Most Every Deal Is Not a Venture Deal

VA Angels’ CEO Randy Thompson writes a column for the Calgary Herald. Here is one of those articles.

February 22, 2013. 6:23 pm • Section: Business, Technology

I used to have some real energy around trying to get myself into the Venture Game – to the point where two partners from the Valley and I put together Argon Venture Partners in 2007. We raised some LP commitments and flew around North America, pitching to Limited Partners (LP’s) in Ottawa, North Carolina, “the Valley”, gathering commitments from Manitoba, Edmonton, and Wisconsin.

However, being completely honest, playing the Venture Game was a way of trying to get some infrastructure around my angel portfolio… I frequently find myself in scramble mode, looking at new deals while tending the existing garden and doing some gigs on the side to keep some cash flow, as opposed to having real passion and belief in the Venture model, which has been proven to be broken for over three quarters of the Venture industry.

Therefore, inside VA Angels we don’t see a lot of “interweb” companies – the last true bastion of the VC funding model.  66% of our deal flow is tech, but it is divided between hardware (companies like Genesis Technical Systems), software (Mobile Data Tech) Med Devices (Innovative Trauma Care, Picomole, Monteris), interestingly some Biotech (we are currently looking at Indel Therapeutics)and of course the Alberta favourites, Energy Tech (Petrojet, EnerTech Solutions).

What I like about this type of portfolio is that each of these deals has given the investors unique exit opportunities. Obviously in the Angel space the usual is to have a startup purchased outright by a large technology company, but separate from the Venture model, the Angels in our community have:

1) Gone public twice

2) Sold patents once

3) Received dividends on debt twice

4) Invested in a game development fund to get quarterly returns

5) Sold shares to investors who bought in a subsequent round and gave the angels a 5x return

6) Sold outright three times

There is a great article on Venture Math by Mark Mcleod, formerly of Real Ventures in Montreal, but when you truly understand the VC model you understand how limiting it is from an exit perspective. You also understand how it constricts what type of deals can be done and how those deals are structured. I do not want this construed as a shot to VCs.  As I truly have an immense respect for the approach and the exits. The objective of VC is to build massive and global companies as much as it is to build a massive exit.

The amazing part about being in the Angel space is that the returns can come in a number of different shapes and sizes, and really the objective is the preservation of capital for the individual investor as much as it is to obtain spectacular returns. Hence, the investment decisions come from a different space. Jevon Macdonald from Startup North also commented this week on the difference between tech entrepreneurs who become investors, and investors who are doing their first tech deals. I agree with him on the differences – they aren’t subtle. It’s hard to invest outside of what you know, but here in Canada in order to support innovation, we need non-tech investors to help change the country by investing outside of the energy, finance and mining spaces that have sustained us to date. The downside? Real money, lack of trust.

The huge downside to the angel approach… VC’s have a solid infrastructure for due diligence, and usually the larger the fund, the better the access to these resources. Probably more importantly, when you lose as an angel, it’s your money.

This means as an entrepreneur you have a massive responsibility when you take angel money. There is a fragile trust between these angel investors and the tech entrepreneur, and if you the entrepreneur screw with that trust, you take investors out of the ecosystem.

Nevertheless as a tech entrepreneur the Canadian angel is a great source of capital!

1) It’s Versatile: It can take the form of debt or equity. It is looking for a multitude of exit opportunities, and it comes in very early in the funding cycle

2) It’s Supportive: This one is a double edge sword. In my opinion, while you the entrepreneur has easy access to capital because investors want to support you, the lack of due diligence, mentoring or oversight means that you are often not held accountable enough.

3) It’s Available: I truly believe this. I think Canadian entrepreneurs have easy access to capital for the right deal. I’m of the opinion that if you can’t raise money in Canada it has more to do with the quality of the deal or your lack of understanding of the funding process than it does with the lack of investors.

Number three above is a major point. Because if you are an entrepreneur, you’ve already found out that most deals aren’t Venture Deals.

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