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Entrpreneurs Find Creative Ways To Fund Growth

For Immediate Release


Melbourne, February 24, 2004 - New Zealand entrepreneurs are finding creative ways to fuel the growth of their businesses, according to GEM New Zealand research released today in Melbourne at the Entrepreneurship Research Forum.

The Global Entrepreneurship Monitor report found that informal investment, which includes business angel activity, plays by far the lead role as a source of funding for start-ups in New Zealand. Informal investment accounted for 99.20 per cent of total investment in such firms in New Zealand. By contrast, venture capital accounted for 0.8 per cent.

(Informal investors are defined as people who have personally provided funds in the past three years to a new business started by someone else, not including stock or mutual fund shares).

For the third year in a row, New Zealand ranks highly in the developed world in the rate of informal investment in new and growing start-ups. As a proportion of GDP, informal investment in New Zealand stands at 3.5 per cent - making it a significant factor in the economy. Internationally, the average is 1.2 per cent of GDP.

GEM research shows 39 per cent of informal investors in New Zealand put their money into a relative’s business, 34 per cent into a friend’s business while 8 per cent invested in a work colleague’s business.

The average amount invested is $20,533, with sums ranging from $10 to a whopping $10 million, reported in the survey.

Though males have traditionally dominated informal investment activity, in New Zealand the reverse is now happening. GEM New Zealand found that New Zealand investors are more likely to be women than men, with New Zealand women accounting for more than half (58 per cent) of our informal investors. This compares to an international GEM gender breakdown of 68 per cent male and 32 per cent female.

Age has a direct impact on informal investments with the amount invested increasing by age. Informal investors aged 55-64 years invested $45,000 per year on average while those aged 25-34 invested $11,620. Peak investing years are 35-44 at $46,160 and 45-54 at $78,350. One third of these ‘angels’ are business managers/executives, self-employed people and professionals while 10 per cent are superannuation beneficiaries.

Informal investors invested in a wide range of enterprises with personal and residential services such as motels, gardening, cafes, superettes, deliveries, repairs, groceries and painting and decorating a popular choice with investors.

The report concluded that informal investment is a key driver for the growth of entrepreneurial firms and a “crucial ingredient” in the development of New Zealand’s economic growth. Yet informal investment is totally tax-neutral, with the current tax regime providing neither incentives nor disincentives.

“By comparison, access to venture capital is so rare at the seed stage of a new venture as to be meaningless for 99.9 per cent of firms”, said report author Prof Howard Frederick of UNITEC.

The report said these findings had implications for entrepreneurs, policy-makers, educators, researchers and journalists.

“In a nutshell, they should pay more attention to the critical role of the four ‘Fs’ – family, friends, founders and ‘foolish’ investors in start-up ventures,” said Prof. Frederick.

New Zealand Venture Capital Association Executive Director, Christopher Twiss, welcomed the findings saying they helped put New Zealand’s professional venture capital market in true perspective. “There is a widespread belief in New Zealand that professional venture capital is the only source of funding available for new and growing start-ups and that the relatively small number of businesses being funded in that way means that this market is failing to deliver.

“In actual fact, the professional venture capital market is delivering on its core objective which is to invest in the “super star” companies referred to in the report.

“More attention needs to be paid, therefore, to the crucial role of the four “Fs” in providing vital funding for the vast majority of new and growing start-ups,” said Mr Twiss.

The full GEM NZ 2004 report with all key findings is now due to be released in late March.

About the Global Entrepreneurship Monitor (GEM)

Launched as a joint research project in 1999 by the London Business School and Babson College in the United States with 10 countries participating, GEM now covers 41 countries and is the largest survey of entrepreneurship undertaken in the world. New Zealand began participating in GEM in 2000. GEM NZ 2004 surveyed 2000 New Zealand adults and interviewed 100 experts including government, academic and industry leaders.

About the Centre for Innovation and Entrepreneurship (CIE)

CIE facilitates the implementation of cutting-edge research and forward thinking entrepreneurship education with the objective of turning innovation into sustainable commercial reality for New Zealand’s small and medium enterprises and the corporate community.

Prepared for CIE by Communicator.

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