The Way I See It… by Michael C. Volker
Early stage angel investing is a numbers game
My passion is
startups. The thrill and challenge of creating a new technology venture is a
most gratifying experience. Successful entrepreneurs – those that have built
and sold their companies – will once again be lured to new startups: once an
entrepreneur, always an entrepreneur.
While some prefer
being serial entrepreneurs, others prefer the mentorship and angel approach. The
former implies taking control while the latter implies a betting-on-others
approach. For more than twenty years, I’ve taken the angel path, opting for
variety by encouraging and supporting other entrepreneurs in the pursuit of
their dreams. This invariably involves the raising of startup funding.
One of the recurring
themes in my columns has been the early stage funding gap that exists.
Commercializing the research conducted in taxpayers’ institutions, e.g. our
universities, requires risk-taking. This is what angel investing is all about
and it is an essential ingredient in the development of an advanced technology
industry.
The growth of the
technology sector in B.C. was largely aided by the provincial government’s
funding of various organizations such as the Innovation and Science Council of
B.C. and the B.C. Advanced Systems Institute. They supplied relatively small,
yet critically needed, capital in the form of commercialization grants to the
likes of well-known companies such as Sierra Wireless, Ballard Power, PMC
Sierra, QLT Inc., Angiotech, Macdonald Dettwiler, Creo Inc., and Westport
Innovations to name just a few. Of course, they also supported many that failed.
Instead of leaving
government to the task of trying to pick the winners, the trend as demonstrated
by the B.C. government, is now towards letting the private sector do this job.
The recently revamped B.C. Venture Capital Act provides investors with a
refundable tax credit of 30% against investments made in eligible small
businesses. When combined with investments through RRSPs and a target company’s
use of the Scientific Research and Experimental (SRED) tax credits, a few
hundred thousand invested by angels can go a long way.
Private, individual
investors differ from institutional investors in one very important aspect.
Angels think of the reasons why they should invest in a deal unlike traditional
venture capitalists whose job it is to come up with reasons why not to invest.
It is these angels that help in grooming companies to the point where they are
less risky and ready for serious venture capital investors.
While this sounds
good in theory, it doesn’t always work that well in practice. In reality most
technology communities do not have a large number of well-heeled angels that
can make dozens of investments. Typically, a few angels will cough up one or
two hundred thousand dollars when double or triple that amount is required.
Anyone who has played
the angel investor role knows that the odds of picking a winner are slim. We’ve
all heard that only one in ten investments will produce a greater than ten-fold
return. Using this logic, ten investments should produce a positive return.
However, I’ve heard that to get one out of ten you have to be in at least
sixteen deals! If that’s true, it’s going to be very difficult to find enough
individuals willing to cast their nets this wide.
That’s why “angel
funds” such as the Western Universities Technology Innovation Fund in B.C. will
– and must - grow in popularity. These are pooled funds that are managed by
angels that co-invest with hands-on angels. These funds can provide funding
top-up and at the same time reduce individual angels’ exposure. By investing in
dozens of deals, the likelihood of overall returns is improved.
Assisted by the afore-mentioned tax
credits, angels and other
investors ought to be attracted to such funds. The way I see it, for this to
really work will take some visionary angels who understand that, aside from
great technology and exemplary entrepreneurs, successful investing in the tech
sector is nothing more than a numbers game.
Michael Volker is a high technology entrepreneur and
director of