Early stage investment has some tricky metrics, writes Franceska Banga, chief executive of the New Zealand Venture Investment Fund.
New to tech investing? Then it can be difficult to discern the facts from the hype, especially for start-ups.
There is often a lot of promise but very little hard data. Even when start-ups have a truly novel technology or a disruptive business model, trying to predict potential market size and the rate of growth can be almost impossible.
Early investors in both Uber and Airbnb had little idea of the market potential of these companies. Instead, they took a punt on a concept they liked and an entrepreneur they believed in. So how should investors value such a company?
Insight and foresight have a vital role to play in making the best investment decisions despite the growth of big data, a meeting hosted by the New Zealand Private Equity & Venture Capital Association (NZVCA) at the Auckland offices of Chapman Tripp heard this week (25th August).
Colin McKinnon, NZVCA Executive Director says: `This workshop aimed to look at how businesses can gain market intelligence and read between the lines for better investment decisions. Sophisticated investors are using new tools for data analysis and scenario simulation to develop insight for private capital investment origination and due diligence. Demographic changes can diminish the value of historic data for predicting future outcomes. But armed with an understanding of the cognitive decision process of individuals along with an ability to “crunch” a big amount of data, investors can provide foresight on customer behaviour across many products and services. But it was fascinating to hear that old fashioned personal connection still has its place. PE managers are still looking for on-the-ground, in-market expertise and want to speak with the right person.’
The meeting heard that resources such as the Gerson Lehrman Group (GLG) expert network provide relevant personal connections that give investors introductions to people whose experience and expertise are important references to making the best business decisions.
Charlie Ross of GLG says its network includes 450,000 experts worldwide and although conversations are personal and direct there is anonymity for the enquirer.
Matthew Houtman of Pioneer Capital, explains that GLG had introduced relevant experts to help a portfolio company validate a critical strategy by providing access to experts in the field and close to potential customers.
Michelle and Don Perugini, Analytics & Enterprise Intelligence, EY, add that big data and cloud computing are used to build simulation models to predict consumer behaviour, and that the psychology of the consumer was at the heart of the modelling. They point out that the Simulait model is based on the concept that cognitive decision process of individuals is unchanged and that human behaviour is driven by changing content and external influences.
They note that by integrating access to huge data resources and a model of consumer decision-making, it is possible to make accurate predictions about future consumer behaviour. These tools can help design products and marketing strategies for significant revenue gain or cost saving.
Colin McKinnon, Executive Director,
New Zealand Private Equity & Venture Capital Association, New Zealand
+64 27 640 6406
With growth, comes a demand for funding. Ian McCrae, CEO and founder of the company, has been at the helm while the company has reached a scale that most business owners can only dream of. McCrae’s tale of capital shortages, the pressures of change and dealing with growth pains is something nearly all Kiwi business people can relate to.
“This is a growth equity story as opposed to the leveraged private equity story many people think of when discussing private equity, especially overseas,” says Houtman. “A growth equity story is more about, ‘here’s a company with really strong growth prospects but is not necessarily stable cashflow positive’, which means they can’t get bank funding, so they need a funding partner to come alongside them for when things go well and when things go less well.”
NZX boss Tim Bennett remains bullish about the outlook for new sharemarket floats, despite the lack of listing activity this year that contributed to an operating earnings decline in the exchange operator’s first half.
So far in 2015 there has only been one initial public offering, freight operator Fliway Group.
Adherium, a New Zealand medical devices company, wants to raise as much as A$35 million from Australian and Kiwi investors in an initial public offering on the ASX, to help fund the commercial roll out of its product and continue research and development.
The Auckland-based company, formerly known as Nexus6, develops and manufacturers digital health technologies that improve medical adherence and patient health outcomes for those with chronic diseases. Its first product platform Smartinhaler has a number of approved inhalers for asthma sufferers, which also collect and report data on usage.