Introduction
One of the central aims of the government's Growth and Innovation Framework, is to create an environment that encourages innovative and fast growing companies with the potential to create wealth for their owners and significant value-added for New Zealand.
There are at least three reasons for studying the early-stage informal capital market:
- A well functioning early-stage capital market is critical to nurturing innovative and fast growing companies.
- A paucity of research, and the private and heterogeneous nature of this part of the capital market, means that it is not particularly well understood either by participants or policy makers.
- The capital and expertise of high net worth individuals (the supply side of the market) could represent a major source of untapped economic potential for New Zealand.
Capital is a fundamental input to business and economic growth. A lack of capital is often blamed for frustrating the growth of small, start-up businesses. Early-stage capital can also bring with it complementary skills and expertise that can help the business to expand.
The traditional sources of capital for businesses are retained earnings, debt provided by banks or the bond market, publicly traded shareholder equity, and venture capital. Small, young businesses can find it difficult, or impossible, to access capital from these sources, and therefore rely more heavily on informal supplies of capital. A widely used term for those who supply small amounts of equity capital on an informal basis to start-up and early-stage businesses is "angel investor".
The government's Investment Ready Scheme and its successor, the Escalator service, have been aimed at improving the preparedness of businesses and entrepreneurs to attract early-stage and venture capital.
The focus of this study is on the supply of early-stage capital and how this part of the capital market functions. In particular, we are concerned with understanding what constitutes the early-stage capital market: who participates in it, its size and how it operates. We are also concerned with understanding what can be done, both by market participants and, potentially, the government, to improve the functioning of the early-stage capital market in New Zealand.
Objective
The objective of this work is to identify and analyse the key characteristics of the angel capital market in New Zealand - how it works, its size, significant developments, and differences with other countries.
In fulfilling the objective we have drawn on a survey of angel investors conducted by the Ministry of Economic Development (MED). We outline the background to the survey in the following section and draw on the survey results to illustrate and highlight points in subsequent sections.
In Section 2 we use desk research, plus results from the survey, to try and establish the size and scope of the early-stage informal capital market in New Zealand.
Based on interviews with participants in the informal capital market (an environmental scan), as well as the survey results, we outline how this part of the capital market works, how it has developed and key issues in Section 3.
A detailed analysis of the survey results is discussed in Section 4 and in Section 5 we examine the public policy issues surrounding the informal capital market and in particular possible policy initiatives.
Throughout the report we compare and contrast what we learn about New Zealand's informal capital market with the results of similar studies in other countries.
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