‘Too soon to tell’ is one of the main conclusions of a NZ Venture Investment Fund research report about the valuation of early-stage kiwi investments.
The report (find it here) by NZVIF’s Chris Twiss and Carl Jones says the NZ market in too fledgling a stage, with too few exits to really be able to read the tea leaves with regard to what the early-stage valuations should or could be to be fair to both the company entrepreneurs and investors.
There has only been 16 exits in the 10 years worth of venture capital and angel investor punts on promising businesses, with eight of these exits through trade or private sales, five through liquidation and three as write offs.
This is from a data set of 186 companies invested in between 2004 and Dec. 2010, in which approximately $900 million of such formal investment has been made. The authors note that there is no separate data for the universally recognised group known as the 3 F’s – friends, family and fools – but that they are likely to have at least matched the $475m invested by angels.
It is too difficult to draw conclusions the report says.
“There is simply not enough data yet relating to ‘exit’ values to enable us to analyse the critical links between initial investment valuations, the valuations (upwards and downwards) of a company as it progresses through various stages of development, and the ultimate value of that company in terms of the final investment returns earned by investors,” the authors say.
Over time, with a better dataset, especially around exits, NZVIF will have a more precise understanding of these areas it says.
The report notes that worldwide, early stage investments are now taking much longer to reach a “liquidity event”, and that there is a relative absence of IPO’s as an exit option. Within the US market for example, in 2000 it took on average about 2.6 years to exit; now it is 8.7 years.
As noted by one experienced US angel investor, “Lemons rot faster than plums ripen.”
NZ angel investors currently tend to have one or two early stage companies under their wing, though NZVIF expects this to develop to more of a portfolio approach.
North American research on angel investors by Prof Rob Wiltbank at Willamette University allows a conclusion to be drawn NZVIF says.
It is, “that an angel investor needs a portfolio of more than 10 early stage company investments to ensure success and that 15 would be preferable to maximise return expectations. Are New Zealand angels, therefore paying a premium for the one (or small handful) of deals they are typically investing in at present?”
The report notes that with only one or two investments, angels may have a poor outcome, and give up on this type of investment altogether.
As noted in the report’s introduction – “valuing these early stage companies is challenging given their highly uncertain nature and can definitely be viewed as an art rather than a science.”