Chris MacDonald: What I’ve Learned About the Angel Investing Industry
Chris MacDonald is a Sauder School of Business student who interned with the Open Angel Society in Vancouver this summer. We asked Chris to reflect on what he learned about angel investing during his time at Open Angel.
My name is Chris MacDonald and I’ve had the pleasure of working with Open Angel this summer as an intern on a portfolio valuation and indexing project.
Starting out, I had preconceived notions of what the valuation of a company looked like. Courses on mergers & acquisitions, advanced corporate finance, portfolio theory, and capital structure that I’ve taken in my MBA program provided me with a structured theoretical approach to discounting future cash flows for companies to come up with a net present value. This, I soon found out, had little functional value in the complex world of pre-revenue startups and angel investment. These companies were not easy to categorize - many did not have established cash flows, and by the nature of their businesses needed to exist in very unique niches.
I had a lot to learn. Here are some of my biggest take-aways.
Lesson #1: Angel Investing is Very Different Than Venture Capital
Not enough emphasis is placed on verbiage in finance, in my opinion. Coming into this internship, I had the perception that angel investment and venture capital were the same thing. This however, is very off base.
Companies that seek angel investment are past the “bootstrapping” stage, and have exhausted all the “friends and family” money they have been given. They’re not quite ready for venture capital money, as venture capital firms will require a certain amount of revenue and a clear road to either an IPO or an acquisition within a certain time frame. Most companies that are pre-revenue or with small revenue numbers will need angel money to continue to grow, before looking at venture capital.
Lesson #2: Angel Investment Matters: Startup Companies Are Made (Or Die) By Angel Investment
Some companies don’t need angel investment. You know, the kind that are started by millionaires.
For every other startup, the gap between “friends and family” money and venture capital/exit can be quite the massive chasm. The period of time in which a pre-revenue start-up remains pre-revenue or minimal-revenue often dictates how much money will be needed to sustain operations and grow.
A healthy ecosystem of angel investors — high net worth individuals who want to get on board early with a company or group of companies they believe in, is necessary to support pre-revenue startups through this funding gap. Tech startup hubs such as Silicon Valley have a healthy, growing ecosystem of companies and investors. Other regions such as Vancouver or Toronto or Seattle have smaller ecosystems, each with their own set of problems — ironically, this leads me to lesson #2.
Lesson #3: A Significant Funding Gap Exists in Vancouver (and in Canada)
The Vancouver tech startup scene has been growing for the last two decades in the shadow of Silicon Valley and Seattle. Many angels may exist, but problems such as a geographical dispersal of angel investors to a lack of the right environment for companies to pitch to these angels is apparent.
The private sector and federal/provincial governments have been working to address this problem. The tech startup industry owes a significant debt to the Canadian government which, in recent years, has increased spending on different government-funded organizations mandated to bridge this funding gap while creating jobs and economic growth through new ventures (i.e. NACO, IRAP, etc.). Here in BC, the provincial government has also joined the game with BCIC, BCTIA, etc.
Private sector organizations supporting the angel investing community such as Open Angel have played an important auxiliary role in growing the Vancouver tech community. Open Angel provides the right platform for angel investors to (1) feel like part of a community; (2) see presentations from a curated group of start-ups at an “investment-ready” stage; and (3) ultimately write cheques to companies.
Lesson #4: Companies Are Worth What Investors Say They’re Worth: Supply and Demand of Money Dictate Valuation Ranges
This is probably one of the biggest “ah hah” moments for me — the realization that the most important indicator of how much a company may be able to raise is directly linked to how much money is available in the investor pool the company seeks out. Stated differently, the supply and demand of money and the number of deals available is what drives the underlying valuation of companies in a given area.
In Vancouver, generally good companies will not have a problem raising money. Companies such as Foodee and Hootsuite have been able to obtain significant funding rounds, and are growing at breakneck speed. These two companies are examples of the few large successes of the Vancouver tech scene.
That said, many companies with good ideas and proven business models do decide to go south to Silicon Valley to raise money. There are many reasons for this, but generally these companies decide to do so because (1) it is easier to raise money in Silicon Valley due to the sheer amount of money available that is chasing deals; (2) the ecosystem of successful billion-dollar companies in Silicon Valley is intoxicating to founders and funders alike; and (3) having access to potential advisors or board members that have run billion-dollar companies is a huge sell.
Driven primarily by the number of investors seeking deals, a Vancouver company that has a great idea may receive two or three times as much money from investors by deciding to move to Silicon Valley. Thus, many questions about how to “plug the leaking ship” or add more investment capital to the pool in Vancouver remain, and a healthy discussion exists here. I’ll leave this discussion for another blog post.
Lesson #5: A One-Billion Dollar Company Is Worth A Lot More Than 100 Ten-Million Dollar Companies
This is another massively important take-away for me. As per my previous “ah hah” moment, having a real robust network of other companies that have “made it” is necessary for startups in an area to believe they can make it too. Many startups in Vancouver or in Canada may exit too early, due in part to the lack of shining examples for these companies to point to, as well as a lack of industry expertise in getting companies from $100M in sales to $500M or $1B in sales.
The discussion around mature companies worth $100M or $1B and above may not seem, on the surface, to have anything to do with angel investment. This, however, could not be further from the truth.
Angel investment relies on the belief that an exit (either an acquisition or IPO) will be possible. Having an ecosystem of billion-dollar companies in Vancouver would have tremendous impacts on much smaller companies. First, these billion-dollar companies have a knack for acquiring small startups, providing angel investors with more ways to get their money out of deals. Second, these companies have gone from $100M to $500M or $1B in size, and thus can advise other companies that may be getting close to this stage in how to successfully get there. This significantly increases the chance of an IPO or outside acquisition for the growing company.
It has been a pleasure working with Open Angel, and writing this blog post has been a fantastic way for me to share my experiences with you while making my own personal “journal entry” with my key take-aways I can look back on in the future.
Happy investing!
The Open Angel Society is a non-profit dedicated to connecting founders & funders. We run investment dinner pitches and investor only socials, and work to increase the cohesion and awareness of investable companies and angel investors in local markets.
