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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
April 21st, 2006

By Brent Holliday
Greenstone Venture Partners


On The Wings Of Angels


"And to her that means nothing,
But to me it means everything.

She talks to angels,

Says they call her out by her name.” – Black Crowes, She Talks To Angels

Venture Capitalists invested US$1.6B in companies in Canada and US$21.7B in the US in 2005.  While we busy money managers have been doling out this capital to companies that we hope will become Google or Skype someday, we are dwarfed in size by another class of investor: the individual. 

Aaaah, the angel.  The most important cog in the investment cycle.  Without the angel, the VC would be forced into earlier stage, riskier investing.  The supply of angel fed companies is mainly what VCs feed on.  How big is the angel investment though?  Who counts this stuff?  It took me all of 3 mouse clicks to find the VC data… but angel data, very tough to find.

Let’s try and compare apples to apples for a minute.  Take that US$23.3B in VC investment in North America and subtract about 40% of it, which went into Series B, C, D, E rounds of financing in established companies.  In other words, remove the large chunk that individual investors do not participate in.  In round numbers, VCs (the “professionals”) invested about US$14B in comparable round funding (seed and Series A).  According to the Centre For Venture Research at the University of New Hampshire (the only place that actually tries to count angel investment in the US), angels in the US doled out a whopping US$23.1B in 2005.  Interesting.

In Canada, a few cursory efforts have been thrown at counting angel investment, the most quoted being the GEM (Global Entrepreneurship Monitor) studies that talk about “informal investment” around the globe.  It states in a 2004 report that total informal investment in Canada is 1% of GDP, which would amount to $10B in total in 2005 (of our $1 trillion GDP).  Even if you take out the 65% that GEM claims is invested by the entrepreneur themselves (in sweat and credit cards), this number is still obscenely high.  The only credible counting of angel investment has been done in BC and for BC only.  This is due to securities legislation that forced a lot of this normally “informal” investment to be reported by “sophisticated investors” through investor exemptions and the use of our VCC tax credit programs over the years.  The result for BC is CDN $355M (in 2004) by extrapolating the roughly 30% of angel investments caught by this reporting mechanism.  If we then factor that amount across Canada using the average BC venture capital rate of 12-13% of Canadian investment, we get a number more like US$2.3B for Canada, which is about 10% of the US angel amount and MUCH more believable.

So, angels invested US$25.4B in a year in North America.  Wow.  That’s a 1:0.95 ratio angel investment to total VC funding and a 1:0.55 ratio of angel to early stage VC funding in a given year across North America.  Of course they invested in many more companies (roughly 50,000 for angels vs. 3,000 for VCs) and, as we all expected, spend less per investment.  In round numbers (because I am cramming together US and Canadian data which may be collected very differently), angels invest $500,000 per company and VCs about $5,000,000 in a given year (at early stages only, seed and Series A). A couple of points on this math: 1) not all angel invested companies receive VC financing (clearly some go out of business and others grow into larger businesses without the need for VC type capital), so you don’t need to worry about 47,000 companies a year perishing for lack of VC, although quite a number of them will not survive. 2) Angel money tends to trickle in while VC rounds are binary, so $500,000 a year per company is not really what they are raising in angel investment in total, but the VC number of $5M is a more indicative average amount of a financing at Series A stage (because it lasts for more than a year).

Is a ratio of angel investment to total VC investment at roughly 1:1, a healthy number for commercialization?  In BC it is CDN$355M to CDN$248M in 2004 (1:0.7), which indicates even more angel capital to venture capital available than the North American average (probably partly due to the angel tax credit program here and partly due to a lack of later stage VC investment). Is the number of companies financed by angels at more than 10x the number funded by VCs a healthy ratio?   I wish I had the number for the Silicon Valley or Washington State to compare, but that information is not available… at least without hiring the Centre of Venture Research for a few thousand dollars!  It would be very interesting to compare.

My interest in all these numbers is to try to understand the right balance of capital needs to innovation to level of experienced talent that creates great companies.  As I have said before, if any of these is under or over abundant, the equilibrium is wrecked and the industry as a whole suffers.  Since angels spend more money than VCs, don’t you think a little more analysis of how and where they spend their money is warranted?  I don’t mean just here in BC, but everywhere?  Wouldn’t it benefit angels themselves to know what patterns of investment and what portfolios tend to work better for the big payoff?  Anecdotally, the “spray and pray” theory appears to be the most favoured portfolio strategy.  An angel will invest small amounts in many, many start-ups over time and look for that 10-50x deal that comes along once in a decade to make up for all of the other failures or wash-outs.  Everyone now knows the legend of Ram Shriram and Google.  He made about $2B on a $100,000 investment in 5 years.  Let’s say Ram invested $100K in 40 other ventures in that time, well $4M down the drain you might say… but of course, you can’t bet it all on one deal when you invest sooooo early.

Local angels have similar stories with Angiotech (doctors on the north shore), ALI (Milt Wong and Paul Lee) and Datum Telegraphic (Haig Farris).  These were not quick hits and in the case of people like Paul and Haig, many other bets were made on start-ups and ideas over the decade or so it took them to hit it big.  When Dick Hardt cashed out some of his earnings from ActiveState and bought into Flickr, he had a very quick return by angel standards, but it is not typical for the really big home runs in angel investing.  Most angels will tell you that the greed factor is not the only driving factor behind making these risky investments.  A huge part of the decision process is based on the love of technology, great innovation and good people to put money behind.  It’s almost a feeling of giving back to the community.  A lot of technology angels were entrepreneurs and engineers themselves and feel a camaraderie with the starving start-up folks.  That’s the reason that you have your head scratchers sometimes when you see very smart angels make investments in weird stuff.  It happens.

I believe there is another route to good returns for angels and that is through investment in companies that may not need the big capital raise from VCs.  These are smaller, regional businesses and or service companies that need <$1M in capital to get going.  There is no less risk in the businesses executing, but they are quicker to customers and revenue than heavy development companies and the financial risk (the risk of raising big money) is not there.  A smart program of investing in these types of businesses might work.  Take IronPoint for instance.  I mentioned them a few months back as another example of a company making it big without VC investment.  Lo and behold, they are acquired this week by Active Systems, the same company that bought Class Systems a couple of years ago.  Angel investors in IronPoint did very well.

It goes without saying that the angel plays a crucial role in the ecosystem of the start-up.  I just added some numbers to the argument that shows how crucial.  Angels are shy about giving data. Nevertheless, some more data would help understand the business of informal investment. 

Letters From Last Time –

Chris Loge at Nokia informed me that with 400-450 employees, I forgot to mention them in my past article about the big technology companies in town.  Thank you Chris for giving me the data and I meant no slight to you and your friends at Nokia.

Hi Brent:

I always enjoy your commentary on BCTechnology.com, and particularly the recent April 3rd installment. It is hard for us ordinary folk to get a perspective on the entire industry in BC and you have done it well. Thanks for that.

Just wanted to let you know we’re listening out here!

Ken Lalonde, P.Eng.

Thanks Ken.  I try to give that perspective and I appreciate the support !


What Do You Think? Talk Back To Brent Holliday


Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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