Round Table: Angel Investment in Vancouver

We hear periodic news reports of a home run for local angel investors (hello Flickr and Club Penguin), but these are countered by complaints that Vancouver is strictly bush league and will never measure up against innovation hubs south of the border. We gathered a panel of experts – including a Silicon Valley investor – for the real scoop on Vancouver’s place in the pantheon of angels.

At its essence, angel investing is as faith-based as it sounds; as early investors, “angels” take a leap of faith when they financially back hopeful and inspired entrepreneurs. Unlike venture capitalists, who often have a professional investment firm behind them, angels are usually entrepreneurs themselves, passionately committed to their industry and eager for the rush of adrenaline that comes with identifying the next big thing (followed by the thrill of capitalizing on it). But investing hard-earned dollars into a self-proclaimed future Mark Zuckerberg is a huge risk, and B.C. frequently loses talent to Silicon Valley, where investors are more willing to roll the dice. Is Vancouver destined to fall behind as budding companies move toward greener pastures below the 49th parallel? Or are Vancouver’s angel investors taking steps to ensure that Vancouver becomes a go-to place, where new, innovative businesses can secure funding and put down long-term roots? To get the inside information on what it takes to turn an ingenious idea into a billion-dollar business – and to do it right here in B.C. – we spoke with four experts: Jean Kovacs, president of the Harvard Business School Angels Association of Northern California; Mike Edwards, executive director of GrowLab; Danny Robinson, board advisor for the B.C. Innovation Council; and Brent Holliday, head of the technology practice at Capital West Partners. 

What is the landscape of angel investing in Vancouver? Do you see the city as a hotbed?

Mike Edwards: It’s definitely not a hotbed. There are only a few active angel investors: one angel-investing group, one public angel investment company and then there are a few active angels. By active, I mean they are on the surface and people talk about them. So it’s a very, very small community. I think they’re on the back page and I think there’s a lot of activity going on that we don’t know about. Compared to other regions like Montreal, Toronto, New York, Boston and Silicon Valley, we don’t have an active angel community.

We often hear of startups leaving town because they can’t secure funding here. How damaging do you think that is to our entrepreneurial environment?

Jean Kovacs: It’s damaging. I’ve been amazed at the number of entrepreneurs in Vancouver: the energy here, the smarts, the vision, the drive. There is beginning to be an infrastructure, and there are law firms and accounting firms now targeting that. But the financing infrastructure is really lacking; it hasn’t caught up yet. Unfortunately, if people do go south to get financing, who are your angels? They are people who are successful entrepreneurs, and a lot of them go [to California] and they have a successful run, so they stay down there and become the next generation of angels or venture capitalists there.

It sounds like a vicious cycle. What’s the solution?

Danny Robinson: The analogy that I’ve used to describe it is: it’s like a leaky bucket. No matter what, Vancouver will be a leaky bucket. We’ll have entrepreneurs going down south, so we’ve got to put entrepreneurs back in the bucket to keep the bucket filling up. We’re obviously trying to pull entrepreneurs out of the ether by encouraging more people but, also, we’re looking at bringing them in from the outside. It’s – in general – negative, but there are positives in [entrepreneurs moving south]. One of the major positives is that you have Canadians running around Silicon Valley.

Edwards: There are 300,000; it’s a city [of Canadians] down there.

Robinson: There’s an absolutely massive group of Canadians down there, and they’ve now banded together in the C100 and are helping Canadian entrepreneurs up here more than ever. And, with the added benefit of the social networking world, other communities all around the world have started to become more recognized as tech centres. That is also good for us, because what it’s done is it has created this macro trend of investing outside one’s geographic area. And that’s great for us because we’re obviously outside of the valley, which has most of the investing happening. Because we’re outside, we get the benefit of them wanting to jump on the trend.

Edwards: I would be a rarity as an angel, investing outside my geographic area. I’ve invested in Seattle, San Francisco, L.A., New York, Boston, Montreal, Toronto, Beijing and Geneva. There would be very few angels that would invest that way; they tend to just stay in their area and try to own Vancouver.

A lot of government agencies are involved, the B.C. Innovation Council for instance. How important is the role of government in encouraging this infrastructure?

Edwards: They’re in charge of regulation. Regulation is a massive impediment for success as an investor. Up until recently, an American couldn’t invest in Canada without withholding-tax issues, and it was very difficult. So, the problem is that one generation of venture capitalists and angels in the United States thinks: “We can’t go into Canada because it’s just so difficult to get our money out.” The government is really important for how they deal with regulation; they set the platform up so we can get investments and so we can attract talent and attract capital. That’s what we’re trying to do. As far as identifying talent and nurturing talent, they’re probably not the best in the world for that.

What is the broadly defined role of angel investors’ contributions to entrepreneurship in B.C.?

Edwards: There are two things we’re doing: we’re attracting talent and we’re attracting capital. The final part of that is that we just have to accept failure and embrace failure. I’ve read a lot of news articles about Summify, and the failure of the system because Summify went down [south]. That’s not a failure; we just need more volume; we need a couple of Summifys to go down there, and a couple Summifys to stay here. We just need more volume.

With all of the budding entrepreneurs in Vancouver, what makes you decide to invest in someone?

Edwards: Well, at the angel stage – the early stage – it’s definitely the entrepreneur. I have a couple of principles that I try to go after. One, I call the “sun principle.” An entrepreneur comes to me for the first time and they pitch to me by themselves with a story. They may have a compelling pitch and a compelling story, but what I’m looking for is their ability to attract people around them all the time. As soon as they can attract people around them, then they have the potential to grow a company. So, if they come to me two months later, same pitch, same individual person, but haven’t brought an advisor on board, don’t have a strategic partner and don’t have some test cases, they’re probably not going to build a company because they can’t even build the first steps of a company. That’d be one principle I look for. And the other principle is definitely: “overcome.” Look at my son. My son’s 11 years old; he skied 100 days last year. I mean, why does he want to change the world? His world’s pretty good. So, you’re looking for someone who wants to change the world, who has a chip on their shoulder and has proven that they’ve overcome something to get to that point.

Kovacs: In the Harvard Angels Group we want to see a product, at least a beta version of it, and we also want to see some form of revenue or an easily understandable pathway to revenue. We need a little bit more proof. We need the product and some stream to revenue.

Robinson: The Harvard Angels would be the same as Mike Volker’s group in terms of how they look at deals. They don’t necessarily look at any particular sector, they look for a track record and look at the financials. They want to see numbers, and that is obviously a very important stage and a very important part of the evolution.

Edwards: The bar is raising; the bar is just totally changing for everybody. For the angels and the venture capitalists, it’s getting a lot higher; it’s a lot more competitive.
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What is the strategy behind angel investing: should you invest in several companies, or go all-in with a few?

Brent Holliday: The angel investors need to think like venture capitalists, which is to say: “I need to spray this across 15 to 20 companies.

Edwards: Going back to the word volume – because that’s our new theme for the day – the valley has something that Jean brought up: the angels and the people that are making short-term investments are all coming from technology companies. So they’re saying: “Hey, I just got a win. I just got hired, I paid off my mortgage, paid off my student debt, I’ve got a couple hundred extra thousand in the bank, plus I’m making pretty good cake and I know this technology. I know this is my passion, so I’ll just make a couple of investments.

What are some of the biggest Vancouver successes from the past year?

Holliday: The big ones were in the early 2000s, when Abatis Systems was bought for $680 million and Crystal Decisions was bought by Business Objects for more than $800 million. More recently, you had Club Penguin sell for $350 million. So we have some very big wins.

We’ve been talking a lot about Vancouver and Silicon Valley. How do we compare to other cities within Canada, such as Waterloo and Toronto?

Edwards: Waterloo, Toronto and Montreal; I guess those are the three big centres. Kitchener-Waterloo is unbelievable, quite honestly. They have incredible government funding and they have great infrastructure.

Holliday: They’ve got a tiny company called RIM. We’ve never had an anchor company anywhere near that in Vancouver.

Kovacs: You go down to Silicon Valley and there’s so much hubris there. Everyone thinks they’re going to be the next Facebook, and then you come up here and there are better entrepreneurs, with better ideas, and they’re thinking: “Okay, well, maybe I’ll grow it to $20 million” because of their mindset, and their examples are selling for $20 million.

Edwards: This is an angel roundtable right? So a $20-million exit for an angel – in a short period of time – is good.

So Vancouver needs more entrepreneurs to hit it big and then come back and reinvest in new startups?

Holliday: That was the problem through the 2000 time frame; tech was not hot, and all of these guys that had exited after the first wave – and had made $5 million, $10 million and $15 million – had basically gone and retired. They had gone right out of the tech communities. That’s got to stop. If you do have a smaller exit, you’ve got to jump right back in with both feet. It shouldn’t be that $10 million is enough, and it’s not about wealth management advice. It’s about the whole hunger to do it again.

Edwards: What Jean and I are looking for in the early stage is that person who’s got a chip on their shoulder and wants to make a difference. They’re going to take some time off to experience the world, but they’re coming back and doing something. That’s what you’re after.

Robinson: And I think we’ve got our first one of those in HooteSuite’s Ryan Holmes.

Holliday: There’s also Jeff Booth at BuildDirect. He says: “If Amazon comes along tomorrow and offers me $300 million, I’ll have a conversation with them, but I’m building a business. I’m going to build a very big business.” He sees himself as a category killer, eventually. It’s funny, conservatism in Canada says that you kind of get squishy when a guy says: “I’m going to build a billion-dollar company.” People think, “Oh really? You’re Canadian! You’re not really going to do that. It’s those guys in the valley that are going do that.

At the very early stage you look for big ambition, but how do you recognize people who actually have a chance of fulfilling their goals?

Holliday: The answer is, you don’t.

Kovacs: I mean, we do a tremendous amount of due diligence. In fact, I think some of the angel groups, because they have these semi-retired guys that love technology, do way more due diligence than your typical venture capitalists. Sometimes I feel bad for the entrepreneurs going through all this, but there are ways to check market sizing and entrepreneurs and technology.

Holliday: The answer from a risk perspective is to play the portfolio theory. Do your diligence, do your homework and make the investments in teams that have been there and done that before, as much as you can. At the end of the day, don’t put it all in one bucket. That’s really the only way to protect yourself against that risk.

Edwards: I’m definitely for the portfolio approach. I did 40 to 42 investments last year, so I’m not doing a ton of due diligence. But I believe 100 per cent in the portfolio approach, because that’s the only way you can protect yourself.

The idea of secondary liquidity has been bandied about recently. How does that work, and how are you seeing it influencing investing in Vancouver?

Holliday: What we’re seeing is that venture capitalists come in and they say: “Not only am I okay with some of the angels taking some money off the table, but I want the founder to take some money off the table.” Otherwise, some founders think they’re going to build this company, then they get there and it’s worth something; then they may not be as risk-taking. So what venture capitalists do is they say, “Pay off your mortgage, pay a couple of bills and give your angels some liquidity. Now, I want you to step on the gas.” The venture capitalists are the ones who want it to go longer. The angels and the entrepreneurs, they may get really tempted to sell.

What do you see for the future of the emerging tech community in Vancouver – will we ever reach the stage where we grow a Google?

Robinson: I think, yes.

Edwards: I’m not after that; I want lots of companies. My goal is to have a lot of companies that are hitting it and make it happen.

Kovacs: I’d say I’m very bullish on the state of Vancouver entrepreneurship going forward. The entrepreneurs here are phenomenal; you’ve got the roots and now you’re building the infrastructure. What you guys are doing is helping that infrastructure to build, so it only can keep going up.

Edwards: We’re definitely an entrepreneurial town. That is in our blood. People are always hustling and trying to figure out ideas. Sometimes it’s real estate and technology, sometimes resources.

Holliday: Our immigration influence is heavy with very entrepreneurial people. So I think immigration, in part, helps too.

Robinson: Definitely, immigration is going to be key to that, I think. But also, the other interesting little indicator is that the employees that I’m hiring now, they insist on stock options, and they never did that three years ago. Let’s say they require a paycheque, and they can’t afford to start a company. They will take the least amount of cash they can possibly take in exchange for stock options, and that just never happened three years ago.

Holliday: I am as optimistic as everybody else, but I’ll just throw a couple of things in that may be concerns. The first concern is that, with a ton of startups getting started by the incubators, the accelerators, the angels and the angel funds: it dilutes the talent pool. We have an increasing talent base here, we have the entrepreneurs that want to start the companies, but if you have five times the companies started in technology, all you’re doing is putting one good person over there, one good person over there and one good person over there. There is a Darwinian process that has to happen, too. If all the angels rush in and fund 5,000 companies, that’s not going to be good.

Edwards: I want Vancouver to be a soft landing for international entrepreneurs and international talent. Think about what Vancouver has to offer: same time zone and a two-hour flight down to Silicon Valley. I can go down the valley, have two or three meetings, and still come back and sleep in my own bed. Likewise, they can come up. We want to be a soft landing for international talent.