David posted a pretty in-depth piece on the First Angel Network this week. This followed an awesome discussion on TechVibes about angel groups over the weekend. The structure and funding model for First Angel Network were a pretty big surprise to me when I moved to Halifax 3 years ago.
Frankly it is pretty easy for us to write a post like David’s because the facts really speak for themselves: Millions of dollars from government sources are flowing in to finance what appears to be the exclusive personal gain of two individuals.
$3000 + 8% is just not acceptable and what makes it even worse is that the 8% does not contribute to the growth or sustainability of the angel group in any way. ACOA and other agencies are the ones paying to maintain the group while the cream is skimmed off the top.
My guess is that the First Angel Network will tell you that their model is normal and that it is on par with what is happening elsewhere. Simply put: it isn’t. It is artificially sustained, it is egregious and the model needs to be wiped out.
Shortly after David’s post went live I had a call with one of the most active angel investors in Atlantic Canada. He’s someone I admire and who always seems to be a step or two ahead of my own thinking. When he speaks I try to listen (which means I have to stop talking. . .).
He doesn’t have much love for a model which skims off the top either, but he’s pragmatic too.
His question to me was: If not First Angel Network, then how do we keep money moving?
Angel groups are not an easy thing: There are large groups of willing but relatively unsophisticated investors out there. They have to be marketed to, rounded up, fed a decent meal (usually) and encouraged to focus while a startup pitches to them for an hour or so total. Not easy and it certainly doesn’t have obvious economics for the organizer. It is a tough model no matter which way you slice it. The question is valid and it is something we need to think about a lot.
The world of tech startups is, or should be at least, different in many ways however. I believe it HAS to be different.
Sophisticated tech angel investors are accessible and they are ready to do deals almost anywhere. Value-add investors will, by definition, be accessible to the network and available to look at deals. We have a significant opportunity here in Atlantic Canada as well because we have some of the best angels in the country living and working here.
The landscape is changing for seed investing in tech and I think we need to find new models which make more sense for a typical startup today.
- There are many individuals investing regularly in extremely early stage opportunities in New Brunswick and Nova Scotia
- There is far more information available to entrepreneurs about financing structures and models than there ever has been before
- 10s of Thousands of investors are accesible via AngelList and other sources
- The ecosystem is larger than just these few provinces– we are easily connected in to what is happening in other communities.
- Legal and other fees should be minimal. Startups should be able to get a round closed for $5k with a max of $10 for a complicated and priced round.
- Early stage capital IS flowing in this part of the country from more formal funds such as OMERS, Rho, Real, Version One Ventures and others.
- There is a new fund coming online here which will be leading deals and syndicating with outside investors.
Alternatives will emerge once there is a void to fill and I believe that capital will still flow to great opportunities, while we may have to watch some less awesome ones whither.
There is a loose syndicate of angels emerging in this part of the country and from what I have seen they are all extremely high quality. It is a group made up of exited founders, successful investors and quality operators. THAT is who should be seeing deals and they do far more than 4 deals a year– dozens are getting done.
In the end the challenge we have is not simply to tear down the old. The challenge is to take responsibility for building something that matters in the future and that will create more startups through a better model. I believe that First Angel Network’s model needs to change to become less predatory and more focused on creating value in the ecosystem, otherwise we need a new alternative to replace it.
That is our job here and that is what will really make a difference.
Right now we have the beginnings of an alternative:
- AngelList is an amazing network which can be used to access outside investors and which already lists over 1000 investors who have interest in the region
- Democamps
- Founder’s meetups (which there are at least 3 of in Halifax and I suspect more elsewhere)
- Launch36
- Gateway investors like Dan Martell and Gerry Pond (they access big syndicates)
- Well connected and clued-in service providers like Robert Cowan (please share any others you can vouch for in the comments)
These are all founder-friendly and accessible routes to getting access to early stage capital. None of them take 8%.
It’s not perfect, but we will get there.
Great post Jevon and it explains the current situation well. I think it comes back to smart money vs just money. FAN is a shield for rich folks who are passive investors. I’d add East Valley Ventures team to the list.
@jevon:disqus there are some other great startup service providers out there in the region. Christian Weisenberger of Beyond the Box Law is a fantastic startup-side lawyer. He charges on value rather than minutes and plays a key role in helping with startup financing and governance (he’s also an MBA and level II CFA).
I just came across Chad Davis of Silver Thatch Accounting who helps startups set up and connect all of their cloud based applications (Xero, Google Apps, Salesforce, etc). He also charges on value and can provide ongoing consulting accounting services.
Keith Abriel is an amazing local startup CFO who fits in the same vein as the guys above. With all, startups avoid the significant overhead that comes with working with a large firm.
Big firms do have their place to play, especially in deep technical areas such as IP value creation and customer / partner contracting.
At innovacorp, we’re constantly scanning the market for great new services providers that understand startups and charge fair, value based rates because we hate seeing the dollars we invest go anywhere except to grow the company.
We also try and play a helpful role in providing startups with early-stage capital that they can leverage to bring in top quality angels and higher tier private investment firms. We’ve certainly seen this with some of our recent transactions. We’re very pleased to be working with EVV and OMERS on Leadsift, EVV on InNetwork and Vinod Khosla, Peter Thiel and Bill Gates on LightSail Energy.
All of the above shows that the landscape is changing in favour of Atlantic Canadian startup entrepreneurs, and that’s a good thing.
T
very useful. we should do a profile “who’s who” post so we can make sure that entrepreneurs can find the best legal, accounting, etc.
I’d be up for that. Great startup-side service providers are diamonds in the rough. They are limited somewhat by their bandwidth (being small shops makes them great) but go out of their way to work with excellent companies.
Agreed Frank. EVV are an extremely valuable part of the investment mix. We have been lucky to partner with them on a couple of deals.
Christene Hirschfeld at BoyneClarke is a fantastic resource for entrepreneurs and newcos.
Thanks for the plug Jevon! I would agree that what we are seeing is the evolution of the ecosystem and that is a a good thing. Everyday is hard work but when I see the benefit of seeding the next generation of high growth entrepreneurs in the region. That’s why we practice what we preached and anyone involved has to match our Launch36 Manifesto mindset:
“Our network of entrepreneurs and mentors acknowledge that the system is
broken and look for ways of fixing it by adding value to the system in the
process. A collaboration between individuals and organizations who do
something for others with others as opposed to against them. Our entrepreneurs
challenge and defeat the status quo through disruptive innovation and better
solutions which show those who cling to the status quo that they must adapt or
risk obsolescence.”
“There is no bigger anarchy, no bigger freedom, no bigger rebellion than
that achieved by the entrepreneur.”
Great post Jevon. The bottom line is that, like anything, the demand for FAN’s services/capital should be market driven. Tax dollars shouldn’t be used to skew that market. And an efficient market only exists where there is a proper flow of information. The more posts like this and the more entrepreneurs know what alternatives exist, the less demand there will be for FAN’s funding model – they will need to change or be sidelined.