Cautious angel investors sign of a 'maturing' market

Angel are investing smaller amounts in each deal as they focus on supporting existing companies rather than investing in new businesses, according to the latest Young Company Finance Index.

Angel are investing smaller amounts in each deal as they focus on supporting existing companies rather than investing in new businesses, according to the latest Young Company Finance Index.

In 2011, angels made 97 investments into young high-growth companies – slightly behind the previous year's record activity level – but the amount invested was $30.7 million – a decline of nearly half the amount invested in 2010.

The fall in the level of investment was more pronounced in the second half of last year, when angels invested $13.1 million, the lowest total since the Young Company Finance Index began collecting data in 2006.

The 44 deals undertaken was, however, the second highest recorded. As the index's last update six months ago indicated, angel investors are doing more deals but investing less in each one.

And as we wrote last month, there's a dearth of female investors in this space.

NZVIF chief executive Franceska Banga said the trend of angels investing smaller amounts is indicative of a maturing of New Zealand's angel market and is consistent with similar trends overseas, including the US.

"Angels are learning more about how much and when to invest," she said.

"This is a rational response to the recognition by angels that companies require follow-on funding, and there is a lack of material follow-on money from other sources in New Zealand. As angels protect their current portfolios, they are more conservative about engaging in new investments, particularly those which have requirements for large amounts of capital.

Another factor is the challenging general business and investment environment, negative impacting both the appetite of current angels to invest in new companies, and the numbers of new angels coming onboard.

"There is a noticeable upwards trend over the last six quarters in the number of deals being done in the $0 - $250k range – with smaller amounts being invested and milestone payments are common – and a complete absence of larger deals over $1.5m in the last three quarters."

This highlights the need for later stage venture funds, she said, to provide the larger investment capital to develop the companies which angel investors have been backing.

Angel investors have cumulatively invested $220 million into high-growth companies since 2006, in an average deal size of $540,000. The average deal size in 2011 was $323,549.

Of the $30.7 million invested last year, $11.7 million was into first round investments and $19.0 million comprised follow-on investments into existing portfolio companies. In terms of the stage of investment, $6.6 million was seed investment, $23.8 million was at the startup stage, $360,000 at the early expansion level, and nil at the expansion stage.

Deal flow for the year was high, with 97 deals completed in 2011 – lower than the 110 the previous year but much higher than earlier years. The last half was less active with 18 deals in the third quarter and 26 deals in the fourth.

Since 2006, by region, 47 percent of angel deals have been in Auckland-based companies, 19 percent in Wellington, 13 percent in Christchurch, 6 percent in Dunedin and 4 percent in Hamilton, and 3 percent Palmerston North. Software and services have received 26 percent of the amount invested, followed by pharmaceuticals, technology, hardware and equipment, and food and beverage.

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