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Angels get innovative in B.C.

Every week Techvibes republishes an article from Business in Vancouver.

This article was originally published in issue #1054 – Dec. 5 – 11, 2010.

The closing of new funds and other events in the angel and venture capital investment community are promising signs that B.C.’s investment climate is improving, but don’t expect the financing flood gates to suddenly open in 2010.

While two new angel investment funds have recently formed in B.C. and a government-led super-fund has re-emerged after being stalled by the recession, investors are still being extremely selective.

In November, the provincial government’s BC Renaissance Capital Fund announced that it had selected new managers for its $90 million investment pool.

The selections were made months before the announcement, and the fund counts investments in B.C.-based Indicee Inc. and Constructive Media in July and November as the most recent of its five investment milestones.

However, the fund’s vice-president said it might still take some time before the fund managers re-expose themselves to many of the risks that come with investing in technology companies.

“We’re getting crushed this year; everyone is getting crushed this year,” said Todd Tessier, speaking of the wider venture capital investment community.

“To be fair, we’re going to need another year or two to get back to where we were in 2008.”

In 2009’s third quarter, venture capital deals in Canada totalled $191 million, down 51% from $388 million during the same period in 2008.

Domestic venture capital activity in the third quarter was the weakest recorded in 14 years.

The figures are applicable at the provincial level: B.C. has experienced sharp declines in the volume of venture capital spent and in the number of companies that receive venture capital.

However, Tessier expects B.C. to continue to “punch outside its weight class” in per-capita technology sector investment spending.

He partly attributes that to the strong angel investment community in B.C. that helps companies mature to the point where they have access to larger pools of venture capital.

Some of the most innovative manoeuvring in the investment community has recently occurred at the angel investor level in B.C.

The Western Universities Technology Innovation Fund (WUTIF), a Vancouver-based angel fund, formed a capital pool company (CPC) on the TSX Venture Exchange two years ago, but as it neared the end of the two-year window in which it could use the CPC to publicly list a company, none of its investee companies were ready to make the leap.

Instead of letting the CPC expire, WUTIF raised a pool of angel investment capital and created a publicly listed investment vehicle.

GreenAngel Energy Corp. (TSX-V: GAE) was listed last October and has invested in six early stage B.C. companies that are developing clean and renewable energy technologies, including Delaware Power Systems and Habitat Enterprises.

The public and the unaccredited investor, both of whom generally don’t have access to angel funds, can invest in GreenAngel.

“We’re going to let the man-on-the-street investor get access to new emerging technology companies in a way they couldn’t otherwise,” said Mike Volker, GreenAngel’s president and CEO.

Volker, who also manages WUTIF, said generating interest from investors remains challenging. Many of them are waiting for exit windows for their current investments.

“A guy said to me, ‘Mike, don’t bring any new deals to me, get me out of some of the ones I’m in,’” said Volker.

GreenAngel is one of the few funds that are publicly listed and make high-risk investment in startups.

It’s also unique in that recipients of GreenAngel funds must invest in the fund.

“That way, all of those companies have an interest in working together,” said Volker.

The limited partners that helped the newly formed Espresso Capital Partners close its first $2 million fund are primarily angel investors, but Espresso has also put a unique spin on the traditional angel investment model.

“The venture capital industry has significant issues right now, and that has left an enormous hole in the tech sector,” said Gary Yurkovich, a general partner at Espresso.

“There’s a vacuum, so there’s an opportunity now for innovative financial solutions for good companies.”

Vancouver-based Espresso lends capital to startup companies using an investee’s scientific research and experimental development (SR&ED) tax credit refund as collateral. 

While it can take companies months to receive their SR&ED refund after applying, it’s largely a guaranteed cheque for technology developers that have their finances and paperwork in order.

After performing the proper due diligence on a company, Espresso consequently treats the SR&ED credit as a receivable and allows companies to borrow against it.

While Espresso only recently closed its first fund, it has provided roughly $1.8 million in syndicated loans to about 15 companies – primarily B.C.-based – since February 2009.

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