How to start investing in tech and innovation startups

We talk to Suse Reynolds, executive director of the Angel Association of New Zealand, and Greg Shanahan, managing director of the Technology Investment Network, about how to start investing in early-stage technology and innovation companies in New Zealand.

One of the consistent threads running through the history of this publication is that New Zealand needs to get over its obsession with housing, dairy and tourism, and start investing in technology and innovation.

Sounds great! some readers have said. But how? How does a ‘mum and dad investor’ help fund, and (let’s be honest) profit from, the high growth of those sectors are experiencing in New Zealand?

Perhaps the first place we should start is with an important differentiation. "Investing in start-up companies is different than investing in technology,” says Suse Reynolds, executive director of the Angel Association of New Zealand. “Investing in technology can mean investing in companies like Fonterra who are doing a lot of cool stuff in technology, or Air New Zealand."

Reynolds says that the stage and size of the companies you may want to consider investing in depends on your appetite for risking that money you’ve (probably) worked so hard for. "If you've got a higher risk appetite, you can look to invest further back in the capital lifecycle - in companies, entrepreneurs and inventors who are at the coalface, in their garage doing something cool."

Illustration by Wade Wu

But what if you don’t know anyone changing the world in their garage? Well, you may want to get involved in the angel investment community – networks of angel investors (also known as a private investor, an informal investor, or seed investor), individuals who typically invest in many companies at a very early stage.

"When you get to the angle space, it's derisked to a point, but it's still highly risky,” says Reynolds. "On a deal-by-deal basis, when you invest in an angel-type venture, you're still more likely to lose your money than not, which is why we make a point about how important it is to have a portfolio. You need at least ten and preferably 20 of those kind of ventures to be 'guaranteed' some sort of return from your investment."

If it's in one deal only, it's pretty much an out and out punt, which is not to say that out-and-out punts don't work and don't deliver the goodies"

Reynolds understand that this can be difficult for the mums-and-dads with a modest amount to invest. "A few thousand dollars is kind of tricky, which is not to say that you shouldn't, because if that's the 5-10% of your portfolio that you've said you're happy to put at risk in this area, then that's cool,” she says. “But if it's in one deal only, it's pretty much an out and out punt, which is not to say that out-and-out punts don't work and don't deliver the goodies."

One of the advantages of angel investment networks get pitched opportunities by startups and offer opportunities for investors to get to know each other, research opportunities and learn from each other. "That gives you access to not only a pipeline of deals but also you get to walk alongside people who bring a bunch of experience, either in investing or in the vertical that you're interested in. That helps to derisk things because you get access to more intel and experience but you also get more access to more deal flow so you can build a portfolio quickly and efficiently.”

Also, some of the angel networks raise what are called side-car funds, where the fund invests a small amount across all startups that members of the network have chosen to invest in, which gives new or small investors an instant portfolio spread across multiple high-risk investments. “It does mean that you only have a very tiny proportion of equity in any particular venture,” Reynolds says, “but you suddenly have a portfolio of companies that you can keep an eye on and learn from and it can get your confidence up and whet your appetite."

For those interested, but still a little skittish about parting with their savings, Reynolds also recommends joining an angel network and becoming part of a due diligence team, which researches an investment opportunity for the network. This is how many angel networks bring in members, giving them an opportunity to learn about investing and about a particular industry without the risk.

"You get a really deep sense of how entrepreneurs work, how tech works, what the capital lifecycle of these ventures are like,” she says. "When you're investing at a very early stage, it's highly risky and you need to have factored in whether or not you want to be in follow-on rounds, whether you want to put in more money as the company grows or if you're happy having a tiny proportion. Because as that company raises further rounds, your share will be diluted, but hopefully you'll own less but it'll be worth more as the company improves its value as it grows."

Greg Shanahan, managing director of the Technology Investment Network, which publishes the TIN100 Report, an annual report on the technology sector, is bullish when it comes to investing in technology in New Zealand after completing the 2015 edition in October last year.

The report, which charts the performance of the New Zealand technology sector over the last financial year by analysing the performance of the top 200 (by revenue) New Zealand-founded technology companies, says that the sector is up 7% ($609 million) to combined revenues of nearly $9 billion, with a 7.5% growth in exports, up to $6.5 billion.

The revolution that's going on in the tech sector, a large part of that is the strong growth of publicly funded companies that are able to hit scale sooner and faster because of the capital available to them.

"This is a sector I'd seriously consider investing in as the growth opportunities in the tech sector are something you wouldn't want to miss,” he says. "The revolution that's going on in the tech sector, a large part of that is the strong growth of publicly funded companies that are able to hit scale sooner and faster because of the capital available to them."

Shanahan recommends mum-and-dad investors consider traditional public markets such as the NZX (where Xero has made many modest investors less modest) as well as newer opportunities such as equity crowdfunding (which we’ve covered the pros and cons of extensively).

"What I like about equity crowdfunding from both an investor and an investee company is that the amounts that are typically invested are small, so it gives the public the opportunity to participate in something that is potentially high risk but the amount being risked is digestible if people lose that money. So they have to make an intelligent assessment as to whether it's worth it."

Tips and warnings:

  • Do as much research as possible: "the more due diligence you do, the better your chance of decreasing risk” - Reynolds.

  • Invest in the team, not the product: "The team is paramount. You can have a really cool piece of technology but unless the team that's commercialising it really knows their stuff, is self-aware, is driven and committed, then it doesn't matter how cool the technology is." - Reynolds.

  • Don’t believe the hype: “You want to pay the right price for the shares you're buying and make sure there's not too much optimism in the share price.” - Shanahan​

  • In a rising tide, not everything that floats is a boat: “Look past the excitement and the technology to ask, 'Is there a genuine commercial opportunity here or is this a solution looking for a problem?'" - Shanahan