We need to look at the way we fund start-ups if we are to accelerate economic growth, write Bill Payne and Andrew Hamilton.
In the 1970s David Birch from MIT startled the business world by reporting most new jobs in the United States were created by start-up companies.
Mainstream economists scoffed since "everybody" knows big companies create new jobs.
More recently, Dr Carl Schramm, chief executive of Kansas-based E.M. Kauffman Foundation, has
produced new data validating the earlier conclusions.
Dr Schramm presented the chart to President Barack Obama's Jobs Summit, demonstrating the importance of companies less than five years old to job creation in the US.
Start-ups have steadily created three million jobs a year for the past 30 years, independent of the economy. Firms five or more years old, produced few jobs in robust economic years and lost huge numbers during recessions.
Clearly start-up companies are critical to a healthy US economy. Does this apply to New Zealand and are our policies focused on supporting this sector? In part, they are, but much more could be done to fuel the growth of start-ups.
Many start-ups are backed by angel investors, individuals who have made their money and are now investing in the next generation of entrepreneurs.
They do this because they like it, they care about their local economy and finally because they also want to make a good financial return.
In the US, angel investors annually engage with 25,000 high-potential startup ventures, providing mentoring and finance. Here are some interesting statistics:
* US entrepreneurs start 500,000 companies a year.
* Most new jobs are created by "gazelles", very rapidly growing companies, which we suspect are just 1-5 per cent of total start-ups.
* US angels invest in 50,000 companies a year. By comparison, US venture capitalists invest in 3500 companies a year.
* Angels fund only "scalable" companies that plan to grow rapidly to $25 million or more in revenues in the first five to eight years.
To give you some flavour of the importance of angel investment think about eBay, Facebook, Skype, Google or Trade Me.
The returns are fantastic, but more importantly the jobs created from these investments have benefited their economies and regions. We have observed a number of international trends with respect to angel investment which are relevant to New Zealand if we are going to be successful economically.
No country has yet found an investment funding model that provides sufficient capital to support the growth aspirations of its growing firms.
The venture capital model is challenged, and will be for some time unless governments address the fundamental market failure that exists world-wide.
Public markets will not make up the gap and nor should they, as by and large it is not appropriate to have these young firms in a listed environment. Angel investment has grown significantly, but is not filling the gap left by venture capital.
Sharing of "angel investment" across borders (eg, New Zealand to Asia) could fill the venture capital void as well as supporting firms entering international markets.
But this is based on angel investors building relationships with angel investors in global markets, which takes time, and it would seem New Zealand angel investors do not understand the importance of these networks.
While angels continue to look for highly scalable businesses they have been forced to react to the changed market conditions.
They are pulling the valuations of companies down, requiring the entrepreneurs to break even within 18 months and refusing to invest if the capital requirements of the companies are at VC levels.
If you have a business which needs $5 million investment as opposed to $500,000 to get to break even, then you should probably give up now.
International syndication of angel supported investments is a significant opportunity and appears to be occurring between the US and Europe but not in this part of the world.
When you get a Silicon Valley or Singapore angel investor joining an investment with a Kiwi angel investor, you get not only money but the networks, and access to markets in global markets - a huge advantage.
Angels worldwide are leading the development of a new model of investment return, called the "fast exit" to larger corporate organisations who are effectively "buying innovation" from small and innovative firms.
This is an interesting opportunity for New Zealand as long as we can get over the paranoia of selling out.
The lack of venture capital world- wide has significant implications on government strategies with respect to commercialisation of R&D from universities and research institutes.
Governments (including in New Zealand's) have historically assumed venture capital would fund these concepts to market.
The people packaging this intellectual property need to re-evaluate as we have a bunch of hungry and capital intensive concepts being created which have no chance of securing funding.
It is estimated there are more than 1500 angel networks with up to 10 in New Zealand.
Angel investment provides a great opportunity for this country to drive back up the OECD. But the world is a competitive place and unless we are more aggressive in supporting critical components of our innovation system we will continue to fall down the OECD.
* Andrew Hamilton is chief executive of the Icehouse business growth centre and chairman of the Angel Association of New Zealand. www.theicehouse.co.nz
* Bill Payne is the BNZ University of Auckland Business School entrepreneur in residence, world-renowned angel investor and entrepreneur. www.billpayne.com
