Angel investors seek out new investment rather than follow-on money
Angel investors are still investing in New Zealand start-ups, pouring $23.1 million into new companies in the first half of the year and showing more appetite for new rather than follow on funds, as measured by the New Zealand Venture Investment Fund's Young Company Finance Index.
That's slightly down on the record $23.7 million in the first half of 2013 but shows that angel activity in the early part of the tech company pipeline is in good health, said NZVIF chief executive Franceska Banga, releasing the latest index update.
In the year to June 30 a record $50.1 million was invested into young companies, up 30 percent on the previous year. Cumulatively, some $318 million has been invested into start ups since the Young Company Finance Index started in 2006 and seeks to measure activity by angel investors: wealthy individuals who provide capital to entrepreneurs to help in the early stages of proving up their product or service and commercialising it.
"New Zealand now has a well-established tech sector with a growing track record of success over three to four investment cycles. The emergence of significant companies - led by Xero [NZX: XRO] and Orion Health - gives confidence that world-leading software companies can be developed from New Zealand," Banga said.
Software companies continue to dominate, taking 45 percent of the overall angel investment pie since the start of 2013.
A trend this half year has been a shift back to new investment rather than follow-up money. Of the $23.1 million invested in the last six months, 53 per cent was follow-on investment and 47 percent new compared to 80 percent follow-on and 20 percent new in the same period in 2013.
Angel Association chairman Marcel van den Assum said it was a little early to tell if it was a sustainable shift but could be a sign the market was maturing with investors saying 'no' to follow on investments when companies don't meet milestones. It could prove challenging to the sector to ensure new companies which meet targets and show promise get the additional money they need to grow, he said.
Another change this year was the emergence of US-based venture capital and angel investors and angel clubs looking at much younger companies than in the past - around two to three years. That was due to a lack of deal flow of the quality they wanted further up the chain. "They're looking down and looking west. Their screening process can be quite tough which does surprise some New Zealand companies. There are a lot more hurdles and more competition, " van den Assum said.
In terms of the stage of investment, $13.5 million went to seed investment in the first six months, $8.8 million went to to start-ups, and $800,000 to companies in early expansion or expansion stage. The comparative 2013 figures were $3.1 million, $12.7 million and $6.7 million, respectively.
The average deal size over the six-month period was $427,000, slightly below the long-term average of $462,000. Half of the deals were for under $250,000 and 54 per cent went to Auckland companies.
Deal syndication between angel groups predominated in the first half at a record 80 percent of all investment. Most involved the investors taking ordinary shares for their money.
Auckland-based software company Eyedentify attracted $300,000 in June after a funding round involving family and friends, the Seed Co-Investment Fund, and Sparkbox. Chief executive Phil Thomson was philosophical about the four or five months it took to raise the money, saying that was about average for start-ups. Van den Assum said companies needing cash should start the process six to nine months out, particularly if seeking offshore investors, to build relationships and attract investors that added value as much as about dollars.
Eyedentify's cloud-based platform helps the police and retailers solve theft instore. The Retailers Association estimates kiwi retailers lose around $2 million a day through shop-lifting.
Eyedentify makes it easier to report crime when it happens instore, to alert other stores in that chain within the same area of a potential threat, and to identify which products are most at risk. Thomson said one of the most common items stolen to order was meat as it was seen as a high-value food item that was easy to on-sell.
He said the five founders worked part-time on the business while still retaining their day jobs for about a year but mid-way through 2013 realised they needed to get serious about it in order to grow. Now employed full-time, they've used this first round of seed money to hire more staff, put the company on a sound commercial footing, and to explore expansion into Australia which is now likely to happen early next year.