INTOUCH : Tips from an angel

After barely 12 days in New Zealand, Bill Payne has already come across two Kiwi start-ups that are “as exciting” as anything he’s seen in the United States – and his opinion is well founded.
A leading figure in the American angel investment industry for the past 30 years, Payne has helped establish four angel networks, published The Definitive Guide to Raising Money from Angels and been referred to as the closest thing America has to an “entre­preneur laureate”.
Here for six months – based at Auckland business incubator The Icehouse – he’s sharing his knowledge about entrepreneurism and “the capital food chain” with Kiwi entrepreneurs, investors and universities. And, while admitting his experience so far is kinda skewed, he’s bullish about local potential.
“Where I am – here at The Icehouse with 10 companies in incubation, meeting student entrepreneurs over at the [University of Auckland] Business School – I’m surrounded by entrepreneurs with really good ideas. I’ve also met two companies, Biomatters and PowerbyProxi, that have world of future and right now are going as fast as they can pedal. So maybe it’s the company I keep, but I’ve seen some really good companies and lot of people who are entrepreneurs who want to start growth companies.”
Just what do angel investors look for in start-up? Well, lot more than just promising product, it seems.
“Too often we run across entrepreneurs who only want to talk about the product – that’s all they’ve thought about and they think it will sell itself. It never does. We’re looking for good management teams – we tend to invest on the jockey not the horse. We tend to look for companies that can scale rapidly, for businesses that have competitive advantage – ones that somebody with deeper pockets can’t come along and immediately knock out of the water.”
Entrepreneurs who are more attractive prospects are those who have figured out how to market and sell the product, have thought what their team and advisers will look like, have good grip on capital needs, have totted up potential cashflow, and have clearly identified their customer base.
“If they’ve done that, we can go talk to those customers even if they haven’t bought anything yet. You try to determine whether the dog will eat the dog food because sometimes the entrepreneur doesn’t know what the customers will tell you. The cliché is differentiating between pain killer and vitamin pill.
“A vitamin pill you can miss today and it won’t make much difference, but miss the painkiller and you’re gonna suffer the consequences in 10 minutes. So we’re looking for painkillers for business – products that are not ‘nice to have’ so much as ‘need to have’.”
Angel investment doesn’t deliver too many home runs. On average, out of 10 investments about five will fail and three won’t generate any return on capital – so all the ROI comes from maybe 10-15 percent of your investments. It’s not the sort of asset class in which to load half your investment portfolio – between three to 10 percent is about right, says Payne.
Interestingly, he adds, downturn doesn’t generally affect start-up activity. Recent research in the US shows job creation in companies less than five years old is unaffected by the business cycle. And the best time to invest in start-ups is at the bottom of that cycle.
“For entrepreneurs starting business during the down cycle is good because there are good management team people available and if you want to sell, five or six years down the track you’ll likely be in pretty exciting marketplace. So my advice is start your company at the beginning of recession.”
As to whether Kiwis have to overcome bigger fear of failure than their US counterparts when it comes to starting new ventures, Payne thinks that is an old story.
“It’s less of stigma to have failed at company in New Zealand than it was 10 years ago – I don’t see it as an impediment to growth of an entrepreneurial economy here.”
It’s the same in places like England or France where entrepreneurism was once seen as somewhat suspect career option, but where angel investment groups are now flourishing.
“I think everybody expects me to come here and assess the situation and describe all these things that are wrong with New Zealand from the perspective of angel investing and the entrepreneurial economy. I think the opposite is true.
“This [angel group investment] is new stuff and the environment is changing rapidly. While in some ways, you’re bit behind, you’re gonna catch up lot faster than those who were inventing the wheel. We screwed up whole bunch when setting up angel groups in the US – now all the best practice is established and all of us are very willing to share. So take advantage of that.”

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