Milk powder and tourism might be export heavyweights, but when it comes to angel investing (providing capital for a start-up, usually in exchange for convertible debt or ownership equity) the smart money backs technology companies.
Last year new software ventures were financed to the tune of $26.2 million, easily eclipsing the total spend by angel investors just under a decade ago.
Software companies have always grabbed a sizeable chunk of early stage investment money in New Zealand.
Figures from the New Zealand Venture Investment Fund (NZVIF) show historically 30% of angel investment has backed the software sector, but in the past 2 years that support has leapt to soak up around 50% of angel funding.
Success stories build investor interest
NZVIF head Franceska Banga says the last couple of years are the best she’s seen in more than a decade for young technology companies seeking to raise capital.
“Some of what is fuelling that of course is that there has been some success stories, some very significant success stories, coming through the pipeline over the last 5 years which generate both investor interest and entrepreneurial interest to participate in this market,” says Banga.
Xero, M-Com, SLI Systems, Wynyard, and Orion Health have all raised the profile of New Zealand among international investors as a hotbed of innovation.
“As soon as that occurs then those businesses locally that are aspiring, they get up and get dressed much faster, so it is a virtuous dynamic. But I don't think we can underestimate how important it is to have some superstars that are attracting international interest, that are achieving international success, both to motivate the next generation of businesses coming through and to attract investors who might otherwise have not considered technology investment,” she says.
Software is hot right now
Ice Angels investor John O’Hara agrees that software, particularly software-as-a-service (SaaS), is hot right now.
SaaS businesses have the advantage of being able to scale easily compared to the likes of biotechnology where the path to market will typically be long and expensive, O'Hara says.
But more than the sector it’s the people behind the business that drive investment decisions, he says, followed by the market opportunity and finally the product.
“In terms of relative importance if I had to put a percentage on it it would probably be something like 70% for the people and probably 20% for the market and probably 10 for the product.”
O'Hara say entrepreneurs are usually very proud of their innovation, but given the product is likely to evolve many times before hitting the market it’s the people involved that you're backing.
“You can always change the market or change the product. If you've got the wrong team of people that’s kind of it; there’s nowhere to go.”
A sounding board for entrepreneurs
Rudi Bublitz of Auckland-based angel investors Flying Kiwi Angels gives early-stage entrepreneurs the opportunity to run their ideas past investors before getting too far down the track.
Every Thursday, 2 hours are set aside at the Flying Kiwi Angels HQ on K’ Rd for entrepreneurs wanting a sounding board and Bublitz is prepared to deliver a tough reality check to budding entrepreneurs if the idea doesn't stack up.
“If people carry an idea with them for 2 years and then you kill it, that’s pretty tough,” says Bublitz.
But it’s a lot easier to do when less time, effort, and money has been invested, he says.
Like O'Hara, it’s the drive and vision of the founding team that tips the investment decision for Bublitz, but he also takes a good hard look at the business proposition.
“Personally I like a clearly defined market.”
And finally, evidence that people are willing to part with cash for the product ticks his final investment box.
While it can be a bit chicken and egg, Bublitz says having a MVP, or minimum value proposition, to demonstrate the potential of the product that already has people willing to pay for it shows the idea has legs.
“If you don't have that then it’s just speculation.”
Angel Investing: By the numbers
New Zealand Venture Investment Fund have compiled and Young Company Finance Index, a barometer of the investment by angels in formal angel groups. Here is a small sample of their findings.