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Angel investment hits record $61.2 mn in 2015, latest index shows

Monday 11th April 2016

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Wellington company owner Simon Swallow says he doesn’t expect to get any money back from his angel investment, which is an odd comment from an investor.

He’s put around $1 million into 15 Kiwi start-ups in the past five years for “fun”, driven by a desire to help NZ Inc and is hopeful at least one will turn out to be the blockbuster that at least repays his investment.

“I wanted to give a group of New Zealand entrepreneurs the chance to test the market and even if they fail at their first one they will learn a lot and come back even stronger on the second one,” he said. “I’m backing the jockey rather than the horse.”

Swallow is one of a growing number of Kiwis turning to angel investment, a category where a record $61.2 million was committed for 94 Kiwi start-ups in 2016, up $4.8 million on the year before, according to the latest Young Company Finance Index.  Just over half the deals were Auckland-based.

The index shows culmulatively $414.7 million has now been invested into young companies by angel groups since the index, compiled by the Angels Association NZ, began in 2006.

The software and services sector had the biggest increase in funds, attracting $39.4 million compared to $26.2 million in 2014 and accounting for 60 percent of angel investment last year.

Average deal size was $464,000, slightly down on the $490,400 in 2014, 76 percent of deals were syndicated between different angel groups, and 70 percent were follow-on rather than new investments, which is a sign the market is starting to mature. Some 14 companies raised more than $1 million with the highest at $7.5 million.

Angel Association chair Marcel van den Assum said it was pleasing to see ventures were also raising offshore funds.

“Four companies raised $7.2 million from overseas venture capital firms through series A and B rounds and three companies raised $7 million through overseas angel networks,” he said. “The market for capital is global and these results illustrate that New Zealand companies are internationally competitive.”

The index is only indicative and doesn’t capture investment by individuals and others outside the formal angel networks and funds.

“There’s a great deal of activity not captured by these figures,” he said.

Equity crowdfunding, another way for small companies to raise funds, attracted $14.9 million in investment in 2015 for 27 companies. There were 12 unsuccessful campaigns where they reached only a third of their funding targets.

Three previously angel-backed companies launched crowdfunding campaigns, successful raising $2.6 million in total. An average of $552,000 was invested in each company.

Swallow, whose company Charter Square specialises in international pension transfers, prefers investment where he can provide some expertise and is on a number of company boards. He’s focused on investing in tech companies, educational and agri tech in particular, and said one of the big mistakes he sees new angel investors making is behaving towards entrepreneurs seeking money like they’re participants in reality tv shows Dragon’s Den or Shark Tank.

“It’s not what’s it’s about. You have to leave the founders feeling incentivised to build the business, not screw people to get the best deal,” he said.

Another trap for new investors was spending all their available capital upfront and forgetting to leave sufficient funds for follow-on investment which means they could get heavily diluted if the company grows successfully, he said.

He’s had three exits so far – one where he got his money back through a management buyout, one where the company folded, and one where he’ll make a single digit return. The rule of thumb for angel investing is that of 10 companies chosen for investment, half fail outright, three do okay, and only two succeed.

The 43-year-old’s wife prefers investing in property which she views as a “safer” bet, but Swallow said angel investing “gets his juices flowing”.

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