SCIF crucial to co-invest with Angels

A seed fund that has proved critical for co-investing with angel groups in promising Kiwi start-ups is close to running out of money and is asking for a government top-up until it becomes self-sustaining.

Already the New Zealand Venture Investment Fund’s (NZVIF) Seed Co-Investment Fund is facing constraints in who it now partners, given it has only enough cash to last less than another two years if it continues investing at its current level of $5.4 million a year.

NVIF established the seed fund (SCIF) in 2006 to support the development of formal angel investment – the next step beyond family, friends and high-net-worth individuals – in New Zealand. The way it works is angel groups apply to partner with SCIF and any private capital investment is then matched dollar for dollar by the government-funded SCIF, up to a half-million-dollar limit per company.

The fund has invested in 116 companies and spent a total of $29.93m of the Government’s $40m establishment capital.

Returns to date from the five companies it has exited – which include HaloIPT and Green Button – have brought in $3.6m. Although the fund is allowed to recycle those returns into new investments, it’s not likely to generate enough in the next two years to keep going without a further capital injection or a government underwrite.

NZVIF chief executive Franceska Banga said they were talking to the government now about further funding of about $20 million to $25m by 2016.

The fund should be on track to become sustainable from its returns by 2018 or 2019, said fund investment manager Chris Twiss.

“We have to get some certainty around the funding as we’re hamstrung at the moment in forming new partnerships and it’s impacting on our operations,” Twiss said.

The seed fund’s portfolio ranges from hi-tech robotics to healthcare, agri-tech to paint tinting technology and more than 40 per cent of investments are software related.

Banga said it was too early to predict overall investment performance as most of the companies were still at an early stage – averaging three years of investment. It takes on average seven to eight years for returns to come through.

As of last year the fund had about 20 per cent of companies that had failed or were no longer having additional funding by its investors, which is in line with the experience of overseas seed funds. Twiss said about 10 had been liquidated and a further 20 had just gone dormant, with investors deciding not to throw good money after bad.

These funds are inherently high risk, although the seed fund’s risk is lower through being diversified among its partners. Banga said the common thread among the non-performers included technology failing to live up to its initial promise, poor alignment between the founder and investors on the company’s future direction, not having the right capabilities within the company to make it grow, and being too slow to come to market ahead of competitors.

Although the fund kicked off in 2007, it took a while to establish partnerships with angel groups and make investments. It has partnered with 15 angel groups since its establishment…

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