Capitalist Seeks Millionaire for Long-Term Relationship
Angel investors inject money and savvy into startup hopefuls
March 2, 2010
Early on a blustery November morning, 30 angels descend on SFU Harbour Centre. The angels—angel investors, people who put their time and money into early-stage tech companies—are mostly middle-aged, multiracial men who favour golf shirt/black jacket combos. Successful entrepreneurs, they’ve come to watch up-and-comers pitch the latest in medical devices and consider investing in them.
Mike Volker brings the projector online. He started Vantec—the Vancouver Angel Technology Network—in 1999 with 12 angels, and has grown it to 500. If there’s a larger such forum in Canada, he hasn’t heard of it. Vantec draws 30 to 50 angels each month, depending on the field. Today’s is medical technology. The economy has changed seismically since the network’s inception, yet Volker insists now remains a good time to invest in startups. “Before the recession, company values were well above $2 million at the get-go.” Since then, there’s been a 25 to 50 percent decline in the values of the companies coming out. “Angels used to invest at the quarter-million-dollar mark,” he says, but that has changed, too. “Angels are investing smaller amounts and there are more investors getting into a company.”
This morning’s lineup includes startups developing robotic vaccine-manufacturing systems, an ankle-strengthening device already being tested by the BC Lions, and a Star Trek-esque skin patch that monitors a patient’s vitals. The first presenter, a 20-something fresh out of business school, works through a PowerPoint on an HIV vaccine in the first stages of animal trials. The angels make notes but don’t seem impressed. Even if the trials work out, a lawyer in the third row whispers, the chances of any vaccine reaching production are 5,000 to 1.
Investments are risky. Almost half of all new startups fail and most of the rest survive only on life support. That leaves a mere 15 percent—such as $6 million Creo, which skyrocketed to revenues of $125 million within three years of angel help (and later sold to Kodak for a cool billion in 2005)—to compensate for the failures. The obvious challenge for angels: how to find the winners?
“Some investors use a shotgun to target investments,” says software whiz kid-turned-angel Greg Smith, who sits behind his MacBook in the back row. Smith says he prefers the rifle approach. “It’s like making movies,” he explains. “It’s a hit-driven business. I might not do 50 investments, but over my life I will do 10 and I might have two or three hits.” On the floor, a heavy-set businessman presents EnGene, a biotech company developing therapeutic protein, but it is too far out of Smith’s own field to grab his attention. He nurses his coffee and waits.
Whatever their strategy, angels want industries they are familiar with so they can lend their expertise. Smith is looking for an industry with a “really big fish,” a Google or a Microsoft that could buy out his investment for a couple of hundred million dollars down the road. For this to happen, he explains, the company needs to be in an industry that can grow, and there needs to be a flexible management team that he can get along with—these investments are long-term. Unlike venture capitalists, angels are often called on to inject cash into the business again and again. “You’re pretty much getting married,” he says. “It’s seven years before you get your money back.”
Troy Spracklin is up, pitching Edge Health Solutions, a company producing medical record software that he hopes to dovetail with Barack Obama’s resolution to digitize American health clinics. Like his presentation, Spracklin is slick and professional. He’s already inked an agreement with the biggest medical software company in the world and is sitting on an exclusivity deal with Macintosh. He also has a few war wounds, something Smith likes to see. Back in 2008, Spracklin was just $400,000 short of a full-scale launch. Two hours after the investment was confirmed, disaster struck. AIG crashed. His investors lost everything. Today Spracklin needs $2 million for a web-marketing blitz to muscle Edge Health into the American market. He fields a barrage of questions from a tall, booming man named Gary Yurkovich, who has invested in medical informatics before and knows the business. As the two spar, the room crackles.
The meeting ends, and the consensus is that Spracklin—who used to design armoured vehicles and Navy subs—has the technical aptitude and business savvy. And Edge Health is in what Volker calls the “angel investor sweet spot”: the right technology and management team in the right stage of development. Two months later, Yurkovich will call up Spracklin and arrange a lunch to discuss finances and market positioning. They get a feel for each other. One more step in the angel’s careful dance.