KEY POINTS:
Mike Murphy spends a lot of time talking to angels. The former IT entrepreneur oversees Auckland's ICEAngel investor network, at last count a 65-strong group of business-savvy, entrepreneurial types who invest in and mentor young companies.
Murphy insists it's not a bit like the reality TV show Dragon's
Den, although there are parallels. Entrepreneurs approach Murphy with their product and business plan. If he thinks they're up to it, they pitch their proposal to a panel of investors. Questions follow.
That's where the similarities end, he says. "On TV the investors know nothing about the company or the person, ours spend time finding out. You can't invest in a company after five minutes."
ICEAngel applicants are pre-screened before the organisation will take them on. They also go through rigorous due diligence processes before investors sign any cheques.
Murphy's outfit, set up in 2003 as the investment arm of startup company incubator the ICEhouse, aims to widen that bridge. Recent months have seen a flurry of ICEAngel investment activity - since August the network has invested $1.9 million in three companies, more than half that raised in the first two years of its existence.
The plan is to amass investments in 50 companies by 2011. Murphy also wants the network's membership to reach 90-100 in the next 12 months. It is already believed to be the biggest angel investor network in Australasia.
New Zealand's angel investment marketplace is still in its infancy, says Matt McKendry, a partner at Deloitte. McKendry works with the Government's Escalator programme, which offers a training and brokering service to help young companies raise capital. He rates the current pool of angel investors, their skills and networks at "C +".
"We're getting a wider pool of investors with broader skills and networks, but there are a lot of 50-year olds who have sold their widget and are bored and when they do invest, they act more like the owner than the investor."
Most local angel investors haven't adopted a portfolio approach to their investments and just back one or two companies. "Because they put their own money into it every deal [has to] be a winner. So they drive a really hard bargain."
The standard success rate in a general investment portfolio of 10 companies is five failures, three or four that "do OK" and one that really succeeds, McKendry says. But he concedes not everyone has the time or the cash to assemble a 70-strong investment portfolio such as the one held by The Warehouse founder Stephen Tindall.
A lack of "serial entrepreneurs" successful enough to invest is also responsible for the under-developed angel scene, says Scott Gilmour, ICEAngel board member, software entrepreneur and former Intel senior executive. Apart from Tindall, "there's [not enough] experience floating around," he says.
"In the US you build up something like Netscape, sell it in five years and then you're on to something else." It takes much longer to build up companies in New Zealand, and entrepreneurs who have spent 15-20 years doing that don't necessarily want to have to do it all again. "They're happy to get the boat and the bach. But that means you don't have that generation of management being developed and nurtured who then have the experience and the cash to go out and do it themselves."
Angels are mostly "been there done that" types who offer "smart money", says ICEAngel chairman Trevor Smith. "The business acumen angel investors can bring carries as much weight as the funding itself."
Mentoring and external governance is critical to supporting growth and often overlooked in the rush to get the dollars in, Smith says.
Successful ICEAngel applicants get to pick the brains of angels such as Smith, previously a senior director for British American Tobacco Holdings, Aki von Roy, former president of global pharmaceutical company Bristol Myers Squibb in Europe, or expat American Greg Casagrande of Ford and Mazda group in North America and Japan.
The Government last August changed its Seed Co-Investment Fund (SCIF) programme to match angel investments by up to $250,000. ICEAngels is one of four angel investment companies licensed to receive SCIF funding. Another funding option includes New Zealand Trade & Enterprise's Beachheads programme which offers advice and networking services for local companies looking to expand offshore.
While angels won't get it right every time, their expertise does limit funding mistakes, says one investor who did not want to be named.
"We've all seen examples of companies that got money when they shouldn't have." He recalls how one firm, rejected for funding by the commercially experienced Beachheads panel because of flaws in its structure and business plan, went on to receive an enterprise marketing development grant of $100,000 a year for five years. The company collapsed four months later due to one of the flaws identified by the panel.
Fortunately the money had not been spent. "But that was emblematic to me how this is a problem of government largesse dished out by bureaucrats," the investor says. "If you had an angel or a venture capitalist you wouldn't get as many mistakes."
New Zealand's No 8 wire-type entrepreneurs are all very well, but without a business plan even great ideas will sink, says ICEAngel board member Paddy Boyle. The former managing director of packaging company Vertex says a big part of an angel's role includes "talking people around to a realistic assessment of their company as a business.
"Often there's a huge difference in valuation - investors see a much smaller amount. [The founder has] overcome so many obstacles and become so immersed in it. They think, 'If only people would understand what I'm offering, they'll buy it'."
So what do the angels get? "Number one is economic interests - we want to make good investments," says Gilmour. Angels generally sit on the board of the company they invest in, and get paid in options. There's a social element too. "The bigger picture is, if I make good investments [then] that has a positive effect on the economy and society as a whole." Gilmour's example is software company Right Hemisphere, in which he invested in 1998. Now the company's 115 staff develop complex 3D products for the likes of Nasa and Boeing and, after 87 per cent growth last year, expects to make $20 million in export revenue this year.
ICEAngel Investments
* Biomatters, biotech software $988,000
* Nexus6, drug delivery and health information technology $500,000
* Calcium, e-marketing software development $200,000
* Optima Corporation, software $1.2 million
* Go Virtual, medical software $930,000
* Data Brake, intelligent brake light system $500,000
* Total ICEAngel investments $4.23 million