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Angel backers favour follow-on investment over new money, Young Company Finance Index shows

Tuesday 25th October 2016

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Kiwi angel investors put most of their money into follow-on investment rather than backing new start-ups in the first six months of the year, according to the latest Young Company Finance Index.

Total angel investment during the half was $22.9 million, up $3.3 million on the same period in 2015, but still down on the record $29.7 million recorded in 2010. In addition, angel-backed companies attracted a further $8.5 million from overseas investors, particularly Australian angels.

Some 78 percent of the money ($17.9 million) went to support existing investments rather than funding new companies which got just 22 percent ($5 million), a trend likely to continue given angel investors' have now built substantial portfolios in the past decade.  

Two-thirds of deals were syndicated between different angel groups while just under half went to software and service companies and 20 percent to pharmaceuticals and biotech start-ups.

In the 12 months to June 30, $64.5 million was invested into young companies, up 29 percent on the same period last year.

Angel Association chair Marcel van Assum said there was no shortage of quality and volume of deal flow, with good opportunities emerging from the new accelerators. However, it did create a “pipeline pressure” and a growing shortage of seed capital for start-ups, he said.

Angel investors were backing growth in their existing investments because of a lack of series A and B financing from other investors, he said.

“Great deals will only be sustained with deeper pools of non-angel growth capital as angel-backed companies develop and need new capital to deliver on their potential,” he said.

Van Assum said there needs to be a 10 times increase in early stage capital in the next few years to enable New Zealand’s flourishing young companies to continue building momentum.

Angel groups are now also distinguishing between follow-on for companies meeting milestones and targets rather than simply pouring money to keep them alive, he said.

One example of a company that gained follow-on investment was SmartShow, which sells the events smartphone app, ShowGizmo, that acts as a paperless catalogue, guide, and communication point for trade shows and conferences. The five-year-old company raised $1 million in April.

Chief executive and co-founder Marie-Claire Andrews said it was the third fund-raising round for the Wellington company which has now had just under $2 million from investors

Andrews said this round was the easiest yet with more than half of the new money coming from Australian angels after Wellington’s Angel HQ took the lead and the scale and level of engagement from the Australian investors was higher than in New Zealand.

ShowGizmo makes most of its $1.6 million annual revenue out of Australia where customers include the likes of Microsoft, Apple, and Telstra. The new money will accelerate its six-month-old push into North America and add to its 25-strong staff.

Over the half year, 12 companies also used equity crowdfunding platforms to raise a total $11 million with an 85 percent success rate, up $3 million on the same period last year.

Cumulatively, 46 companies have raised $28.8 million since equity crowdfunding was introduced into New Zealand in 2014. That compares with the $438 million invested into young companies by angel funds and networks over the past decade.

Angel investment in New Zealand was maturing to the “second horizon”, van Assum said, moving from measuring inputs such as the amount of money invested into young companies to looking at outputs such as jobs created, tax paid, and their financial returns.

“This is a 30-year timeframe – that’s the typical experience in the US, and we’ve only been at it for 10-to-15 years so we need to see it through. The government is looking at the NZ Venture Investment Fund’s future and it needs to stay the course,” he said.

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