The governments Seed Co-Investment Fund continuing to partner with early-stage investors is important to the growth of the start-up investment activities in New Zealand. Andrew Duff, chairman and co-founder of Sparkbox Ventures explains in Business Day.
Angel investing has gone from pretty much nothing to a decent niche in our capital markets over the past decade.
In 2001, when Sparkbox Ventures was starting out, there were scarcely any other groups on the scene. Stephen Tindall’s prolific K1W1 vehicle was active. Ice Angels, one of New Zealand’s largest angel network groups, didn’t start until 2003. It was a niche area and the concept of angel investing was largely unknown.
Now the Angel Association of New Zealand has active members all over the country. There are around 15 active angel groups. Successful business people and entrepreneurs are joining, investing in and mentoring new companies.
Around $50 million a year is being invested by formal angel networks, with probably as much again by angels outside these groups.
There are a number of reasons why, but an important one is the SCIF programme run by the New Zealand Venture Investment Fund, which co-invests alongside 4 angel groups. The government is currently reviewing SCIF and considering whether to commit another chunk of capital to keep the programme going and growing.
It is right to review it.
No programme of this nature is perfect and can always be improved (speed of approvals and flexibility of terms, for example). But if the government considers that professional angel investing is a valuable component in our capital markets, it should approve SCIF mark two.
Lack of capital remains a major constraint on start-up businesses.
Capital is the fuel that keeps early stage companies going and enables them to accelerate quickly to capture a market opportunity. Many start-ups fail, not because they were a bad idea or poorly executed, but simply because they didn’t have enough cash to survive through to the next investment round, let alone break-even.
What the SCIF programme does, by co-investing alongside angel investors who are also committing capital, is it increases the pool of capital. This increases the chances those start-ups have of surviving, accelerating to gain traction in global markets and, perhaps, becoming our next Mesynthes, Booktrack or Xero.
If the growth we have seen in angel investing continues on its current trajectory, then in another decade the sector should be self-sustaining.
I hope we will have a 1000-plus angel investors linked to 20 to 25 angel groups collectively investing over $100 million a year.
If SCIF is abandoned, we would undoubtedly still make progress, but the industry’s development will be much slower – as it is in Australia, whose angels enviously wish their government would introduce a similar scheme.
Some question why the government is involved with angel investing.
SCIF is neither a subsidy, nor a grant.
It is a co-investment programme which seeks to make a return similar to that of the early stage investment specialists it partners with. Angel investors put in their own capital. NZVIF does likewise. If a company invested into goes belly-up, the angels and NZVIF lose their money. If a company does well, both do well.
The SCIF programme should make money for the Crown commensurate with the investment risk, not lose it.
SCIF provides a longer runway of capital for ventures, thereby improving the prospects of success. This in turn enhances the appeal of this higher risk end of the capital markets, attracting more angels to the industry. It also supports syndication and national collaboration, both of which improve start-ups’ prospects of accessing relevant skills and offshore networks, and increases the capital being raised and further rounds of capital being brought to the venture.
Economic Development Minister Steven Joyce is pondering the future of the SCIF programme. Without it, New Zealand’s transition to a more diverse and innovative economy will be slower and more difficult.
Andrew Duff is chairman and co-founder of Sparkbox Ventures, an early stage investor that has been investing in New Zealand innovation companies since 2001. www.sparkboxventures.com