Four ways to increase angel investment by 30%

Recent figures reveal a fairly dismal angel investment performance in New Zealand over the last five years. The amount of angel funding recorded by the NZ Venture Investment Fund ($50 million in the 2013-2014 year) has barely increased beyond 2009-2010 levels.

Expat American Chip Dawson has been investing in early-stage New Zealand companies for 20 years, helping them enter the US market. He reckons we aren’t short of funds  – instead we need better-prepared entrepreneurs, more canny investors, and a bit more Government support.

New Zealand seriously trails countries like the US when it comes to the amount of angel investment coming into the economy (see Idealog story here). Official US angel investment figures show $US24.8 billion was invested in US early stage companies in 2013, which equates to $US78.50 of angel investment per American citizen per year. In New Zealand, that same number is $US8.70 – about a tenth.

So what can be done? Seasoned investor and businessman Chip Dawson reckons if we solved the four problems below we could see angel investment rise 30%-40%.

We need more seasoned investors

Far too many investors in New Zealand have made their money from farming, Dawson says, or property. And although they are right in wanting to diversify, they have little expertise in early-stage companies. When angel investing doesn’t work for them, they – and their money – goes back into property.

“[If you don’t know what you are doing], angel investment can be like playing roulette. Either do it smart, or you might as well flush your money down the toilet.

“I think there should be a more formalized angel investment programme, so people interested in investing could go to seminars, webinars and become more skilled before putting their dollars in.”

Instead, lack of experience results in some angels being too hands-off in terms of providing expertise to the companies they invest in – and others being too inclined to micro-manage.

Inexperienced angel investors also often have unrealistic expectations of the returns they are going to get, Dawson says (“On average, count on getting 2.5 times return on investment as an angel, perhaps 3.5 times if you are an experienced investor.”) When they don’t get the returns they are expecting, they back out.

“On average, if I look across 10 companies I invest in, four will stay the same or go down, three will go under and maybe three will be rising stars. So only one, two or maybe three companies will pay for your investment.

“I’ve won some and I’ve lost some, including some big ones. You have to expect a loss.”

We need more investment-ready companies

Too many New Zealand entrepreneurs go to market for funding woefully unprepared, Dawson says. They have a good idea for a product, but haven’t done detailed research into their market, their competition, potential customers, strategies for growth, and where their future staff are going to come from.

“A great idea is not necessarily going to be a great company. Inventors often don’t understand the business matrix; they continue to invent stuff they don’t know how to commercialise – they get a few early adopters buying their product and they think they are onto a winner.”

Any sensible investor wouldn’t touch a badly-prepared company with a barge pole, Dawson says, and that means lots of possible angel money going uninvested.

“So often I see companies which are all enthusiasm but no understanding of the market. The idea that ‘I only need to get 1% of this market and I will have a multi-million dollar company’ is not a marketing strategy.

“Go online and research everything around your product, then get on a plane and spend a week in your market. Go to a trade show and look at your competitors; look for your gaps, your differentiators.

“Then get yourself a clear plan before you go to potential investors.”

Entrepreneurs need to be prepared to share

 Dawson says often Kiwi entrepreneurs want an investor, but aren’t prepared to give away an equity stake in their company.

“There’s no way of changing the mindset of a determined founder. We’ve just walked away on many occasions.”

Other entrepreneurs choose inexperienced investors, who are unable to provide the mentoring they need. Or they choose a seasoned investor and then don’t listen to their advice.

Butt in, big Government

Government should be doing more to help early stage companies be successful, Dawson says. Whether it’s procurement policies that favour small Kiwi companies over big international brands, more help for businesses needing to be investment-ready, or more targeted grants.

“Government is more involved in the US in terms of specific support systems. It seems to work.”