Why the venture capital industry needs more money

Angel investment into young Kiwi companies climbed to record levels beyond $53 million last year, according to the New Zealand Venture Investment Fund (NZVIF).

But the government-backed fund said the industry’s wings are still too small and new venture capital funds were needed to ensure companies receiving angel investment remain in New Zealand.

NZIF invested $53.8 million across 103 deals during 2010, as recorded in its Young Company Finance Index.

That’s $2.7 million or 5.3% more than in 2009, when the fund invested $51.1 million across 76 deals.

The bigger leap was made the year earlier, when investment increased $18.4 million from $32.7 in 2008.

In total, $189 million has now been invested in young companies by angels since the index was first collated in 2006.

NZVIF chief executive Franceska Banga commented on the record level of investment with a warning – the venture capital industry needs more money if the companies receiving angel investment were to keep growing in New Zealand.

“It is great to see such a vibrant level of angel investor support for promising New Zealand technology companies, but there needs to be much broader capital markets investment if New Zealand wants to support the growth and development of its own companies.

“Currently, we are seeing angel investors continuing to invest into companies with follow-on investments. As the companies grow, they need venture capital funds to come in and provide greater levels of capital and also the expertise and contacts to help technology companies take their products and services into international markets.”

New venture capital funds supported by institutional investors were needed, if New Zealand was to support promising technology companies in New Zealand while they grow mature.

Of the $53 million invested last year, just under half or $24 million, was into first-round investments and $30 million comprised follow-on investments into existing portfolio companies.

The majority of the money invested last year ($39.2 million) was at the start-up stage. Just over $5 million was seed investment; $6.6 million was at the early expansion level and $2.8 million at the expansion stage.

Cooperation between angel groups continued with high levels of syndicated deals involving different groups of investors, said Ms Banga.

Deal flow for the year was high, with 103 deals completed compared with 76 the year earlier.

However, average amount declined – $522,000 compared to $672,000 the year earlier.

Software and service-related enterprises received 26% of the amount invested, followed by pharmaceuticals (23%), technology, hardware and equipment (16%) and food and beverage (10%).