Full data on 2009, as well as a number of other interesting articles and industry news is available in the latest issue of Young Company Finance #8 – February 2010.  This issue also contains an exclusive interview with Dave Moskovitz.

Cumulatively, $127 million has now been invested into young companies by angels since Young Company Finance began collating data in 2006.

NZVIF chief executive Franceska Banga said angel investors are the playing an increasingly significant role in the financing of high-growth, innovative start-ups.

“The increased activity results from a number of years of market development by the angel investment community, NZVIF’s Seed Co-Investment Programme, NZTE’s Escalator Programme, and economic development agencies and incubators throughout the country.

“As the number of companies being invested in grow, and those companies need follow-on investments, the investment activity increases.  The challenge facing the industry and our capital markets is to ensure there is sufficient investment capital to fund further growth.

“These companies represent part of the ‘pipeline’ of companies referred to by the Capital Markets Development Taskforce.  Some will be the next generation of top New Zealand companies on publicly listed markets- providing our capital markets can provide the investment to allow them to grow and develop through the growth pipeline.”

Of the $50 million invested last year, $20 million was into first round investments – the highest annual dollar value of investment into new companies – and $30 million comprised follow-on investments.  In terms of the stage at which investment was made, $8.9 million was seed investment, $29.9 million was at the start-up stage, $11.2 million at the early expansion level, and $300,000 at the expansion stage.

There is greater syndication of deals – meaning angel groups are collaborating with each other to raise funds for investments.  In 2009, 48 percent of deals were syndicated and 52 percent were not.  In 2006, just 26 percent of deals were syndicated and 74 percent were not.

Deal flow for the year was substantively increased on 2008. In 2009, 63 deals were completed, compared with 29 in 2008 and 49 in 2009.  Average deal size in 2009 was $800,000.

Since 2006, by region, 54 percent has been invested in Auckland, 12 percent in Christchurch, 11 percent in Dunedin, 9 percent in Wellington and 5 percent in Palmerston North.  Software and services have received 28 percent of the amount invested, followed by pharmaceuticals (23%), technology, hardware and equipment (13%), and food and beverage (12%).

Download Young Company Finance Number 8 – February 2010.

In its 2009 annual report, NZVIF posted a net surplus of $3 million and completed 50 investment transactions totalling $18.7 million- a record level despite the demanding investment environment. Over $80m of private capital was raised alongside this.

NZVIF chief executive Franceska Banga said the better than expected result – it had forecast a deficit of $3.4 million – was due to a combination of investment realisations and improvements in the holding value of investments.

“It is still early days for our venture capital funds and the development of the industry, but the year saw encouraging progress. We have equity interests in 81 New Zealand companies in sectors such as ICT, pharmaceuticals, biotechnology, life sciences, and telecommunications. Across NZVIF’s portfolio, there is good revenue growth and, consequently, the combined value of those companies is rising.

“The business environment is, however, tough and venture capital market faces major challenges – particularly when it comes to raising new funds. Individual investors are waiting out the recession and are reluctant to commit money to new ventures before seeing a return on existing investments. Meanwhile, institutional investors remain on the sidelines.

“It has been pleasing to observe the seed investment sector’s continuing growth. Across the total sector, angel investors invested a record $30 million into young New Zealand companies over the first six months of 2009, taking the amount invested over the past three-and-a-half years to over $100 million.”

NZVIF’s $4 million commitment will be alongside the Trans Tasman Commercialisation Fund – an AU$30 million investment fund established last year to commercialise research at Auckland University and four Australian universities.

The investment partnership will look at commercial opportunities emerging from UniServices – Auckland University’s commercialisation agency. NZVIF and TTCF have already invested into two drug development companies spun out of UniServices – Pathway Therapeutics and Saratan Therapeutics.

NZVIF chief executive Franceska Banga said the partnership is encouraging given the level of innovation emerging from Auckland University.

“Auckland University is New Zealand’s highest ranked research university, and UniServices is generating some exciting commercial opportunities, as we are already seeing with Pathway and Saratan.

“NZVIF’s involvement in the trans-Tasman partnership ensures that there will be a New Zealand focus to companies being developed from New Zealand generated research.

TTCF Investment Manager Craig Reilly said there are significant investment opportunities in New Zealand-generated life sciences, engineering and ICT research.

“With this partnership, we hope to see greater investment in research which has the potential to advance to the commercial stage in global markets.”

NZVIF’s partnership with TTCF is through NZVIF’s Seed Co-Investment Fund. Through the fund, NZVIF is investing $40 million into early stage companies with strong potential for high growth, alongside investments made by its partners.

This is the eleventh partnership NZVIF has entered into through the Seed Co-Investment Fund. Through these partnerships, NZVIF and angel groups have co-invested over $33 million into 30 companies.

Related posts:

1. Manawatu Investment Group and SCIF put $1m into Speirs Nutritionals
2. Wayne Mapp talks about innovation and commercialisation

Conceived and managed by WaikatoLink, AngelLink is a new national angel investment network specifically designed to commercialise intellectual property from universities and CRI’s, and is backed by the country’s most experienced and well-resourced hi-tech and biotech investors.

It brings New Zealand angel investment to the next level.

This is exciting news for a number of reasons:

• Movac, K1W1, Sparkbox, Neville Jordan, Waikato University, AUT, and SCIF are coming together to actively collaborate. While these players have co-invested with each other on a tactical basis before, this is the first time they’ve all agreed to work together in a more formal, strategic framework.
• Research institutions generate considerable intellectual property that until now has never seen the light of day, due to limited resources and commercialisation experience in the niche investment spaces and geographic locations that they occupy. A national network will increase the likelihood of successful commercialisation of some of New Zealand’s best IP.
• Conversely, angel investors nationwide have had limited access to university-sourced IP. AngelLink will give access to opportunities to a wider group of experienced investors.

The common theme is that all of the stakeholders – inventors, entrepreneurs, incubators, investors, and government – all understand that there are huge gains to be realised by working together, and have the appetite to make it happen. People realise that the pie can be made disproportionately bigger by relinquishing some ownership and control.

There’s a word for that – maturity.

And the experience and professionalism is evident from the start. AngelLink achieved SCIF accreditation prior to launch. Although based in the Waikato, they chose to launch at NZX in Wellington to underscore the national nature of the network. AngelLink is not a small club of wealthy dentists and farmers. At the launch, Chris de Boer, AngelLink’s chairman, said that he’d never seen such a broad spectrum of New Zealand investors in one room, ever. The gathering included people like Wayne Mapp (Minister of Science Research and Technology), Mark Weldon (CEO NZX), Franceska Banga (CEO NZVIF), Sir John Anderson (Chancellor Waikato University), Jim Bolger (Chairman NZ Post), Neville Jordan (Endeavour Capital), Mark Stuart (CEO WaikatoLink), Greg Sitters (Sparkbox), Phil McCaw and David Beard (Movac), Suse Reynolds (Angel HQ), John Errington (CEO VicLink), as well as a number of familiar faces from the local Wellington angel scene. Exposure to the entire investment food chain is compelling.

Chris said that they already have pipeline with four deals ready to go on day one.

There is some potential risk in setting up a new national angel network that has some overlap with the existing regional clubs. Some of New Zealand’s fledgling angel clubs are struggling to achieve and maintain critical mass, both in terms of investment capacity and ability to attract quality opportunities. But that shouldn’t be a problem so long as AngelLink sticks to institutional IP, and doesn’t compete with clubs for deals coming from local incubators and garage entrepreneurs. Syndication is all about sharing expertise, resources, risk and reward in such a way that everyone benefits.

And if AngelLink continues in the same manner as it has started, everyone will benefit from commercialising previously hidden IP.

New Zealand will be the winner.

Endeavour Capital chairman Neville Jordan said the Endeavour Growth Fund hopes to attract up to $100-150 million from New Zealand institutions and investors which will be earmarked for New Zealand investments, particularly those based on high quality research and development.

NZVIF chief executive Franceska Banga said NZVIF’s commitment of up to $20 million will be co-invested with the Endeavour Growth Fund into young New Zealand companies with high growth potential.

“There are some very promising New Zealand companies in the early expansion stage which will be requiring capital to fund their next stage of growth. The Endeavour Growth Fund will provide capital for high growth companies which will be the mainstay for New Zealand’s future growth.

“NZVIF and Endeavour Capital have track records of supporting investment into high growth potential companies. I hope New Zealand institutions and investors support this positive initiative.”

Neville Jordan said Endeavour Capital has previously raised and managed two earlier funds.

“We have considerable experience and success in investing into sectors such as cleantech, biotechnology, software and life sciences. This is an ideal opportunity for investors – both New Zealand and overseas – looking for opportunities in the New Zealand market. It will also be of great assistance for young companies facing the difficult prospect of raising capital in the current economic climate.

“At the Jobs Summit and since, there has been much discussion around private equity funds investing into New Zealand companies. This is a substantial initiative which will help a number of high growth companies – including some small and medium sized enterprises – to grow. Having taken this step, the challenge is now for other institutional and private investors to put talk into action.

“The companies we will focus on are creating the highly productive jobs which New Zealand needs to generate. A New Zealand-based fund will help to keep these companies here in New Zealand as they grow, and protect New Zealand jobs.”

Mr Jordan said the fund also aims to attract another US$270 million from offshore investors which will be focused on offshore investments, particularly in the Asia Pacific region.

Prior to establishing Endeavour Capital, Neville Jordan was the founder of MAS Technology, the only New Zealand private company to list on the NASDAQ main board. He was awarded the CNZM for services to telecommunications and export in 1999.

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.”

Basically, the fund allows registered angels to take a passive stake in a diversified portfolio of startups that have been selected by the rest of the significant angel space in New Zealand, with potential support from VIF and SCIF.  That’s a brilliant concept, in that it allows people to hedge their bets and swing the wisdom of the crowd into action to everyone’s benefit.

The Halo Fund could occupy an important place in any angel’s portfolio.  Sure, there are some areas that I think I’m smart about, and will be better at picking winners than most.  But it’s always nice to have a balance to one’s own hubris, and there are also a lot of other good opportunities out there that I’m not really qualified to evaluate to the depth I’m comfortable with.  The Halo Fund provides an excellent complement to my own expertise, and allows me to leverage off the expertise of others (and vice-versa), with low effort and low cost.

Here’s the press release:

A new $5 million angel investment fund is being established targeting new angel investors and which will increase the capital available to seed and start-up companies.

Seven angel investment groups from throughout New Zealand and the New Zealand Venture Investment Fund are launching the Halo Fund.  NZVIF will manage the fund.

NZVIF chief executive Franceska Banga said the Halo Fund is an ideal way for new angel investors to enter the market and become familiar with angel investing.

“The Halo Fund will give its investors access to a diversified portfolio – which is important part of angel investing – of early stage companies in New Zealand.  The Fund will invest alongside NZVIF’s Seed Co-Investment Fund and its active investment partners.

“To invest in the Halo Fund, investors will need to belong to one of the Fund’s partnering angel groups.  Investors will then gain access to deals and investments being made by all the partnering angel groups from across New Zealand.

“At present there are limited opportunities for New Zealand investors to access the early stage investment opportunities that exist in the New Zealand market place.  The Fund’s investment objective is to provide investors with qualified access to a diversified portfolio of 15 to 30 plus investments over the lifetime of the  Fund.

“The best people to guide early-stage investments are successful high-tech entrepreneurs.  The Fund involves leading accredited angel groups in New Zealand and a significant proportion of New Zealand’s leading angel investors who have extensive experience of investing, working in and exiting angel investments.

“It is a unique opportunity to gain qualified access in a cost effective manner to a portfolio of New Zealand early stage, high growth investments. And young New Zealand companies will benefit from the increased capital available to fund their growth,” Franceska Banga said.

The Halo Fund – Fact Sheet

Halo Partners:

• New Zealand Venture Investment Fund
• Upstart Angels (Dunedin)
• Ice Funds – Ice Angels (Auckland)
• Powerhouse Ventures (Christchurch)
• Venture Accelerator (Nelson)
• Manawatu Investment Group (Palmerston North)
• Pacific Channel (Auckland)
• Sparkbox (Auckland)

The Funds key terms include:

• The minimum size of the Fund is NZ$5 million.
• The minimum investment for an investor is $25,000
• The Fund will be a closed fund i.e. once the fund closes there will be no further opportunity to invest in the fund, and operate for 10 years.
• Proceeds from liquidating investments will be distributed to investors, not invested back in the fund.
• Maximum investment in any eligible company is $125,000 first round, maximum of one follow up round of another $125,000 matching Co-investors’ investments on a 1:2 basis i.e. the Fund will invest 50 cents for every dollar invested by the Co-investors.

The Fund will only invest in eligible deals.  Eligible deals are those deals that are brought to the Fund by one of its approved Angel Groups and are:

• In businesses or business opportunities which are at the “seed” or “start up” stage of development a the time of initial investment;
• Do not fall within the following industry sectors (but without precluding investment in innovations which might be used by these industries): property development, retailing, mining and hospitality;
• Have a majority of their employees (by number) and assets (by value) in New Zealand at the time of initial investment.

The Fund’s investment process is that as investments are made into early stage companies by the angel groups and NZVIF, the Halo Fund will also invest on a one-to-two basis.  As an example, if an angel group committed to invest $250,000 into an eligible early stage company, the Halo Fund would invest $125,000 – putting in 50 cents for every dollar invested by the angel group. NZVIF’s Seed Co-Investment Fund could also invest up to $250,000. The total combined investment into the eligible early stage company would be $625,000.

Event details: “Demystifying Angel Investment”, 11 November, 5.30pm at Otago University, 385 Queen St, Auckland.  Contact NZVIF by email or phone (09) 951 0170 to register.

Angel investors is the term given to experienced business people who invest not just money but also some time and effort to help new businesses to grow.

New Zealand Venture Investment Fund chief executive Franceska Banga said attracting more people to angel investing could help to increase the amount of capital available to young companies with high growth potential.

“New Zealand produces quality research and innovation which we struggle to commercialise because of the difficulty in finding capital.

“The current investment climate is making capital even harder to find in the short and medium term for young companies.  So increasing the pool of high net worth individuals who want to engage in angel investing is, arguably, more important than ever.

“More angel investment will be good for New Zealand’s economy.  We need more seasoned angel investors willing to invest in young companies with innovative products and high growth potential.

“The Auckland seminar will introduce potential angels – generally people who have done well from a successful business and are looking for new investment opportunities – to the mechanics of angel investing.  It will also introduce them to some Auckland-based angel groups such as Sparkbox, and ICE Angels.

“Currently, there are around 250 experienced angel investors active in New Zealand, although many more will be doing it on an ad hoc basis.  A pool of around 1000 active angel investors would greatly expand the
capital available to young companies.”

The Auckland event is one of a seres which are being held in centres throughout New Zealand by NZVIF, in conjunction with the Angel Association NZ and local angel groups.  The presenters include representatives from NZVIF and ICE Angels.

They report that “investment in the venture capital and the mid-market private equity segments was slightly below historical average levels, both deal volumes and average deal size ratios indicate that, market conditions are challenging but the sector remains fundamentally sound.”

They also note that “the venture capital market is reaching a significant point where a number of managers seeded by the New Zealand Venture Investment Fund in 2002-03 are close to fully invested and are now moving into the divestment phase.”  They point out that this divestment phase is taking longer than anyone would have liked, blaming current market conditions.  The bad news for angels is that follow-on capital could be tight until the VIF-supported VCs can unload sufficient portfolio to free up some cash.

Franceska Banga provides the following interesting quote: “Current market conditions make for ‘great vintage years’ for those that recognise the stage of the investment cycle that we’re in.  As business owners adjust their valuation expectations, the opportunities to invest will become apparent.”

Half of the survey respondents were pessimistic about the outlook for the next 6 months, with the other half split between optimistic and neutral; things are looking better for the next 18 months with 59% being optimistic, 33% neutral and only 8% pessimistic.

In total, NZD 22.9m of VC was invested in 1H 2008.

Venture Accelerator Ltd is an angel investment group bringing together a number of highly successful business people now residing in the top of the South Island. Shareholders come from Nelson and Blenheim areas.

NZVIF chief executive Franceska Banga said the partnership with Venture Accelerator increases the capital available for new start-up businesses in the Top of the South Island and throughout New Zealand.

“Venture Accelerator Ltd is a network of private investors investing in early stage businesses. They bring considerable business and entrepreneurial experience, and are looking to be very active in searching for and investing in exciting new companies.

“While the group is Nelson-based, it has close links with angel investor groups in other centres and has already been involved in co-investment projects throughout New Zealand. These groups connect start-up ventures with willing investors to facilitate the funding and success of emerging companies.

“Under the partnership, both Venture Accelerator Ltd and NZVIF will each invest up to $4 million into high-potential companies.”

Venture Accelerator Ltd chief executive Mark Houghton-Brown said the group has a passion for the sustainable development of the regional economy and will focus on innovative companies offering significant & progressive solutions where the investment can add significant value.

“New Zealand is generating wonderful innovation but many prospective start-up companies struggle to get their ideas to market successfully, because of the difficulty in finding willing partners with the contacts and the capability to assist them.

“At the same time individual investors often find it difficult engaging with local entrepreneurs in a satisfactory way because of the lack of infrastructure and support. The opportunities for both sides are considerable.

“Venture Accelerator Ltd comprises highly successful business people from the ‘top of the south’ keen to invest in exciting new ventures. Not only do we bring capital, but we also have considerable skills and experience, in a range of sectors, which will be of benefit to helping young companies grow successfully.”

Venture Accelerator Ltd’s partnership with NZVIF is through NZVIF’s Seed Co-Investment Fund. Through the fund, NZVIF partners with groups like Venture Accelerator to invest in early stage businesses with strong potential for high growth.

Franceska Banga said the Seed Co-Investment Fund is an important product in NZVIF’s investment portfolio.

“This is the ninth partnership we have entered into through the Seed Co-Investment Fund. Through these partnerships, we and our partners have jointly invested over $16 million into 18 companies.”