Angel investors want NZ 'tax tweak'

Edinburgh-based angel investor Nelson Gray

International gurus want tax breaks to help boost angel investment.

The latest Young Company Finance Index shows angel investors poured $30.7 million into 97 deals with New Zealand starts-ups and entrepreneurs last year.

Spend was down $24 million on 2010, but until last year the figure had been steadily rising since 2006. In the past six years, a total of $220 million has been invested by angels in New Zealand.

Recently, the Angel Association held an angel investors’ summit in Wellington, with a number of guest speakers from around the world.

Edinburgh-based angel investor Nelson Gray is a trained chartered accountant who spends much of his time mentoring young angel investors and on the speaking circuit promoting angel investment to local governments.

He is also the director of Scotland’s angel capital association, Link Scotland.

He admits the recession has probably had an impact on angel investment, but it has not been quite as bad as people might think and he can also see the positive side.

“It is bad in terms of people not making capital gains on certain asset classes, which they would then reinvest in our environment into the angel market.

"But it’s good in another way because actually many entrepreneurs get spurred to start their own businesses – because they’ve got no option because there’s a recession on,” he told NBR ONLINE.

He says the recession is causing people to give up working for big corporates and getting stuck into running their own business.

A little bit of tax tweaking

Mr Gray thinks it could be time the government stepped in to boost angel investment and he is calling for a “little bit of tweaking on the tax side”.

“From my international experience, I know politicians will react to that, thinking people are looking for a handout and that it’s an expense.

"But if you structure it right, it’s cash positive and the government gets more money in than it has to pay out. And that’s how you will double and triple the number of active angel investors.”

Mr Gray says certain criteria could be stipulated. For example, to be eligible for a 20% to 25% income tax break, angel investors may be required to invest $100,000 every year into a company which is no more than three years old, does not have more than 20 employees and is not connected to friends or family.

He says the UK environment for angel investors is very supportive.

“We’ve got very good tax incentives. The first kind of breaks went in in 1983. The government is very, very supportive – they absolutely recognise we are the drivers of employment and other stuff for the future."

Investing about $US200 million a year

Associate professor of strategic management at Oregon's Willamette University Rob Wiltbank says Oregon angel investors are investing about $US200 million into the economy every year.

And despite New Zealand levels far lower than that, he believes angel investors here are working well together.

“I’ve never worked in a place where the markets where I’m selling are so far away. So that’s been an interesting thing to see – how do I scale up a business when my customers are just so far away?”

His advice to those entrepreneurs is to be more capital efficient – not to spend so much and you will not have to raise as much money.

The second word of advice is to sell early and often.

“I think a lot of times they tend to delay the sales work for later … and they shouldn’t do that. They should start on that side much sooner. So it might mean you just have to start taking more trips to Japan or Beijing or the US sooner as opposed to later.”

Mr Gray says New Zealand’s angel investors have plenty of skill and enthusiasm, and are generally better at what they do than they think they are.

Mr Wiltbank says he works on a theory of a return of $2.50 for every $1 dollar invested.

Entrepreneurs are the backbone of the economy, but they are always in a recession. He says they are always talking to angel investors as a result.

Challenging environment

New Zealand Venture Investment Fund ceo Franceska Banga put last year’s drop in angel investment down to the recent challenging general business and investment environment.

She says this has had a negative impact, both on the appetite of current angels to invest in new companies and also on the numbers of new angels coming on stream and being prepared to actively invest.

Since 2006, 47% of angel deals have been in Auckland-based companies, 19% in Wellington and 13% in Christchurch.

Software and services have received 26% of the amount invested, followed by pharmaceuticals with 24%; technology, hardware and equipment with 15%; and food and beverage at 9%.

bcunningham@nbr.co.nz

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7 Comments & Questions

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These angel investors are a great bonus to our economy and should be given the breaks they need to drive new industries and create jobs they are taking huge risks.

Close some major corporate loopholes and give the angels a break

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Bollocks...! If their business is investing they will find breaks and structures which will allow them to offset losses agajnst gains, unless of course they are short on gains from their own wise investment decisions. We already have VIF do we need another government financial incentive? If our investments, management, skills are not as good as other opportunities then providing a 'crutch' for investors is the wrong way to address the imbalance.

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I think this is in a different category of investment, the risks are much higher.

This kind of investment is much more beneficial than stand investments it creates job faster and often in sectors that we need to grow if NZ wants to be successful. It is obvious that we cant compete in the manufacturing sector we must grow high tech/skilled sectors this is a perfect way to kick start such businesses

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its a wonder they make any money if they think contributing $30m entitles them to their own tax rules. Roll that approach out throughout the economy and we'll be buried in admin in two seconds.
tell them to pull their head in and get on with it.

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Mr Gray at least has the pragmatism to declare that such a scheme needs to be properly managed. On this basis I reckon its worth a go. Business in NZ is dying on its feet at the grass roots level with a tax system that grasps at any opportunity. The countries that have a more generous tax system embracing entrepreneurs seem to grow. NZ suffers from too many parasites including public servants feeding off an ever decreasing pool of do'ers.

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Why would you give Angela a tax break.

My guess is that they all treat any gains as non taxable 'capital' gains already.

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The issue is that if a tax break was introduced then a capital gains tax would need to be included. Also as mentioned earlier the NZVIF is in a way a subsidy already so that would need to be taken into account.

The problem with the Angel market as represented by NZVIF etc is that it has largley failed to generate any really successful businesses, yet there is evidence of non VIF investors having success.

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