Wanted now: angels for entrepreneurs

RICHARD BRADDELL meets an expert on venture capital who questions why New Zealand has so few early-stage investors.

New Zealand's entrepreneurial wings may be clipped by a shortage of venture capitalists, but that is nothing compared with the problems caused by a dearth of angels, says an American venture capital expert.

Professor Dennis Ray's angels are no heavenly creatures. Instead, they are reasonably well-heeled private investors who are willing to provide smaller amounts of capital to seed entrepreneurial businesses.

Professor Ray says the difference between venture capitalists and angels is that - in the US at least - the former make investments of $US3 million or more and their investment targets are usually reasonably mature.

Venture capitalists are hard-nosed about their investment timeframes: they generally want a return in 18 months, which is why they were attracted to the internet boom and the fast-track it offered to initial public offerings.

Angels are different creatures. In the US, they will invest sums typically in the order of $US100,000.

Naturally, they want to make money. But they are also along to share in the excitement of seeing an idea become a reality, and are more relaxed about the time it takes for it to come to fruition.

Unfortunately, New Zealand has a distinct shortage of investors prepared to fill this gap before the professional venture capitalists are willing to become involved.

Professor Ray, who is the founding director of the Global Business Accelerator Programme at the IC2 Institute in Austin, Texas, said that on the basis of the 250,000 angels in the US, there should be 2500 in New Zealand.

But there is nothing like that number, which is bad news for New Zealand's economic development, he suggests, particularly when you consider that the number of financing deals done by venture capital firms in the US is less than 10 per cent of those by angels.

"Economically, I think you get much more bang for the buck from the private investor," he says.

"I've been puzzled why the rate of success is relatively low under venture capitalists - 10 per cent that are hits, maybe another 20 per cent that are so-so.

"One explanation that I have not seen in the scholarly literature is that they [venture capitalists] raise the bar so high that it puts a lot of pressure on the entrepreneurs; on the team. The expectations are so high that failure is built in."

Professor Ray says New Zealand's challenge is to identify its private investors. He suggests that we could look at some of the models in the US, where angels club together to seek out suitable investments.

One such club, which began in Silicon Valley, admits members who are prepared to invest $US50,000 a year.

To ensure that members are of good character and will not run off with their borrowers' intellectual property, they must be nominated and seconded by two existing members of the club.

Individual angels are responsible for bringing deals to the group and they take on the responsibility of doing due diligence and grooming the entrepreneur before he or she presents a proposal to the monthly meeting.

Professor Ray says Industrial Research could take on the role of facilitating angel groups, perhaps in the manner of The Capital Network (TCN) in Texas.

TCN identifies potential angels and invites them to a quarterly meeting. It advertises for entrepreneurs and angels, screening the 30 or so proposals it receives each month down to seven or eight.

It then prepares executive summaries for the angels' consideration and it grooms the budding entrepreneurs so they can make an effective presentation - a process that is useful even if their proposal is not adopted.

Professor Ray is in New Zealand at the invitation of crown research institute Industrial Research. He has been addressing seminars in Auckland, Wellington and Christchurch.

He will return to New Zealand in June and July, when investors will have an opportunity to meet entrepreneurs.