Hark the angels

By Fiona Rotherham

Sunday 1st December 2002

It's basically a dating agency for consenting adults, but the partners you meet are business rather than bedding ones. Crown research institute Industrial Research (IRL) set up its Mentor Investor Network Events (Mine) in June last year as an introduction service to help early stage companies find investors.

In the past 12 months, nine companies have raised a total of $4.2 million through Mine, ranging from $100,000 to $1.5 million per company. There has been no shortage of willing suitors, with 130 companies going through a rigorous screening process. Of these, 33 were deemed ready to woo their angel "dates" at formal presentation evenings in Auckland and Wellington. The scheme is being extended nationwide following one-off Industry New Zealand sponsorship. A seminar was held in Christchurch in October and others are planned in Hamilton, Palmerston North and Auckland's North Shore once sufficient investors and companies are lined up.

The rationale is sound. One of the big barriers for New Zealand start-ups is finding seed capital. Many fall over in the gap between initial funding from "family, friends and fools" and when venture capitalists are willing to risk getting involved. Typically angels - who put in under $2 million under the IRL scheme - fill the gap. But where does a budding business find its angels?

IRL is evaluating various business models based on charging a success fee, though Mine would continue to be non-profit. Australian angel networks typically charge between 3% and 6% of the total capital raised and Mine manager Melissa Yiannoutsos says the New Zealand network will charge something similar if that business model is adopted.

Angels provide more than just money. They offer hands-on assistance as mentors and often sit on a company's board. Mine has attracted 150 angel investors and hopes eventually to have around 200. The majority - two-thirds - are based in Auckland. "Wellington started with a hiss and a roar but the last evening I went to, the room had under 10 real investors," says Simon Arnold of Wellington-based arnold.co.nz, which helps screen companies under the scheme.

In the US there are an estimated 250,000 angel investors. The typical American angel is a man, probably a self-made millionaire, likely aged 48 to 59 and with a postgraduate degree - often technical. He usually has previous management experience, invests in one to four deals a year close to home and looks for a 22% to 50% return on investment.

Here in New Zealand the typical angel has also been a successful entrepreneur in his or her own right and has at least $50,000 to invest. Some of the angels are individuals, some represent family trusts and investment companies, some are property developers looking to diversify and a number are cashed-up dairy farmers looking for new investments.

American angel investing specialist Professor Dennis Ray helped IRL kick-start New Zealand's first angel network by adapting similar models to those used in the US. He reckons three factors determine a successful match: the angel having industry experience and skills the company can use, the angel having relevant contacts to help the business expand and the right chemistry existing between the two. "You need to get a fit at all three levels," Ray warns. A fourth factor is the "coachability" of the entrepreneur and whether they are willing to listen to advice.

Not all the Mine angels meet these criteria. Some companies complain the angels have been too slow to invest and are passive investors without the skills and contacts companies require. There needs to be more kosher investors, says Dermot Kelly, one of the partners in Department of New Ideas, a group of angel investors involved in screening business ideas in Auckland for IRL.

"When push comes to shove, some lack the interest to take that much of a risk and don't want to put the hard work into the company. They look for reasons not to invest," he says.

Another angel investor, David Miller, agrees some investors lack the necessary business nous. He recalls one presentation evening where a company, Water Master, was demonstrating how its technology extracts drinking water from the atmosphere. A fellow potential investor leaned over to Miller and asked: "Does this company have something to do with Auckland's water supply?" Miller soon put her right. "She hadn't even read the information we were given on each company."

Mine's Yiannoutsos is satisfied with the level of investment to date, but acknowledges there needs to be more mentoring of the mentors. IRL plans to hold seminars over the next year on how to be an angel investor. Ray says the education should include what angels can contribute and how they should value the companies they invest in. He says in some cases in New Zealand, angels are ending up with 50% of the company because there just aren't enough angels around. "It's just too high. It should be around 20% to 30%. You shouldn't be transforming the entrepreneur into an employee with stock options."

Mine's long-term goal is to encourage angels to pool their funds into syndicates, as is common with American angel networks. Diversification helps minimise the investors' risk and provides the companies with a bigger network of available mentors.

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