Eco Investor August 2014

Unlisted Companies

Angels Give Big Help to Start-ups

Back in February 2010 Eco Investor suggested that the Federal Government commence an angel co-investment fund along the lines of those in New Zealand and Scotland; had it done so Australian start-ups might be enjoying the sort of support and growth that New Zealand start-ups are enjoying.

The New Zealand Government's Seed Co-investment Fund is now investing over NZ$5 million a year into start-ups alongside angel investors, and recently invested into its 115thcompany.

The NZ Venture Investment Fund (NZVIF) established the Seed Co-investment Fund (SCIF) in 2006 to support the development of angel investment in the country. Its modus operandi is not difficult nor as high risk as it could be, as angel groups apply to partner with the SCIF. When an angel partner invests in a start-up, the Seed Co-investment Fund matches the private capital on a one for one basis.

NZVIF says that a decade ago, angel investing in New Zealand was minimal. But by July this year the Fund had allocated NZ$40 million in capital, had 14 seed co-investment partners and funded 115 companies. The total capital committed through the program including the Fund and the private sector was NZ$173 million.

The average size of NZVIF's first commitment is NZ$170,508. NZVIF has invested NZ$29.9 million, and the SCIF partners NZ$61.5 million. Other private investors have invested NZ$77.6 million. The ratio of NZVIF to SCIF partner investment is one to two, and for all private investment one to 4.6.

The cumulative portfolio company revenues are NZ$100 million, and 50 per cent of the companies export.

NZVIF chief executive Franceska Banga said the Seed Fund portfolio showed the diverse depth and breadth of emerging New Zealand technology companies. The Fund's portfolio ranges from hi-tech robotics to healthcare, agritech, paint tinting technology and software companies. One of the companies, GreenButton, was recently acquired by Microsoft.

"The major area of investment is in software and services. Trademe and Xero demonstrated the potential of creating world-class software companies in New Zealand. Angel investors are now backing a lot of new start-ups in the sector. Over 40 percent of the SCIF portfolio companies are software related," she said.

Ms Banga says it is too early to be able to predict the fund's overall investment performance, as most of the companies are still at a very early stage. "We have, however, seen some healthy returns from exits from Halo IPT and GreenButton. The rule of thumb is that most companies will fail but a few very good performers will bring positive returns overall across a portfolio."

Although New Zealand has seen considerable growth in angel investing, it is still in its infancy. In the USA, angels invest around US$20 billion a year – six times the level of angel investment in New Zealand, she says.

Last month SCIF partnered with its fifteenth angel group, over a dozen experienced NZ and ex-pat angel investors who have formed Flying Kiwi Angels (FKA) to invest into innovative start-up companies in IT, life sciences and green tech.

The NZVIF will match investments dollar-for-dollar up to the cumulative $4 million limit that it can invest through any single partnership.

"While it is good to see new angel investment networks establishing – such as Flying Kiwi Angels and Arc Angels - some established angel groups have, over the past couple of years, closed down or reduced investment activity. We need a stream of new groups and new capital entering the market, adding to and complementing a range of existing angel networks and funds to build the market to a sustainable level."

Among the companies the Fund has supported, Ms Banga says "Puteko, which we invested in alongside Sparkbox Ventures when it was an idea being commercialized by young developers in Christchurch, is developing unique animation software which creates 3D images from 2D. There is huge interest in it in Japan and the USA, and the company recently raised over $1 million in new capital."

"Rockit Apples is a Hawkes Bay company backed by angel investors from Tauranga. It has taken unique miniature apple technology developed by scientists at Crop and Food which it has transformed into a healthy snack food available in retail chains like Starbucks and Marks and Spencers across Asia, Europe and the USA. It hopes to be the next Zespri."

HaloIPT was a University of Auckland spin-off to commercialize world-leading wireless electricity transmission technology. SCIF co-invested alongside the Trans Tasman Commercialisation Fund. HaloIPT needed an international partner to succeed. Within 18 months, it was purchased by a large US company, Qualcomm. NZVIF and TTCF provided the capital to take it to the market before the international partner it needed came onboard.

NZVIF first became involved with GreenButton in February 2010 when the fund invested alongside a number of angel investors. SCIF's early one to one investment allowed GreenButton to raise sufficient capital to bring in key leadership including the chief technology officer and to engage with those US partners who had been fundamental to its success. SCIF provided continued investment to maintain its pro-rata investment position and to encourage new investors.

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