Group of investors challenge traditional venture capitalist model
Businessman Mike Volker extolled the virtues of angel investing to the St. John’s Board of Trade on Tuesday, but none of his figures or graphs in a slide presentation could compete with a simple typewritten sheet of paper.
Dating from 1987, the letter sought investors for a small company run by a couple of university drop-outs out of second-floor offices above a 7-Eleven in Waterloo, Ont. Volker visited the office, and after being impressed, agreed to invest $30,000 for 15 per cent of the company.
The letter was from Mike Lazaridis for his company, the then-unknown Research in Motion. Best known as the company that introduced the BlackBerry to the world, Research in Motion notched almost $20 billion in revenue last fiscal year. It didn’t make him a multimillionaire, however; Volker, the 2009 Canadian angel investor of the year, gave up his equity when he moved from Waterloo to Vancouver.
And while none of the many other investments he’s made have been in businesses as successful as the one with Research in Motion, the letter serves as an example of the potential that exists for an angel investor, a speculator who invests smaller amounts — typically $300,000 to $1 million — than the traditional venture capitalist, earlier in the development of a business.
It’s an investment model that Volker, the director of Simon Fraser University’s Innovation Centre, sees potential for, especially since the venture capitalist style seems to be falling out of favour.
“One of the big differences is that VCs typically have to invest several million dollars in a deal, so that means they’ll invest much later, not at the beginning startup stages,” he said. “And when they invest two or three million, they want to get five times their money back, so that automatically means that a company, when it’s sold, has got to be worth at least $100 million. If it’s not woth at least $100 million, they won’t even look at it. So whenever we talk to VCs about getting into a new company, they say, ‘Well, first of all, does it need several million? Secondly, can we get out at a very high valuation?’ And that’s not many companies that fit that mould. Most companies that angels invest in — angels invest not millions but hundreds of thousands … and then when those companies are sold, they’re typically sold for $10 million to $30 million. They’re not sold for $100 million because they’re often very specialized, focused companies.”
Investing smaller amounts also means investors have room to spread their investment capital around, helping to lessen their risk and improve their returns too, said Volker.
“Traditional venture capitalists have had a lot of trouble raising more money to invest, because they haven’t had the returns,” he said. “They’re not giving back their investors a decent return, so they’re not being able to raise more money. That’s the main reason,” he said, noting that Canada invests about $1 billion in startup companies, a figure he said was too low, as private investment is often crucial to get fledgling businesses off the ground. He’s also encouraged by the growing involvement of the Newfoundland and Labrador Angel Network, which recently marked its fifth year of operation.
“They’re just getting going. I really would encourage them and hope that it’ll grow, and perhaps one way of doing that is by establishing a fund,” he said. “Rather than having individuals invest in these companies, work together as a group; that way you get the benefit of being in a lot of companies. Because to be successful … you have to be in a lot of companies, because half of them are going to fail, and you don’t know which half.”