Where Angels Tread

One hundred angels swoop into town this month and two worlds collide – Nelson’s sunny, easy going attitude with the serious business of calculating commerce and high finance. If these angels bring a message, it’s a reminder for us not to get lost in the lackadaisical.

“Perhaps embarrassing”, says Mark Houghton-Brown, chief executive for Top of the South angel investment group, Venture Accelerator Limited. We’re discussing the Angel Association New Zealand’s third annual summit, which is being hosted here.

Not typically ethereal halo and wing set wearing types, angel investors are all about providing investment capital for start-up and early stage companies; a key part of New Zealand’s economic growth strategy. Ironic, says Mark, because there is little suitable opportunity for angel investment in our region under the status quo.

It does seem somewhat paradoxical. In a nation that loves to measure things per capita, we probably have more than our fair share – and indeed, some of New Zealand’s most well respected investors in residence in here – from Stateside war veterans to online trading luminaries. But true to the angel image, they are perhaps more refined harp players than fanfare trumpeters, and don’t tend to go canvassing.

Nelson-based Venture Accelerator is the investment vehicle for a local network of business angels. It is New Zealand’s only independent private angel group that receives no external funding and is entirely voluntarily run. It is also one of only eight partners vetted and accredited to invest money on behalf of the Government’s investment fund. But in their three years of operation and active investment, the accelerator is yet to put any financial support behind a local enterprise.

“To a certain extent, investors are blind or agnostic, in that they don’t really care where they invest. But the explicit point of this group and the motivation of its members is to invest locally”, says Mark.

There’s certainly no shortage of people around armed with no. 8 wire and the get up and go to actually do things, so what’s the problem? If a biblical reference is appropriate, Matthew 22:30 speaks of angels not being the marrying kind – and looking at the typical profiles of entrepreneur and investor, you begin to suspect why cupid hasn’t always hit the mark.

The quintessential entrepreneur is painted as someone fresh from tinkering with inventions and ideas in their shed or spare room, determined, single-minded and often not so amenable to taking direction. Investors, by their very nature, are objective strategists looking for the exceptional with go global potential. They’re also planning a highly profitable exit from any venture right from the very outset; that’s the whole point of their existence. The dark side.

“A key thing in angel investment is what we call ‘coachability’ of the person”, says Venture Accelerator director, Nick Ferrier. “Will they listen, will they change, will they be prepared to step away as it grows?” Realistically, the person who has just invented a marvellous widget is not necessarily the same person that will make a suitable managing director for a company 100 or 250 people strong in a few years time. In gaining financial backing, an entrepreneur needs not only a viable and saleable idea, but a blend of enthusiasm with realism. There’s a time scale and it’s not going to be their little cherub forever – it’s very different once you have other people’s money involved.

So, to have hope of realising that constant talk of incentivising economic development in the Top of the South – just like the red sea came together again after parting – it seems a meeting of minds between entrepreneur and investment is required.

“There is a huge gap there”, says Mark. “If you want to build a billion dollar business, it doesn’t just happen by accident from the back garage. In order to make the two get together, it needs to be facilitated. It needs a process and coherent strategy”.

He speaks of it being “entirely a mentality”. People come here to raise families, to retire and for lifestyle, and our present state would seem to reflect that. Economic development has largely been focused on getting grants and government funding, with the result that there hasn’t necessarily been any real driver. And this, at least in part, Mark blames on the lack of a coherent economic development policy and division within local authorities when it comes to any kind of related vision.

At the time of writing, one is led to believe from councillors (and mayoral candidate) Aldo Miccio and Ali Boswijk, that there is no clear mandate on exactly who is responsible for Nelson’s economic development strategy. “The EDA [Economic Development Agency] was set up as a pragmatic way to get money from central government and they have some good projects underway”, Ali Boswijk says. “But it wouldn’t fall to them to make major strategy decisions. That just wouldn’t happen the way they are currently set up and the way that Council relate to them.”

Aldo Miccio notes that, in fact, the EDA looks for a bit of direction from Council, but unfortunately the Council has no process to provide that direction to them. Both councillors would like to see a new approach put in place, in the form of an Economic Development Committee within Council that would take on overall responsibility.

Venture Accelerators, as well as Miccio and Boswijk, are strong proponents for establishing a business incubator in Nelson; a solid base from which to nurture our region’s entrepreneurs. Incubators do have a very good record for increasing the success rate of start-up businesses – from 20% to 87% according to US statistics.

Just like those already operating in many other New Zealand provincial centres, an incubator’s role would be to mentor entrepreneurs, help with strategic planning and implementation, get businesses to the stage of being investment ready and assist in identifying and managing potential funding options. They usually operate based on taking a very small equity and future profit share from each business incubated.

Nelson-based entrepreneur, Tony McCombe, sits in the cockpit of an aviation sector venture he’s spent the last 18 months developing to a point where it’s now attracting serious interest from potential investors. “Incubators in Dunedin, Palmerston North and Auckland showed interest in us from the outset, but we did struggle trying to gain traction locally”, he says.

From his perspective, it’s not just money that helps start-up businesses take off and fly, but also other forms of support that add so much value. “We’ve grown a lot through the process we’ve been through. We always knew we had a good idea, but strategy-wise, mentorship from the very early stages would have been a big help.”

According to Nick Ferrier, there are several local companies out there at the moment that could potentially benefit from going into an incubator – “but it’s a little bit chicken and egg if we can set up that structure”. That is, it takes money to make money and local authorities, as well as the community, first need to get behind the idea and raise the initial funding required.

“It would be unrealistic to expect that on day one an incubator was all singing and dancing and had a dozen highly paid $250,000 per year staff. But you have to start somewhere, so you’re going to start with a man and a dog and an office and try and work out what’s in the region”, offers Mark.

Ali Boswijk agrees, but also suspects that traditionally councils have been hesitant to get involved in private/public partnerships because they are afraid their actions may be perceived as favouritism. The following statistics might help to change that mentality – according to New Zealand Trade and Enterprise performance data, for every dollar invested into an incubator, forty seven dollars is returned back into the local economy.

“It’s a no brainer”, Mark says. “Nelson is busy thinking about fishing, forestry, farming and foreigners… we need to be thinking about the 21st century. We have a limited hinterland of which to extract value – it is government policy to support incubators and business angels – but it hasn’t made it to the Top of the South. It’s come pretty much everywhere else.”

So, as the big host of angels out at the Mercure discuss the finer points of plums (‘finance speak’ for healthy profits) and lemons (the 80% of start-ups that typically fail within the first two years) – perhaps the real message for us is this: there’s no rest for the wicked or the angelic, and if at first you don’t succeed, try a different angle.

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HOW TO ANGEL INVEST BY BILL PAYNE


Possibly the most well known U.S. angel investor, Bill Payne spent six months in New Zealand this year sharing his 30 years of knowledge and experience with entrepreneurs, universities and investors around the country.

What do you consider the 5 most important factors when deciding whether to invest?
The management team; whether the business is scalable (meaning can it grow rapidly); its competitive advantage; the sales and marketing channel; and how much capital it’s going to take to get cashflow positive.

New Zealand is a small market. How can companies set themselves up for larger markets or obtain larger scale in the market?
I generally advise companies to go local and mess up there instead of internationally. Start small, then go to Australia and expand from there. Get traction in the local market first. Sometimes overseas markets are good, but you don’t want a bad reputation in a big international market.

Angel investors can provide capital and knowledge. Which is more important?
There was actually a Harvard Business School publication by Josh Learner in March 2010 saying that, in general, the skills and experiences that angel investors bring to the portfolio companies is more important than the money. Mentoring time and experiences are usually more important than money.

Let’s talk about returns…
When most entrepreneurs first encounter an angel investor who wants to make 20 times their investment on a deal, they think we’re greedy – that we want to take all their company and all the profit. It’s not like that, but it is high risk investing. The best we can expect from 90% of the companies we invest in is to get our invested capital back, but half of them go out of business and return nothing. We need to have the potential to return 20 times our investment because we don’t know which ones are going to make it unless they’ve shown their progression already. So we don’t want to invest in ‘nice to have’ objects for customers, but ‘must haves’.

What are your favourite sectors of investment?
I did my business education in material science, but when I started out as an angel investor I couldn’t find any deals in this sector and realised I needed to invest in more things. I’m more of a generalist. I have more software companies in my portfolio than anything else, but it has also being the most active sector over the past 30 years.

What is the value of being in a group of angel investors?
We first stared forming angel groups so we could see more deals, bring more deals in and get better diligence as we did more deals and got more sophisticated. All this came true, but there were also unintended outcomes – we became easier to find and could look at more deals in a shorter period of time. I also made great new friendships with like minded people.

You’ve done 50 deals a year. Some people think that’s slow, but is it rate that allows you to get things right?
Back when I was a solo angel, it took longer to get through ten. I felt I needed to get to know people, but today I am quicker to make decisions in groups and I’ve got to know the industry. I started in 1980, but the industry really picked up in 1995 and I’m not ready to pull the plug yet. I’m 69, so I’m starting to think about things, but I think I’m safe to invest for another ten years.

You have made the comment that angels should be looking to build a portfolio
I think a diversified and signified portfolio is a critical component to business strategy. There’s been a story going round the US recently about how many deals it takes to be successful as an angel, and it came out at 20. If you do the math, the more deals you do, the more significant you will be. You need to have lots of companies to have few successes.

Entrepreneurs often don’t ask angels for enough money up front in order for the company to be properly capitalised, with multiple rounds of investment often being required.
One of our responsibilities as angel investors is due diligence. Rather than figuring out what the ask is, how much is actually needed for positive cashflow? If you know the money is going to run out and you’re going to have to put more in, you can plan for it. If you know it’s going to cost $6,000, you can put $3,000 in now and $3,000 later. This shows if you’re going to fund them again or not based on whether the company performs. We have to invest a lot of time to see the outcomes and multiple rounds can happen.

What do you think of the actual knowledge amongst the government here?
They could know more about emerging sector, but the government is much closer to the emerging sector here in New Zealand than in the US, so that’s good.

What do angels do day to day?
I think most consider it a part time activity and I also consider my grandchildren, golfing and teaching part-time activities. I try not to let angel investing get more than 25% of my time. On a day to day basis, angels engage with portfolio companies and, depending on the role we have, we may highlight problems or mentor the sales manager, CEO, etc. Usually, angel groups who invest in portfolio companies will take a seat on the Board of Directors.

What happens when it goes bad?
When a company is in trouble they usually run out of money and make a decision whether or not they want to keep operating. I’ve lost a lot of money in investing and I can say no when they ask for more money – I see it as a responsibility. There are three possible outcomes for portfolio companies: a nice exit and we go out together for dinner, a write-off investment or a company downfall where we have to put ten people out of work to prevent from going bankrupt.