Investing in start-ups and young technology companies can be rewarding but investors should not hold high expectations of fast turnarounds in investment gains, according to a recent findings from a New Zealand Venture Investment Fund report.
NZVIF’s Snapshot Report says that speedy profitable exits occur occasionally but, in general, investors should take a portfolio approach, be prepared for the long haul, and be well provisioned for follow on investments.
As an example of the latter, the report says that investors making an initial investment of $20,000 into a young technology company should typically expect to make follow-on investments taking their stake to between $40,000 and $80,000.
NZVIF CEO Franceska Banga says that while early stage investing is a high risk investment class - at least four in 10 companies fail - it is enjoying a period of marked growth.
“Angel investing is at record levels, equity crowdfunding platforms are now underway and a growing number of young technology companies are listed on stock exchanges,” Banga says.
“In addition, the NZX has just established its new NXT platform specifically targeting young companies wishing to raise capital for growth.”
Amid this heightening interest, Banga says there has been limited information for investors looking to enter the sector.
“NZVIF has been investing in the sector for 12 years and has a portfolio of 187 companies,” Banga explains.
“Some of the data from this portfolio - which represents the combined investments of nine venture capital funds and hundreds of angel investors - will be useful for new investors.”
According to Banga, the companies invested into are typically small - with most earning under $1 million in annual revenues - but they grow quickly, with annual revenue growth rates of around 50 per cent a year.
“Software companies are showing particular promise,” Banga adds. “Across NZVIF’s two portfolios, software companies are performing ahead of the overall portfolio in terms of revenue growth.
“In the Seed Fund portfolio, software company annual revenue growth was 73 per cent and in the Venture Capital fund it was 42 per cent.”
Of the exits which NZVIF has been a part of so far, Banga says 21 per cent (13 of 62) have been earned back the level of investment or better.
“Four exits have been greater than three times the amount invested,” Banga adds. “Forty per cent of the current portfolio is valued at less than the amount invested.
“This is in line with early stage investment expectations where most of a portfolio’s value is derived from a handful of successful investments.”
To increase the prospect of positive returns, Banga believes investors should carefully select a portfolio of companies.
“They need to be prepared to invest for the long haul and through periods of less benign market conditions, when valuations can be down and liquidity can be close to non-existent,” he adds.
“Early stage investing is best suited to investors with the financial capacity to absorb losses and continue to invest while waiting for the reward of success.”