Angels fly in BC
I spend a lot of my time working with early stage
technology companies, such as university spin-offs, in raising equity capital.
One source of early stage funding is angel investors. In fact, it may be the only
source for many nascent ventures. And, just so you don't think that we are
talking small potatoes here, I guesstimate that Angel investing is approaching
one-fifth of the magnitude of funding provided by venture-capital companies. In
B.C. last year, just over $400 million (not much, is it?) was invested by
venture capital companies. I figure that Angel investing amounted to at least
$60 million.
In comparison, American estimates range from U$10
billion according to PricewaterhouseCoopers' Kirk Walden, director of venture
capital research all the way to U$35 billion with 400,000 active angels
according to Jeffrey Sohl, director of the Center for Venture Research at the
University of New Hampshire.
There are two characteristics which, in my view,
differentiate angel investors from other investors. An angel is someone who a)
has built his/her own technology company and b) invests his/her own money in new
ventures. Because they are accountable only to themselves (and perhaps their
spouses), Angels take more risks. At least it appears that way. I would argue
that their "domain expertise" makes them more comfortable in taking
risks which we should not expect traditional venture capitalists to take. After
all, VC's invest other people's money and they have an obligation to be more
cautious. Whereas an angel can assess an opportunity fairly fast, VC's need time
to do their "due diligence". VC's should think of reasons why not
to invest (they're very good at this). Angels think of reasons why they should
invest. VC's are very smart and they have to make a lot of money for their
investors whereas angels are very creative and are not focused on just money
(although that's fun, too).
Angel investors are also magnets for Venture Capital.
VCs are more likely to invest in companies backed by angels. Companies that have
difficulty attracting angels are probably wasting their time in going directly
to VCs.
One trend which I see emerging is the formation of angel
funds. Such funds are created when a number of angels, as a group, decide to
pool their capital in a single entity which will make investments on their
behalf. This is fine insofar as it may create VC-style pools intended for
earlier-stage investments. On the negative side, though, such pools may operate
more formally and slower than fast-acting, hands-on angels. It also means that
individual angels are now doing angel-investing mutual-fund style as opposed to
the focused, targeted rifle shot approach.
In the USA, formal angel groups are increasing their
investments now that valuations for startups have fallen. Among them are Angel
Capital Network of Sausalito, California; Band of Angels of Silicon
Valley; and CommonAngels of Lexington, Massachusetts. Here in B.C., there
are no highly visible angel groups although there are some informal groups and
perhaps some formal ones in the works.
One pool, CommonAngels of Massachusetts limits
its investments by putting a U$5 million limit on valuations, forcing it to
invest mainly in startups. I like this criterion. Of the 18 companies the group
has invested in since its formation, only one has failed. Angel Investors LP
in California has, on the other hand, not fared so well. About 40 of the 200
companies it invested in are out of business. Still, that's not so bad for this
type of activity. Angels are not looking for a high success rate. They are
looking for a few BIG winners.
Over the past few years, Angel investing in B.C. has
increased substantially as many technology entrepreneurs were able to cash in
some of their founders stock at high multiples. In recent months, prospective
angels are not as keen to liquidate their positions at one-tenth of there they
were a year ago.
Although the investment capital is not flowing quite as
freely as it did last year into back-of-the-envelope business plans, there is
still a great appetite for new opportunities, especially now that business
valuations have come back down to earth.
Unfortunately, I see almost no appetite at all for
concept companies trying to use the internet as a vehicle for selling various
products and services. Some say that angel investors are out to lunch these
days. There's considerably more emphasis on some solid, protectable intellectual
property than just having a great idea.
So, if you're an entrepreneur with more than just a
great idea, and you want to make contact with B.C. angels, a good starting point
is the Vancouver Enterprise Forum's website at http://www.vef.org.
Trading the BC Techs
This week, I attended a meeting of financial analysts at
which there was a presentation by Standard & Poor's on its plans to
introduce a Canadian venture- capital-based index that would include Canadian
Venture Exchange-listed companies and possibly some small Toronto Stock Exchange
companies.
The idea is to make this an exchange-tradable index to
allow investors to buy and sell the index. Many indexes, such as the popular
"Cubes" (i.e. the highly liquid Nasdaq QQQ's which have traded
in the U$33.60 - U$109.12 range this past year), and the i60's (on the
TSE) track particular market sectors and allow investors to trade in these,
often beating so-called "managed" mutual funds. Such ETF's (Exchange
Traded Funds) are popular because there are minimal fees associated with them,
liquidity is very high, and they can be bought and sold as easily as company
shares.
In B.C., we created the T-Net20 index of the top B.C.
tech companies three years ago in an effort to track the progress of our
industry. This index, which started at 1000 in January 1998, actually shot over
the 10,000 mark just one year ago. Today, it's in the 1500+ range. To me, that's
fantastic - a 50% increase in only two years! Others will tell you that's
terrible - a loss of 80% in just one year.
Now, wouldn't it have been fun to actually have gone for
a ride on this roller-coaster? The only way to have done that would have been to
invest millions in the basket of stocks in this index. If the index itself were
tradable, then investors could have enjoyed the ride with as little as a few
thousand dollars.
From time to time, many readers have asked if they can
trade an index like the T-Net20. I can't help but wonder if such a vehicle would
be of interest to investors - especially those who believe that BC's tech sector
is still in its early growth stages with lots of upside potential. What do you
think? Send me your comments.
In the meantime, though, what are you going to ride?
(ride seems to be an appropriate word these days). When we starting tracking the
tech sector just over 3 years ago and when we started off the T-Net20 at 1000,
the total market cap of the 20 companies in the index was only $5.6 Billion. Ballard
Power (TSE:BLD) was at the top of the list with almost half the total value
- $2.5 billion and PMC-Sierra came in second at $1.3 billion. Today,
Ballard's market cap is sitting at more than double that - around $5.1 billion
while PMC-Sierra has more than tripled to around $5.2 billion (forget that it
went to more than $40 billion).
Here's what the list looked like three years ago:
| Company |
May98
Mkt Cap ($000) |
Apr01
Mkt Cap ($000) |
| Ballard
Power Systems |
3,725 |
5,100 |
| PMC-Sierra
Inc |
1,812 |
5,200 |
| QLT
PhotoTherapeutics Inc |
730 |
1,900 |
| Sierra
Systems Group Inc |
248 |
54 |
| A.L.I.
Technologies Inc. |
223 |
52 |
| Angiotech
Pharmaceuticals Inc |
194 |
903 |
| AIM
Safety Company Inc |
153 |
40 |
| MDSI
Mobile Data Solutions Inc |
150 |
66 |
| Mainframe
Entertainment Inc |
88 |
17 |
| ID
Biomedical Corp |
93 |
112 |
| QI
Technologies Corp |
93 |
15 |
| Bluestar
Battery Systems Intl Corp |
86 |
n/a |
| Forbes
Medi-Tech Inc |
93 |
45 |
| Epic
Data International Inc |
72 |
5 |
| Westport
Innovations Inc |
75 |
306 |
| Spectrum
Signal Processing Inc |
76 |
22 |
| Stressgen
Biotechnologies Corp |
78 |
229 |
| Micrologix
Biotech Inc |
69 |
149 |
| Xillix
Technologies Corp |
65 |
13 |
| Avcorp
Industries Inc |
58 |
18 |
Although they're not all on the list today, not a single
company has failed. One moved to the USA (Bluestar). Note that this is
the original list. Today's list looks a lot different since the top 20
ranking has changed considerably as companies such as Creo Products and Pivotal
Corp went public, bumping others off the list.
Interestingly, the Biotechs in the group have generally
fared much better than the infotechs.
Bottom line: BC's a good place to invest, the tech
sector is still young, and there's still lots of upside room (especially now!).
Capital Pool Corporation (CPC) Update
In this column, I keep track of Capital
Pool Corporation ("CPC") companies (see chart below) as defined by
the CDNX because they may provide funding and management to, and in the process
acquire, technology companies. They provide companies with an alternative to
traditional venture capital financing. CPCs are the continuation of the former
VCP and JCP programs on the Vancouver and Alberta Stock Exchanges.
I mentioned before that this
program, which has been very popular in the West, may soon be available to
Ontarians. The Ontario Securities Commission has finally given its support.
However, due to the recent talks
about the CDNX becoming part of the TSE, I worry about the future of this
program. I have a hunch that the CPC program may be a victim of this merger.
Although they sound great in
principal, I must confess that CPS are not - in practice - working out as well
as everyone had hoped. Most of this is due to the fact that it takes a great
deal of time and work for a CPC's directors to find a winning deal and if and
when they do, there is just so much legal nonsense - regulatory red tape - that
good deals can be lost because they take so long to consummate. Major overhaul
of the rules is needed.
Each month, we identify all the new CPC
companies as well as those which are about to begin trading and those which have
completed their qualifying transactions (i.e. graduated from the CPC).
New additions to the list are Amberstone Capital
Corporation, Capalta Inc., Group Pacific Capital Inc., Tamerlane Ventures Inc., and
Vista Investments Inc.
Capalta and Vista are from Alberta while Amberstone,
Group Pacific, and Tamerlane are from BC.
Since the previous update, the following companies have
come to trade: Colt Capital Corporation, Cyan Corporation, ebisdot.com inc.,
Environmental Management Solutions Inc., EPS Capital Corp., Mountainview Energy
Ltd., Sinotec Ventures Corp., and VistaTech Corporation.
Since the previous update, the following companies have
been deleted because they have completed their Qualifying Transactions: Clarity
Telecom Networking Inc., Kirkless Capital Inc., and Vast Capital Pool Ltd. (which
took over UserFriendly.com)
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities.
An introductory article explaining
CPCs may be found at www.bctechnology.com/statics/mvolker-jun
Local Happenings
Forrester Research, Inc. claims that the
Internet is redefining the way business is done in Canada and that by 2005, B2B
eCommerce in Canada will surpass C$270 billion. Next Thursday (Apr 12), Bruce
Temkin of Forrester will be giving a presentation in Vancouver. He leads
Forrester's research into the Internet's impact in reshaping
business-to-business (B2B) relationships. His areas of expertise include
eBusiness strategy, restructuring of distribution channels, and the evolution of
Internet-based business models. Register ONLINE www.bctia.org/events/registration.html.
The next Vancouver
Enterprise Forum event will be held on Tuesday, April 27th at Science
World. The topic will be: "Genetics/Genomics", moderated by David Ing
of Pacific-International. Just this week the federal government announced $136
million in funding to Genome Canada of which close to $40 million will flow to
B.C. for research. We can expect many new companies to be formed to pursue the
exciting opportunities which will result from this research. Come and learn more
about this fascinating subject.
About New
Ventures BC - The New Ventures BC Competition is an annual event open to
all BC residents, with prizes totaling $125,000 - which is believed to be the
largest of its kind in North America. Individuals with a new business idea can
attend seminars and networking information sessions that will give them the
chance to turn their idea into a successful startup. A number of these are
scheduled to take place during the month of May. Check www.newventuresbc.com
for details.
SFU's TIME Centre is open for business -
business folks, that is. TIME is an acronym for Technology, Innovation,
Management, and Entrepreneurship. TIME supports the growth and development of
the tech industry in B.C. TIME features a "Business Centre" (looks
like an airport business lounge) which is open to technology entrepreneurs and
business people to use as a drop-in downtown office facility. Need to plug-in?
Make some calls? Do some work? Hold a meeting? Why hang out at MacDonald's when
you can work productively at the TIME Centre? Drop by and check it out! It is
located at SFU's downtown Harbour Centre campus at 515 West Hastings St. More
information can be found at www.sfu.ca/time.
PS - there are some great facilities for holding your company's AGM here.
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