Family and friends more important than angels' help

US veteran "angel" investor Bill Payne has put US$1.5 million (NZ$2m) into about 50 technology start-ups during the past 30 years and reckons he has achieved an average annualised return of 20 per cent to 25 per cent, thanks mainly to "four really nice exits".

Now he is spending five months in New Zealand as "entrepreneur in residence" at Auckland University, sponsored by BNZ and other businesses, trying to pass on what he learnt along the way to entrepreneurs and other angels. Last year he won the US Angel Capital Association's highest honour, the Hans Severiens Award.

Funding options for entrepreneurs include using their own savings or mortgaging their homes, borrowing or accepting investments from friends and family, "organically" growing their businesses by reinvesting profits from early sales, and seeking out angel investment or venture capital.

Mr Payne says no-one knows how much money entrepreneurs invest in their own companies. "We do know that in the United States about 500,000 companies are formed each year, and what we have found out recently - which shocked me - is that friends and family invest about three times as much annually as angels and venture capital funds."

The economic downturn has reduced the amount being invested each year by angel investors by about 20 per cent to 25 per cent. But Mr Payne believes angel investment has become more important in the mix in both the US and New Zealand.

"New venture capital funds are having one hell of a time interesting investors because returns from venture capital have been less than anticipated.

"I don't know that we have evidence that angels' returns are better. [But] angel investing is thriving and growing both in awareness and investments and venture capital is struggling to find a model that works."

The angel market here may be three to five years behind the US, but is rapidly maturing. "The quality of deals I have seen is absolutely on a par to the US."

A study this month suggested angels invested $50m in 63 companies in 2009, up 72 per cent on 2008.

Mr Payne sees no evidence that New Zealand's egalitarian ethos might put local entrepreneurs at a relative disadvantage given they may have fewer wealthy friends, relatives and angels to tap.

"I think the landscape here is pretty comparable. You have got some people in Auckland and Wellington that made their money as entrepreneurs that are investing in lots of companies." He cites The Warehouse founder Stephen Tindall as an example.

"There is an assumption, somehow, that it is easier to raise money in the US than it is in New Zealand and that is just not true. It may be easier to raise $20m in the US than it is in New Zealand, but it is still really damn difficult work. It is very time consuming, and very few people are successful at it.

"My advice to Kiwi companies is: see if you can't get all the way to positive cashflow with $500,000 or $1m, but raise it here and then figure out how you are going to sell overseas. You could spend weeks in Silicon Valley just trying to find the men's room in the VCs. Don't learn that environment unless you have to."

While young Kiwi firms are quickly forced to look to export markets for growth, the small size and remoteness of the New Zealand market can work in their favour, as they can "fly under the radar" while they find their feet, he says.

"You can dominate the local market and no-one even knows you are there. You can't do that in the US. If you get a significant share of any market in the US you are on the radar and suddenly everyone is trying to knock you off."

Mr Payne says most angels tend to invest in businesses within about 80 kilometres of where they live, and he is no exception, so is not looking to make investments here.

But he has seen four of five companies that he believes would have no trouble securing money from angels in the US, including cordless power technology company PowerbyProxi, an Auckland University spin-off, and biometrics firm Biomatters.

- © Fairfax NZ News