'Mad money' and the sane start-ups

Michael Murphy knows a 10 per cent stake in a $20 million company is worth more than 100 per cent in a $500,000 one. Picture / Dean Purcell

Aucklander Michael Murphy has spent more than two decades working in the information technology sector as a senior manager and company owner - experience vital to his new role as head of the ICE Angels.

Despite the catchy name, it's not a team of crime-fighting caped crusaders although for many budding entrepreneurs the ICE Angels can prove just as heroic.

ICE Angels are investors who put significant amounts of capital, experience and knowledge into helping start-up companies get off the ground.

Investments can vary from those looking to build a prototype to companies already in the marketplace looking to take the next step.

Murphy has experienced the challenges involved in taking a business from concept to reality.

In 1997, he set up the New Zealand division of global enterprise resource planning software company Baan, which he subsequently owned after a management buyout and later sold.

"It's lonely out there by yourself," Murphy said.

Life could have been easier had he given up some equity to a few angel investors whose experience would have helped him grow the business.

"If I had someone like the ICE Angels ... around at that stage it would have been fantastic because I think it's all very well to hold on to the company and keep 100 per cent ownership ... but, as time and years pass, you realise [that] 10 per cent of a $20 million company is better than 100 per cent of a $500,000 company."

One of the biggest challenges for any start-up is to validate the market - that is to ensure enough potential buyers existed to make the company commercially viable.

The realities of starting a company cannot be easily taught.

"It's something that comes through the school of hard knocks, to an extent," Murphy said.

Angel investors do not want to take over the running of a business but want to be on hand - often through the formation - to provide guidance and help.

The typical angel investor is aged in their late 40s, with a corporate background, has worked overseas, often in the technology sector, and has returned to New Zealand without a full-time job.

They might be involved in consultancy work and have a portfolio of investments, including in the high risk start-up environment.

And the risks are indeed high.

Three or four out of 10 initially equally promising start-up ideas could fail. This is a success rate that leads some people to call such investments "mad money".

The ICE Angels association, set up in December 2003, is based at Auckland's Icehouse business incubator.

It has 55 members who meet every two months to hear sales pitches from entrepreneurs.

The level of money put up by an angel investor, and the amount of equity this buys, varies.

However, $500,000 for a 25 per cent stake would not be uncommon.

"It's a little bit like the [television programme] Dragon's Den," Murphy said. "[Except] they're much nicer to the people looking for the cash."

They may be nicer than their television counterparts but it appears the angels are no less easily separated from their money.

Since its formation about 150 entrepreneurs have applied for support but the angels have invested $2 million in only four of them - an outcome Murphy wants to boost.

"Three or four investments in the past couple of years is not great," he said. "I think the vision is clearly to be able to have five or six investments each year ... getting the name out there [and] getting well known, particularly in the technology area."

Despite the risks, a growing number of people are willing to put money into companies at an early stage and networks, such as ICE Angels, make it easier for them to get involved.

The challenge is to get the right fit between investor and idea.

"It's not just the money," Murphy said.

"If they want money they can go to the bank. [It's] the money and the wealth of experience that they [the investors] bring to the party."

Venture guru

Name: Michael Murphy.
Born: 1961.
Home: Married and lives in Auckland.

1980: ICL Computers, manager.
1982: PTL Margarine & Oils, manager and computer programmer.
1984: Bond Corp, IT analyst.
1987: Eagle Technology Group, sales marketing and general management.
1997: Baan New Zealand, chief executive and owner.
2003: Carib Corp, director and owner.
2006: ICE Angels, chief executive.