You Don't Need to Be Rich to Invest
This week (Sep 28,2010) I went to a presentation in Bellingham by
Rob Wiltbank of
Willamette University in
Oregon. Wiltbank does research on angel investing and the returns
enjoyed by angels. He looked at 1000 "exits" in North America - i.e.
companies that gave a payback to their investors (however large or
small, including zero return for failed deals).
Of 1,000 companies studied:
52% returned less than the original investment in 3 years
33% returned 1 to 5 times the original investment in 3.3 years
8% returned 5 to 10 times the original investment in 4.6 years
3% returned 10 to 30 times the original investment in 4.9 years and
4% returned more than 30 times the original investment in over 6 years
The overall average works out to a 2.6 times return in 3.5 years which
works out to an IRR of 27% - not too shabby!
At first, one might conclude that the investment hold periods are
relatively short, i.e. 3.5 years on average, but I think that's skewed
because the first group (that's the 52% that produced a negative return)
includes the failures and they usually happen early in the game.
The stat that more than half fail within 3 years makes me feel good
WUTIF Angel Fund because of the 50 companies that we've
invested in, less than 10% have failed since we made our first
investments over 6 years ago in late 2004. We've only had one exit so
far and that was Brightside
Technologies which was sold to
Dolby Labs in 2007 to give us
a 2.1 times return in just under 2 years.
Volker is on the Board of Directors of
Capital (VCC) Inc. (Western
Universities Technology Innovation Fund)
and owns shares in this company, and also serves as President of
WUTIF Management Corporation which acts as
Manager of the Fund.
Please see important Disclaimer at bottom of this column]
What makes a winner? Wiltbank struck a chord with me when he talked
about prediction versus
entrepreneurs are less inclined to make big predictions of outcomes and
then determine the inputs to achieve those outcomes than they are to
determine what it is they can
control to achieve desirable outcomes. For example, Joe Entrepreneur
will be thinking about what he can
do and then simply go about it. What
can he put together and who
can he sell it to?
Wiltbank noted that good entrepreneurs really know how to sell. After
all, what's more important than a customer? What's important to me in
looking at a deal is who the customers are, or at least, who will they
be and how can Joe sign
Valuations are always a hot topic. Wiltbank had a very simple formula
for this: you take the amount of capital being raised on the seed
(angel) round and divide it by 0.3. For example, a company raising $500K
(which is typical for a seed round), would be valued at $1.66 million
after the investment has been made. In other words, the angels get about
30% of the deal. This is very close to what I've seen here in the
Vancouver market this past year.
From a quick survey of 13 Angel groups in the USA and Canada done last
week by Bill Payne, the
average pre-investment valuation was $1.67 million. That suggests that,
using Wiltbanks' rule of thumb, the average raise was in the $700K
range. Of course, these are ballpark numbers in any event and are
influenced by the stage of a company's development, the strength of its
IP (Intellectual Property), the management team (and it's negotiating
ability!) AND the amount being raised. Raise more, and you're worth
For entrepreneurs and angels, there are two venues in British Columbia
for deal flow. These are the regular monthly
VANTEC meetings and the semi-annual all-day
ANGEL FORUM. The 28th Angel Forum will take place on October 19th.
There's still time to sign up!
And, next week, I'll be heading off to Canada's
National Angel Organization annual summit in Montreal. At last
year's summit, the NAO gave me the award of "Angel Investor of the Year"
and I was further humbled by also getting the "BC Angel Investor of
2009" award at the Angel Forum. While I know many angels who quietly
invest much larger sums than I'm capable of, and who deserve that honour
more than I do, I think it's because of my work with VANTEC and angel
funds that gives me a more visible profile. And, in that regard, I
really want to encourage
to look at angel investing especially in light of Wiltbank's reported
What? "I'm not an angel", you say. Alas, not many people - in fact,
fewer than 2% of the population - can claim to be angels under the
so-called "accredited investor" definition as determined by Canada's
securities regulators. The terms "angel" and "accredited" are generally
interchangeable. In fact, in the USA, the
Angel Capital Association only recognizes its angel organizations if
all of their angel members meet the accreditation standards. The USA and
Canadian definitions are quite similar. In Canada, to be accredited you
must have a net worth (excluding your home) of either $1 million
or personal annual income of
$200K or family income of
at least $300K. Do you
One of the big challenges we have in growing our technology sector is
capital formation. How do we mobilize capital for start-ups? Beyond
friends and families, angel investors are really the only option for
entrepreneurs. Institutional Venture Capital (which, in itself, is
struggling to make good returns) rarely invests in small seed rounds.
The problem with Angels, though, is simply that there aren't enough of
them. This, I believe, is a big impediment to innovation.
There's also a growing group of so-called super angels that are starting
to act like VCs and may displace them over time. Unlike VCs who invest
other people's money, these folks invest their own capital. That's why
they're still called angels. But, like VCs, they tend to look at bigger
deals later on.
So, why can't poor you, a member of the 98% non-angel group, invest in a
startup? It's because the regulators want to protect you from throwing
away your money on a flaky deal. So, for a company to legally be able to
sell you its shares, you must either be accredited (i.e. you can afford
to be stupid) or be a close friend or relative (i.e. its OK for friends
to be fooled). Companies that want to sell their shares to
anyone need to file a
full-blown "prospectus" with the regulators (which also means they
become public companies). Although a few companies do this, it simply
doesn't make any sense for a start-up needing a few hundred thousand
dollars. While there are other "exemptions" to the prospectus
requirement, such as investing a minimum of $150,000 (in B.C. the
minimum used to be $25,000 - whatever happened to that?) or having the
company do a watered-down prospectus called an "Offering Memorandum"
(still costly and time-consuming), we still need a better exemption. For
example, why not simply have investors sign an affidavit or
questionnaire that they understand the risk? For the time being, it's a
We need to create more mechanisms to allow you, the wanna-be angel, to
participate. One such mechanism that I'm involved in is
GreenAngel Energy Corp (TSXV:GAE). The idea was to create, using a
prospectus, an investment company that
anyone can buy into. In the
case of GreenAngel, real angels can buy in directly by purchasing
treasury shares from the company. Non-angels can trade shares on the TSX
venture stock exchange and easily get
quotes and news from numerous sources.
The writer of this column (Mike
Volker) is Chairman and on the Board of Directors of
GreenAngel Energy Corp., and owns shares in this company. Please see
important Disclaimer at bottom of this column]
In the same way that small investors created a buoyant market for the
mining sector, they could create the same environment for tech stocks -
especially the small, unproven ones. But, instead of emerging companies
going public too early, an investment company such as GreenAngel can
take equity positions in a number of companies thereby improving the
odds of a good overall return - hopefully as good as Wiltbank's 27%.
By focusing on a hot new sector, i.e. "green energy", the company will
be able to attract not just investors who want to get in on the ground
floor with emerging companies, but also those who are keen on green.
Another benefit in using a public investment company is that investors
have on-going liquidity. They don't need to wait for a buy-out or IPO.
This is one of the most often heard angel pet peeves - getting into a
deal and not being able to get out. One of the biggest challenges for
GreenAngel will be to build awareness and increase the investor base -
and daily trading - to provide such liquidity.
If we can make this work for greentech, then why not then do it for
Web2.0, genomics, or new media technologies?
Bottom line - we need more angels - big ones
and little ones! And
you can be one too!
It's about "TIME"
Simon Fraser University's TIME Centre
in downtown Vancouver recently
expanded to SFU's Burnaby campus (Discovery Park) to offer incubator
offices to entrepreneurs at both locations.
TIME is an acronym for
Technology, Innovation, Mentorship,
and Entrepreneurship. It's more than just an incubator.
Complete, ready-to-go furnished offices with high speed internet,
servers, telephone and fax, printing, etc. are only the beginning.
New Ventures BC, the
Vancouver Enterprise Forum, the
Vancouver Greentech Exchange, the
VANTEC Angel Network,
WUTIF Capital and
GreenAngel Energy all make TIME their home.
Within TIME there is also the TIME Business Centre
(a little like an airport business lounge but without booze) that 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? There are some great facilities for holding your
company's AGM. 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 campus at 515 West Hastings St. You won't believe the
www.sfu.ca/time for info.
a technology entrepreneur, is Director of the Commercialization &
Entrepreneurship Office at
Simon Fraser University
and President of the
Western Universities Technology Innovation Fund
GreenAngel Energy Corp. He is a founder of the
Vancouver Angel Network and past Chair of
Vancouver Enterprise Forum and past Chair
of the B.C. Advanced Systems Institute. He owns shares in many of the
companies he writes about. Copyright, 2010.
What Do You Think? Talk Back To Mike Volker