Angels vs VCs, CPC Update, Telus New Ventures BC, Manning Awards, and 1188 W Georgia. A monthly column focusing on new and emerging BC publicly listed technology companies     Technology Futures:     October 1, 2004 By Michael Volker Angels vs VCs, CPC Update, Telus New Ventures BC, Manning Awards, and 1188 W Georgia. Angel investors and Venture Capitalists square off There's a growing tension in the early stage investing game. Angel investors and Venture Capitalists (VCs) are becoming increasingly antagonistic towards one another. Earlier this week, I attended the National Angel Organization's (NAO) - see www.angelinvestor.org - annual summit conference in Calgary. This was attended by active angel investors across the country as well as angels from Silicon Valley, notably from the well-known Band of Angels. This VC - Angel tension was quite apparent. In one presentation, a well-known Vancouver VC made a presentation comparing angels to VCs. After her talk, an angel in the audience said, "You sound just like a Venture Capitalist!'. She responded by saying, "That's because I am a Venture Capitalist"! This is a revealing comment. It tells me that perhaps angel investors don't have an appreciation of how VCs work and what their mandate is. That's why I thought I'd muse on this with a view to elucidating the subject for entrepreneurs seeking investors. Venture Capital is an industry that is run by professional managers - MBA types who understand investing and whose mandate it is to maximize the return on their investors' capital. ROI is their primary motivation. Angels are successful entrepreneurs who've made a few bucks in their businesses and are now willing to support nascent ventures by providing them with capital and often, also with mentorship and guidance. Some guys, like Mike Satterfield of Yaletown Ventures, started off as entrepreneurs then became angels and are now VCs. Others like Mike Brown started off as VCs (creating Ventures West) and then became angels. Now Mike hates VCs. What's going on? Unlike most VCs, Angels know what it is like to be an entrepreneur. They understand what it's like to take huge financial risks, mortgage one's home, spend countless hours working for peanuts in anticipation of a big payout. They understand the tradeoff between personal income and building a tangible asset of value. Because Angels identify with their proteges, and because Angel investing is more of a hobby than a business, they tend to be far less demanding with respect to their ownership stake and other rights pertaining to their investee company. The most common mistake angels make relates to the "valuations" question. They rarely drive a hard bargain. Because they expect many-fold returns - in the 10X to 100X range - why sweat about getting 10% vs 5%? They also don't demand certain shareholder rights or require founders' vesting provisions and the like. In short, their too easy. You'll often hear VCs - a good example is local VC firm - BDC (funded by us, the taxpayers), claim that they do indeed invest in early stage companies. This is not the same as investing in a start up. What's the difference? In a startup there's little more than a body or two with a great idea and a vision. In an early stage company, there may not be any revenue, but there's a team, solid intellectual property and a detailed business plan. VCs will invest in such a company. They will not invest in a startup - that's angel territory. So, what's happening is that angels and founders work together to get companies to the point where they require substantially more capital. That's when they start talking to VCs. Of course, VCs being more focused on ROI generally drive a much harder bargain with respect to valuations. Indeed, their valuations are often lower than those previously agreed to by angels. When angels invest $500K (a typical number) in a startup, they can expect to get 10%-40% of the company. But when VCs enter the picture, they usually invest a minimum of $1 million and more likely $3 or $4 million (much higher south of the border). Hence, it's very unlikely that they'll give a firm more than a $5 million valuation - regardless of what the company has to offer. In fact, one VC speaker at the NAO conference flatly stated that "all" of their "Series A" (aka first round VC investment) investments are done at $5 million! This means that for the angels who went along with higher valuations will feel squeezed ("crammed-down") and will end up being substantially diluted and will even suffer a paper loss on their investment, blaming VC greed for their misfortune. Then, VCs will go on to extract very onerous terms (the notorious "terms sheet') which give them - to the exclusion of the early angel investors - all sorts of rights with respect to future financings in order to protect their interests. Often, when an exit does occur, they can exercise these rights and end up with taking 80% of the value that's been created. But, hey, that's their job. That's why VC firms are flush with capital - even though many have suffered from poor performance - to the extent that the proven ones are turning investors away. Vancouver's Ventures West recently raised another $250 million to invest. This is large by Canadian standards but considered a small fund in the USA. Where will they find enough deals in which to place that capital? And, that's another problem - deal flow. VCs complain about the lack of quality deals in which they can invest. Well, no wonder - if no one other than angels is seeding the startups, where will the deals come from? That's why Angels are so important in this continuum! There's a view that angel investing, like VC investing, might become an "industry" in its own right. What concerns me greatly, though, is that as angel returns go, the results are very disappointing. In one presentation, it was noted that of 180 angels in the Band of Angels, more than 120 have yet to enjoy any return on their angel investments! It turns out that, on average, angels invest in three of four deals. Therein lies the problem! In order to get the big winners, my own experience (and that of research firm, Thompson Venture Economics) has shown that you have to have a portfolio in excess of 15 deals! The solution? I believe that (and this is emerging as a trend) angels are starting to work together in groups on specific deals. Angel capital pools or angel funds are another way to go. Such funds can better play the numbers game while still allowing their investors to co-invest alongside their deals. That's the model that I'm using in  WUTIF Capital (VCC) Inc (see www.wutif.ca), a small angel fund based in Vancouver that will invest in dozens of tech startups over the next few years. Another startup fund, BC Advantage Funds (VCC) Inc. will also invest in pre-VC companies. BC Advantage's capital comes from public investors - similar to those that invest in labor sponsored funds - but who wish to get in "earlier". One item of business for these startup funds is to develop a standard "terms sheet" for startups to avoid some of the affore-mentioned issues when larger investments are required. Speaking of terms sheets, there are some really goofy ones going around. On one day last week, I saw three terms sheets that all used a convertible debenture or convertible preferred share form of investment. These are becoming, regrettably, more common. This goes back to the valuations issue. Because entrepreneurs and angels shy away from dealing with the issue, they defer to the Series A round valuations. Here's how it works: Angels put $500K into an instruments which converts into shares when a first VC-round investment is made at a pre-determined discount, say 20% or so. The rationale is that this gives angels some benefit from being first in. I don't like it. It can cause even greater problems and anxieties down the road. It also runs contrary to giving angels the 10X to 100X returns that they deserve by capping that figure. It makes more sense to me to agree to a "reasonable" valuation at the outset. When I first started doing angel investments in the 80's, I used a very simple approach which worked very well. I was negotiating with a couple of Waterloo companies - now very successful (one was RIM). For the capital that I offered, one company suggested a 10% stake. I agreed that 10% was reasonable of they could "guarantee" the company's business plan. After all, an angel investor is trading a present cash value for a future promise. I suggested that the company give up 15% but that if certain business plan milestones where achieved, I would be amenable to returning 5% to treasury. This worked. In 18 months the company was doing well and we both ended up with a "fair deal". Company founders were rewarded by their performance. Instead of them worrying about dilution, I worried about "accretion" - a far more positive approach! Finally, for entrepreneurs seeking an angel, a must-read book is Guy Kawasaki's, the Art of the Start - a book which neatly and refreshingly summarizes what most angels already know and what entrepreneurs ought to know when pitching their deals to angels and other investors. Guy spoke at the NAO conference and struck a cord with angels. For more info on the book and Guy, check www.garage.com. Entrepreneurs take note! Footnote - September's Vancouver Enterprise Forum event focused on early stage investing. Two local entrepreneurs - Richard MacKellar and Glenn Bindley shared their experiences in dealing with angel investors and VCs. Their presentations are available on the VEF website at www.vef.org. CPC Program Update Angels and Venture Capitalists are not the sources of capital for technology ventures. In this column, I've frequently commented on the pros and cons of going public on a junior stock exchange and raising capital from the general public. My favorite example of this is QLT Inc. - the highly profitable and successful UBC biotech spin-off that started off on the TSXV's predecessor, the Vancouver Stock Exchange - trading for pennies at the outset. Of course, there have been dozens more since then, including many successful ones that chose this as an alternative to dealing with VCs. Raising capital from the general public is, my my view, a grossly under-utilised mechanism. Why not share the high risk associated with a tech company (yes, they are very risky!) among many investors (speculators)?. A large percentage of our population has the propensity to invest relatively small sums, say less than $10,000 per person, on speculative deals. Who wouldn't want to be in the next QLT Inc or Angiotech? It's just a pity that this process is so fraught with red tape precipitated by the abuses we've seen in corporate America. To make the process of a public offering a little easier, the former Alberta Stock Exchange back in 1987 invented the so-called "blind pool" company now re-invented as the TSX Venture Exchange’s Capital Pool Company Program (CPC). Many CPC's have been formed to help tech companies raise capital. I used to track these in this column but stopped doing so when the public market cooled off after the dot-com euphoria. Over 1,500 companies have listed through the CPC program and more than 170 former CPCs are now trading on senior exchanges, including Aastra Technologies, Boardwalk Real Estate Investment Trust and Garda World Security Corp. and numerous technology ventures. Not only is the CPC program an alternative vehicle to the traditional initial public offering (IPO) or reverse take-over (RTO), but it brings management teams with public financing ability together with companies requiring capital and public company expertise. Over the years, the parameters of the program have evolved and that's why a little update is in order. So, how does it work? There are two phases to the program. In the first phase, three to five seasoned directors and officers with significant experience working with junior public companies invest between $100,000 and $500,000 in seed funding and then raise up to $1.9 million to a combined maximum of $2 million through a CPC prospectus offering. The CPC has no commercial operations or assets (other than cash). Retail investors participate in these offerings based on the successful track record of the management team. Then in the second phase, the CPC management team has 18 months from the time of listing to seek a private company with significant growth and market potential to complete a Qualifying Transaction (QT). In essence, the target private company carries out a reverse take-over of the CPC. Once the QT is complete, the new company trades as a regular listing on TSX Venture Exchange and can complete another financing to fund the company’s growth strategy. Unlike an angel pool of capital which invests in many companies, a capital pool corporation takes a rifle shot approach by attempting to identify one company as a potential winner and then getting behind it. The main challenge is to find that winner - which may not be easy. Many CPCs fizzled because they could not do so in the 18 month time frame. Currently there are 55 CPCs that have not announced a QT. The CPC program should be of interest to Venture Capitalists looking for creative financing structures for portfolio companies, Angel investors seeking greater control over the growth of their investments, advisors with clients seeking alternative investment of financing opportunities, and private companies such as: industrial companies with unique proprietary products and potentially large markets, a services business with a number of prime candidates for consolidation, resource companies with opportunities to expand with acquisition, software companies close to commercialization with a potentially large user base, and biotech companies with outstanding platform research. Some advantage of going public are: access to capital, growth buy acquisition (using shares vs cash to acquire a company), retaining control and effective control (i.e. no major investors like VCs dictating to management), public visability/reputation, rewarding management and employees with stock options. To, learn more, just give the friendly folks at the TSX-V a call at (604) 689-3334. Telus New Ventures BC Winners A North Vancouver company with a new lithographic plate processing technology for the $50 billion North American offset printing industry is this year’s winner of the BMO Bank of Montreal $60,000 first prize package in the TELUS New Ventures BC competition. The technology was developed by Douglas Manness of Vectis Technologies. A former product manager for plate line equipment at Creo Inc., Manness’ new plate processing technology improves printing quality while reducing costs. It uses fewer chemicals, is self-cleaning and improves etching control for more consistent plate development. TELUS New Ventures BC is one of North America’s largest technology business competitions. The four-round competition attracted 83 BC entrants last April. Over the past six months teams participated in business education seminars and networking events, as they worked mentors to polish their business plans. To win, competitors must convince a jury of venture capitalists, financiers and angel investors that their business idea is commercially viable and that they can execute the idea in the marketplace. Three winners shared $120,000 in prizes at an awards ceremony September 24 in Vancouver. The winner of the $40,000 second prize package is SST Wireless Inc. of Kelowna for its new tire pressure monitoring system. Based on break-through radio frequency technology, the system alerts drivers when their tires are not at the optimal tire pressure. The technology is built into a tire pressure valve and will be distributed as an after-market product. Aquassure Bath Products, also of Kelowna, won the $20,000 third prize package for an elevated bathtub with a patented, waterproof sliding door. People using wheelchairs or walkers or who have disabilities can simply transfer into the bathtub and sit comfortably submerged with their legs extended. Jury member Donna Bridgeman, of Growthworks, says the 2004 competitors, representing an eclectic range of technologies, presented the best group of business plans she’s seen since the competition began four years ago. The annual TELUS New Ventures BC competition is operated by the non-profit BC Venture Society and made possible through the generous support of both private and public sponsors as well as volunteer mentors and judges. Manning Awards honour BC Entrepreneurs Tonight at the Fairmont Hotel Vancouver, Canada's prestigious Ernest C. Manning Manning Awards Foundation will honour several outstanding Canadian innovators. The program will be highlighted by the presentation of the prestigious $100,000 Principal Award to a Vancouver entrepreneur and will be emceed by another innovative Canadian, Preston Manning. National in scope, the Manning Innovation Awards was established to recognize and encourage Canadians who have made outstanding contributions to our country through their innovative achievements.  The substantial awards program also includes the presentation of the $25,000 Award of Distinction, two $10,000 Innovation Awards, one of which will go to a pair of Vancouverites, and four $4,000 Manning Young Canadian Innovation Awards. Since the awards program was inaugurated in 1982, there have been 17 Manning Award recipients from British Columbia including 7 Principal Award winners.  On a per capita basis, substantially more winners are from B.C. than any other province. Murray Goldberg of Vancouver will receive the $100,000 Principal Award for his development of WebCT, the world's first and most widely used course management system. This year 10,000,000 students in 85 countries will use WebCT as a daily part of their educational experience. Evian Macmillan and Ian MacDonald of Port Coquitlam solved the number one problem in restaurants with "Table Shox" the patented solution to wobbly tables. They will receive the $10,000 Innovation Award. Add 1188 W Georgia to your address book That’s the new address for a whole whack of industry orgs that are now co-located in one handy, central location at 1188 West Georgia St in downtown Vancouver. The list includes the Innovation and Science Council of BC, formed as a result of the recent merger of the BC Advanced Sysytems Institute and the Science Council of BC, the BC Biotech Alliance, Leading Edge BC, The BC Technology Industries Association, WIN-BC, Social Venture Partners and many more! Talk about one-stop shopping! Drop in sometime and find out what's going on in the science and technology sector in B.C! Business Centre for non-downtowners If you don't have a Vancouver "office" but find yourself downtown occasionally without a "home", you are invited to use SFU's TIME Business Centre. TIME is an acronym for Technology, Innovation, Management, and Entrepreneurship. The Business Centre (looks like an airport business lounge) 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!  If you're an entrepreneur looking for a place to get your company started, there's some great office space available at the TIME Centre. There's also access to various resources, e.g. tech advisors, access to capital (e.g the VANTEC Angel Network), mentors, etc. Worried about the high cost of being downtown? Well, not to worry - some payments can be in the form of equity. Check www.sfu.ca/time for contact info. WUTIF...you wanted to invest in a tech startup? The Western Universities Technology Innovation Fund (WUTIF), is an "angel fund" catering to tech startups based in BC (not limited only to universities). WUTIF Capital is a VCC that offers investors a 30% BC refundable tax credit. If you're keen to co-invest with angels in up and coming companies, this is a good way to get started. Check www.wutif.ca for details. Pooling and risk-sharing is the way to go! Michael Volker, a technology entrepreneur, is Director of the University/Industry Liaison Office at Simon Fraser University, past Chair of the B.C. Advanced Systems Institute, Chair of the Vancouver Angel Network and past Chair of the Vancouver Enterprise Forum. He owns shares in many of the companies he writes about. Copyright, 2004. What Do You Think? Talk Back To Mike Volker Tech Futures is a bi-weekly column that focuses attention on new and emerging BC publicly listed technology companies.  Contact: risktaker@volker.org Tech Futures Archive T-Net 20 High Tech Stock Index B.C. High Tech Links