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    Technology Futures

By Michael Volker

You Don't Need to Be Rich to Invest With Angels

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 about our 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.

[Editor's Note: Mike Volker is on the Board of Directors of WUTIF 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 control. Successful 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 them up.

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 more!

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 you to look at angel investing especially in light of Wiltbank's reported 27% IRR!

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 qualify?

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 roadblock.

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.

[Editor's Note: 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 price! 

Check www.sfu.ca/time for info.

Michael Volker, a technology entrepreneur, is Director of the Commercialization & Entrepreneurship Office at Simon Fraser University and President of the Western Universities Technology Innovation Fund and GreenAngel Energy Corp. He is a founder of the Vancouver Angel Network and past Chair of the 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

Disclaimer (Technology Futures Column)

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Mr. Volker is Chairman of GreenAngel Energy Corp., President of WUTIF Management Corp., and on the Board of Directors of both GreenAngel and WUTIF Capital (VCC) Inc. which are written about in this column, and he owns shares in these companies, and many other companies written about periodically in this column.

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Contact: mike (at) volker (dot) org

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