of Australian business that is essential to protect and improve our lifestyle, our culture and our security.
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.