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'Valley of death' investment shortfall requires remedy

Friday 16th July 2010

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The New Zealand Venture Investment Fund should set up a number of smaller, rather than larger funding pools, to help entrepreneurs overcome the ‘valley of death’ investment requirement as they grow innovative businesses, according to Bill Payne.

The American, sometimes called the godfather of angel investing, has reported back to New Zealand following a six month talking and studying trip to this country.

His report, ‘An American angel’s perspective on the entrepreneurial landscape in New Zealand,’ highlights the good and bad points he’s observed, as well as suggested remedial actions.

Payne notes that angel investors both in New Zealand and overseas, generally invest $200,000 to $1 million in start-up companies. That’s below the cut-off point for more usual venture capital companies, which typically don’t invest in anything less than $4 million in later stage deals. The ‘valley of death’ refers to funding requirements between $1 million and $4 million, a space where there are fewer sources of capital.

“This has created a capital gap for entrepreneurs, investment rounds between $2 and $4 million, for which very few investors are available,” Payne said. Instead of the NZVIF developing new conventional VC funds targeted at raising $100M or more, “I would propose that NZVIF and others focus instead on creating 2 – 5 funds, each targeted at raising a total of $60 million to $80 million,” he said.

The NZVIF is a government-sponsored fund which sources both private and public money. Under this scenario, typical investment per round for these funds would be in the $1.5 million-to-$4 million range, with a total invested per company in multiple rounds probably not exceeding $5-6 million Payne said.

Kiwi companies needing substantially more than $5 million should seek sales and marketing traction in the U.S. or European markets with money raised in New Zealand, and then raise additional capital in those larger VC markets, much as they do today, Payne said.

Among other observations made by the engineer and entrepreneur who has invested in more than 50 start-up companies, is that while Kiwi entrepreneurs are passionate about their products and technology, they have little or no understanding of marketing, sales channels, capital sources, governance or competitive analysis.

He suggests “get a footing in local markets before attempting to market/sell offshore.” Mistakes made locally and customer relationships can be repaired easily, and product modifications can be made quickly. “Once the product is robust, and market traction is clear, then think about adding resources to export,” Payne said.

“Don’t attempt to raise money offshore until you have demonstrated customer acceptance in that foreign market, raise money in New Zealand to establish a foothold in foreign markets. Develop key customers in those offshore markets then introduce potential offshore investors to those delighted customers.”

Payne said entrepreneurs are better off writing business plans rather than investment memorandums for would-be investors, as this is what investors want.

Last year, Kiwi angel groups funded 63 new ventures with $50 million, the report notes. Angels in New Zealand appear motivated to invest for both financial gain and altruistic returns such as giving back to the community, economic development motivations and using their business savvy to help entrepreneurs.

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