Making direct investments of private capital into private early-stage companies is known as angel investing.
It is a personal form of investing that carries high risk and the potential for high returns. Angel investors, who can be young business professionals or wealthy, retired ex-business owners, are registered as eligible investors by New Zealand’s Financial Markets Authority.
Angel investments are often the earliest equity investments made in startup companies, and in most cases, all the capital invested can be lost if the business fails. Angel’s mitigate risk by investing with other business angels. By actively assessing investment opportunities together and providing expertise, networks and guidance to investee companies post-investment angels can substantially reduce the rate of failure.
Another risk mitigation strategy is diversification. Many business angels build a portfolio of 10 or more investments across industry segments and stages to increase the potential of return on their investments.
New Zealand’s business angels typically invest $10-$50k per deal each (though investors may sometimes invest much higher amounts) to enable businesses with international growth potential to make progress.
Angel investors typically seek investment opportunities in seed, startup and early expansion stages. By becoming involved with companies that seek capital they add a resource of expertise in a variety of areas including international markets, governance, senior management, sales, finance, technology and operations.
You can find out more about angel investing by downloading the following guides here and here.
Why are angels important?
When business angels buy equity in early-stage companies, the capital is most often put to use in product development, hiring staff, purchasing equipment, and other activities required to grow a business.
The Organization for Economic Cooperation and Development (OECD) highlights the important role angels play filling the gap that lies between seed stage (often funded by company founders, friends and family, universities and research institutes) and venture capital funds (i.e. typically above $3 million).
The OECD’s report, which covers definitions, data and processes can be found here.
New Zealand’s angel investors
Since angel investing was formally recognised as an industry in 2006 New Zealand has seen a proliferation of angel investors, and more recently angel funds. The formation of the Angel Association New Zealand in 2008 reflects the industry momentum. There are currently nine formal Angel groups operating around New Zealand.
In December 2012, the Angel Association of New Zealand estimated there were 350 Angels active in seven Angel groups and funds across the country. Three years later that number has grown to 730 Angels.
This momentum is driven by;
- Successful investors looking to re-invest in new companies
- Growing numbers young innovative companies seeking investment
- An increased professionalism of the angel groups and networks
- The introduction of SCIF by the Government of New Zealand in 2006 (co-invests with qualified angel groups and networks).
Today’s angel environment is maturing. Angel investment groups, networks and funds are undertaking systematic due diligence, investment and post-investment processes. They regularly hold investor events where prospective pre-screened companies can pitch directly to member angels.
New Zealand Government supports early-stage companies
The Seed Co-investment Fund (“SCIF”) is an important element of New Zealand’s early-stage investment environment. Managed by New Zealand Venture Investment Fund (“NZVIF”), it is an early stage equity investment fund which you can find out more about here.
SCIF will match qualifying investments made by angels in angel groups networks or funds accredited by NZVIF, up to $250,000 each round and $750,000 lifetime.