Red Herring says Angel funds out-perform VCs

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In a posting today , Red Herring reports organized angel groups had an average 27 percent IRR, as opposed to VC firms, which are usually in the mid-teens.I think the study is generally accurate, but I do note that one of the sponsors was the Angel Capital Education Foundation.

What does this mean for us here in Alberta?

Well, the vast majority of funding in Alberta is angel money. We have very few active VCs in the province. Most of the angel investing here happens under the radar, and most of it is oilpatch-related. It’s not uncommon to see 4 ol’ oil buddies get together and put money into a new through-the-web SCADA scheme or some such other oilpatch-related idea.

Most of these “shadow” investments are very successful. I don’t have scientifically-gathered numbers, but my running “head count” says these deals are extremely successful, and generate an IRR better than the ones noted down south. I don’t have real numbers because most of these deals are completely invisible.

But it does tell the tech entrepreneur something: you have to be exceptionally clear and focused in order to compete with that kind of thing. Since you’re most likely working in an area outside the domain knowledge of the “shadow angels”, and since you are probably competing with ‘patch-related deals for the same dollar…. You get my drift. You’re going to have to be clear, focused, and exceptionally good at demonstrating the profitability of what you propose to do.

If you want a hand with this, let me know. Tuning presentations is one of the things we do best at CTI.

kgraves@calgarytechnologies.com.

November 14, 2007 | Registered CommenterThe Startup Guy

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2 Responses to “Red Herring says Angel funds out-perform VCs”

  1. The Startup Guy Says:

    Once again, statistics boggle the mind! And, in this case, we get a self-interested proponent of those statistics to promote them.

    My experience (as an angel / venture capital investor) is that I get to watch angel deals go sideways, purely from a lack of experience on the part of the capital providers. There is tremendous value in having “been there, done that”. And the school of hard knocks is a great teacher. Unfortunately, some angels lack that experience, and I’m always willing to share my experiences (and some are limited, and some are not good news) in any funding situation. It’s about building expectations into the risk / return relationship.

    Like any information, you have to question the value of the data being provided. How many angels or angel groups like to share their failures, as opposed to their successes? I would bet the broad array of “angels” in Alberta, having earned their money in resources, or real estate, or services, and attempting to diversify with a “big hit” in technology investing, walk away somewhat wounded financially. And their financial experiences do not appear in any database.

    This is where angel groupings can add value; that is, in ensuring that these investors broaden their technology investments, and, in the face of distress, live to invest in more technology companies — not retreat from the sector.

    Any investor in Canada (except for the labour-sponsored venture capital funds, or specific segregated funds) need to understand the financial return yardsticks provided by the resource industry. Bear in mind that resources are a risky investment, fraught with volatility. So an educated investor will invest in other sectors, even in good resource times, with the realization that diversification is key to any portfolio — especially an early-stage portfolio!

    There is a surfeit of capital available for investment in Alberta. Any investment will have to meet the criteria required of an investment in the stage at which it is situated. Yes, an early stage investment is competing with resource companies — and also with trucking companies, and construction companies, and banking companies. That competition is natural and a requisite of any marketplace.

    What skews our opinion of the marketplace is the entrance of government funds, or their proxy in many Canadian jurisdictions — labour-sponsoured venture capital funds. We, as citizens and taxpayers, as well as investors and investees, need to recognize that these “cheap” funds that are available in other jurisdictions are, in fact, government subsidization. And nothing screws up financial decision-making better than arbitrary government intervention in the financial markets. And government-subsidized technology companies leave home for bigger bucks far more easily than other companies.

    And — as a corollary — let’s recognize the government incentives given to the resource industries. So the “level playing field” argument has to go both ways.

    The best thing, I believe, for angel investors:

    Diversify your early stage financings with groups of investors of similar risk / reward profiles as yourself, and hopefully, some investors with whom you can share due diligence undertakings.

    Likewise, for investee companies:

    Recognize the risk you are asking your investors to take on, and reward them for it appropriately, in light of their alternatives in the financial markets. This is always a moving target.

    January 2, 2008 | Greg McLean

  2. The Startup Guy Says:

    Greg is making a couple of key points to angel investors.
    – the need to work within an angel group to share due dilgience, deal terms and post investment issues
    – the need to diversify among various industry sectors and over at least 5 companies and preferably 10.

    Both entreprenuers and investors may want to consider the advanced company or investor workshops offered by us in Vancouver. See wwww.ANGELforum.org

    January 7, 2008 | Bob Chaworth-Musters

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