Niagara venture forum 25 jan-2011


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Breakfast session at launch of Niagara Angel Forum as part of the Niagara Venture Forum 25 January, 2011

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  • Thanks to Terry (and Nick who is on a cruise) for inviting me to share my thoughts on building a dynamic and thriving Angel Network ecosystem
  • Angel investing is a topic I’m pretty passionate about and a good thing, becauseFor young startup companies Angel money has moved from an alternate to the centre of the universeMy current activities, though born from necessityin my professional investing at Verdexus, are personally very rewarding particularly when we see the results possible from focused work to create a strong group in this domain.
  • This conversation is my life – I am passionately excited about the prospect of building things – products, companies, etc.I started as a technologist (degree in computer science and pure math) and turned that passion for identifying and building out new technology (mostly software) based innovations into business.My career has been almost totally in the areas of software and information technology, although I acted as a first outside director for a biotech spinoff a number of years ago.The relevance of my career is that I’ve touched almost all aspects of building things from technology to companies to financing them and in most forms.Well, yes, because the paths set by software businesses over the last couple of decades have set the stage for almost all businessesHave built from scratch (startups) to major public companies – Now, with a hands-on investment firm I founded, I’m building a small focused portfolio of companies through leveraging capital and strategic management experience we call it Venture 2.0.And, in the absence of Venture capital, have worked to help build out an Angel Network ReplacementSuffice to say, I’ve built a lot of businesses, raised a lot of money, had a lot of fun andProbably seen more permutations of situations than manyAnd entrepeneurs with similar depth of experiences are the types the New Angel Investing is attracting
  • This is an overall landscape. Relative emphasis has shifted, so old advice may no longer be relevantDuring my career, I’ve taken companies public, raised Venture Capital both in the US, Canada and Europe, and worked closely with Angel and strategic investorsInvestment is definitely not “one size fits all” but about evaluating alternatives, talking to lots of people and seeing what fits your particular needs at a particular time(ie. What worked 10-15 years ago not relevant. What worked in 2005 also may not be relevant)Talk about decline of VC as well as public markets in funding KBIsAnd how Angels and Angel Networks are filling the gapRecently neglected areas like gov’t funding and strategic investment has risen.Mention GPI, Bioenterprise, Communitech, etc. and EIRs but assume others will focus on this
  • Historically, Angel Funding often bridged the gap between Friends & Family and first institutional investment roundAlso called, VC Series “A” (because in US name of Series of Preferred Stock issued – A for 1st round, then B, then C)The recent near extinction of Ontario VC, especially Series A has left a gap that is most often filled by Angel-centred syndicates effectively replacing a Series A roundThis has many implications that we’ll discuss later
  • Canadian, and especially Ontario, VC ecosystem was young and still maturing by 2000 with the first tech melt downSince 2000, VC ecosystem never recovered, for the reasons I mention – Labour Sponsored and perhaps the skill set and even the lack of global moneyThe key point is that it was a 10 year decline, during a time of poor returns, rather than the 2008/2009 Credit Crunch that was the causeVenture Capital has issues globally as well, but is generally better funded and with fewer issues than right here in OntarioAs a result, we may be the least VC funded economy in the OECDAnd yet, startups not big companies, are the engine of future innovationTherefore, what was a personal issue for me, is also of regional, provincial and even national importance.I personally witnessed the meltdown of VC partners in our portfolio during 2005-2007 – led to a board room full of C3POs
  • Using an institutional discipline with:Strong lead or co-lead,Common term sheet, andCommon due diligence, Yet, largely because of legacy Canadian Securities regulations, with individual decisions, we’ve managed to evolve a hierarchy of players to get deals doneFirst there is the Angel syndicateThen, although we need to figure out how to make this streamlined and repeatable, there ist he possibility of syndication involving other Angel Networks from NACO or even MaRS Angels for special deals.And, lastly, based on lobbying efforts I was involved in, we now have many players aligning around the epi-centre of an Angel Term SheetSpecifically, Fed Dev = [Describe] has put almost $200 million into our ecosystem over the next 4 years.FedDev is probably the most important now, but Investment Accelerator Fund of MaRS is critical for deals involving strong IP portfolios
  • Further information about Series A ReplacementLess money, but more labour intensive, yet the deals get done.One niggling concern, is that long term, the key players remain unpaid and unfunded, which doesn’t seem to me to be sustainable. The irony is that all the players working around Angel Term Sheets are paid, while the angels are essentially volunteers.Is this the newest form of government “Donwloading”?
  • Having had some initial scepticism about the scalability of Angel investing, compared with private equity and VC, I can safely say that all parties benefit.We do deals differently, with some different goals. Like with founders, passion is as important as money. Angels are contradiction of disciplined focus and experience, coupled with an almost childlike wonder and enthusiasm for the great businesses they are helping shoot for the moon.It’s a heady mix that I urge all qualified people to consider.
  • Having had its first formal meeting in Sept 2009, GTAN is still a startupYet, by focusing on the fundamentals of great companies, investor members and deal discipline, the group has been among the most successful in the province.It’s a great base to start from, and admittedly, Waterloo-Wellington has a wealth of all the essential ingredients.That said, we have a firm foundation and the ability to build out a sustainable strategy to grow our initial efforts.The key challenge is that the Angel model is very labour intensive – a “labour of love” as it wereOf course, we believe that innovative founders will continue to provide great companies, in fact we have the luxury of choice and an embarrassment of riches in that regard.We also believe that we can continue to recruit more qualified, accredited investor members to stay ahead of investor fatigue.We are embarking on strategic planning to make sure we do stay ahead of the curve.It has been a fun ride so far, but admittedly one taking a huge commitment of time, talent and it would only work with a team of people up to the task.
  • Three key takeaways to leave with people:Wisdom (& Mentorship and experience) Trumps the Money InvestedThere’s Safety in crowds – ie. Syndication of Angels, mostly in angel networks is fabulous – also the new syndication with government and other institutional funding sourcesBack the winning, “A Team” – choosing the right team (and not just an individual) of coachable founders who genuinely want to work with Angels is 95% of the success.
  • Now for questions
  • Niagara venture forum 25 jan-2011

    1. 1. Angel GroupsDriving Future InnovationNiagara Venture Forum & Niagara Angel Network<br />Randall Howard<br />General Partner, VERDEXUS<br />Board member & Chair Selection, Golden Triangle Angelnet<br />
    2. 2. Agenda: Vision of Angels<br />“Angel Networks are bridging an unprecedentedfunding gap to accelerate innovative youngcompanies”<br />Who Is Randall? And why am I qualified to discuss this?<br />Where does Angel investing fit in?<br />Where has all the Venture Capital gone?<br />How is Angel syndication is filling the “Series A” gap?<br />What are the benefits of Angel investing?<br />What has been our experience with GTAN in Waterloo-Wellington?<br />Questions: responding to your needs<br />VERDEXUS © 2010<br />2<br />“A person starts dying when they stop dreaming”<br />Brian Williams <br />
    3. 3. Who is Randall? Why Should I Listen?<br />A passionate technologist & entrepreneurial serial executive<br />Who loves to build – innovative products and companies:<br />Directly involved with building a dozen technology based products<br />Involved with building a half dozen companies + 8 acquisitions<br />Involving lifetime revenues of almost $½ billion, millions of users<br />Now, with partners at Verdexus, investing using hands-on,“Venture 2.0” playbook:<br />To date have raised or funded $80 Million of VC, IPO and/or Angel investment <br />Yet, it’s not all about me. It’s about assembling and empowering great teams<br />And, by the way, I’ve made $10 million of mistakes<br />VERDEXUS © 2011<br />3<br />“Making the impossible, merely difficult”<br />Randall Howard<br />
    4. 4. Where Does Angel Investing Fit In?<br />In order of increasing structure:<br />Own money, friends & family and bootstrapping<br />Alternatives to conventional investment:<br />Government programs – e.g. IRAP, HRDC<br />Customer funding – consulting, funded development<br />Partnerships (e.g. Microsoft BizSpark), incubators, EIRs<br />Angels/high net worth (incl. Angel Networks)<br />Institutional (highly structured):<br />Venture capital and private equity<br />IPO and public markets<br />Strategic investors and corporate venturing<br />VERDEXUS © 2010<br />4<br />
    5. 5. Where Does Angel Investing Fit In?<br />VERDEXUS © 2010, 2011<br />5<br />*Source: Paul Connor, National Angel Capital Organization (NACO)<br />
    6. 6. Where Has the Venture Capital Gone?<br />Precipitous drop in Ontario VC fundingfrom $179 m Q3/2008 to $24m Q3/2009<br />Extinction after 10 year decline/low returns:<br />LSIF model – distorted market, then policy reversal<br />Wrong balance of operational vsfinancial skills<br />Few LPs, even fewer global, chasing small asset class<br />Healthier globally (US/Europe), yet issues there too:<br />Average US financings 2.5x larger than in Ontario<br />In Silicon Valley – “Series B is new Series A”<br />Current depressing situation: Ontario lagging world in funding innovative startups<br />VERDEXUS © 2010<br />6<br />“Constraints breed creativity”<br />Sergey Brin, Google<br />
    7. 7. How is Angel Syndication Filling the Gap<br />Angel Syndicates:<br />GTAN: $200K-$500K per funding (& sometimes more)<br />Typically 5-7 investors (and up to 15)<br />Individual investors range $25K to $200K<br />Syndication with 7+ other Ontario NACO groups:<br />Remains an ad hoc process<br />Government and institutional:<br />Fed Dev Ontario Investing in Business Innovation<br />OETF, IAF, OCE CCER, BDC all aligning w Angels<br />VERDEXUS © 2011<br />7<br />“Entrepreneur …has no safety net underneath them”Henry Kravis<br />
    8. 8. How is Angel Syndication Filling the Gap<br />Angel syndication = “Series A Replacement”<br />Series A traditionally $3-5 million (or more)<br />Example super-syndicated Angel Round $1-1.5 million<br />$500K Angel - typically in tranches & 5-10 individual angels<br />$500K IAF – structure, tranching & diligence led by Angel T/S<br />Up to $500K FedDev IBI + other government sources<br />Versus Series A: 30-50% deal size with up to 10x the effort<br />Risk is co-leveraged with less dilution:<br />Angel syndicate leaders are the unpaid centre<br />Funding legal, accounting, etc. more challenging<br />VERDEXUS © 2011<br />8<br />“Entrepreneur …has no safety net underneath them”Henry Kravis<br />
    9. 9. What are the Benefits of Angel Investing?<br />Benefits to the Investor:<br />Collegial collaboration of talented investors in Angel networks<br />Direct involvement in company, mentoring to help it achieve goals<br />Medium and long term financial rewards via exits, etc.<br />Benefits to the Company:<br />Value add of smart, passionate people who can make a difference<br />A longer term mindset than many institutional alternatives<br />Benefits to the regional (& provincial) Economy:<br />Innovative startups are the future economic engine<br />Significantly more job creation multipliers than alternatives<br />VERDEXUS © 2010<br />9<br />
    10. 10. What is the GTAN Experience?<br />Key success factors:<br />Select great companies, focus on Waterloo-Wellington<br />Recruit many “accredited investor” members<br />Focus on getting deals done with strong lead investor<br />Ultimately achieve exits to make cycle compelte<br />Process:<br />>150 companies w 75 at Selection & 46 allowed to present to members<br />10 meetings p.a. (15 so far) & 3 companies per meeting (46 so far)<br />Investors versus “service providers” at meetings; “who’s in?” <br />Results: 50 members, on way to 100, 10 deals done<br />VERDEXUS © 2010<br />10<br />
    11. 11. Agnel Networks – 3 Take-aways<br />VERDEXUS © 2010<br />11<br />1.<br />2.<br />3.<br />
    12. 12. Questions?<br />VERDEXUS © 2011<br />12<br />Contact: rhoward@verdexus.comPresentation:<br />“Turbulent times may well be the best time for an entrepreneur to start a new business”<br />