The 7 Questions Interview Series: Angels and Venture Capitalists

The 7 Question Interview Series is an investigative content series where I seek out key leaders in a specific industry and/or subject matter expertise area and ask them 7 key questions that “enquiring minds want to know”. There is a twist however to these questions. I provide the interviewee with a hypothesis for each question to help frame and set context for their answer. This specific series of interviews is ideal for startup founders.

Series Objective

The objective of this series is to establish direct connections with VCs and Angel Investors across the globe and ask them the same set of 7 questions regarding investing in technology startups. I’d also like to know what their appetite is for investing in Canadian startups and why they do or don’t.

Interview with Randy Thompson, CEO of VA Angels

Here’s my third interview with Randy Thompson  who is the CEO of VA Angels. VA Angels have investment groups  in Calgary, Edmonton, Kelowna and Winnipeg.

When would it be appropriate for a startup to seek investment from you?

If you are giving 25% of your company away on average every time you raise money, the longer you can go without raising it is better. Ideally you are coming to angels when you already know who your first customer is and you have certain things in place. Patents, prototypes, and most of the team should all be in order before you go see angels, and ideally you know who the first customer is from the prototype testing.

What’s more important: the idea, the team or both?

I have always said in BaseCamps that the least interesting thing to talk about to an investor is the product. Of course the problem is most startups don’t have anything else to talk about except the product. Really, the most important thing to me is actually the customer. Then in second is the team. Other angels will change that order, and call the customers the “How big is the problem your solving?”. We will ask are you selling vitamins (Boring) or drugs (non-price sensitive repeat customers)?

What are you looking for in a startup team? What does a winning team look like?

I think it was Dave McClure of 500 Startups that came up with the line: A Hacker, a Hustler and a Designer. Those three people create a great startup team. It encompasses everything that is important to succeeding in a startup. If you have to lift the big tent, you can’t do it one pole at a time, you have to have at least those three things for the tent to go up.

Age does not matter. It really is about the mindset. When I did my first startup, I was 26 and everyone else was younger than me. That was a huge mistake. If I could go back, I would have at least had a blend of experience and rookie enthusiasm. That would have created a much better team than what I started with.

What are you looking for in an idea? What does a winning idea look like?

If the angel has done the right thing, and is treating their investment portfolio the same way a VC would, or a pension fund, where they give 6% of their portfolio to do high risk, then why would you look for mildly profitable? You already have that covered in your portfolio. You can hang out in the public markets, you can go into real estate, you can find ways to generate a 14% to 20% return. Anything under a 20% return should be unacceptable as an angel investment.

In fact, when right now the average exit we have seen inside of VA Angels is between eight and twelve years, you can appreciate that return on investment is something we measure in single digits the longer that companies are… The longer we hold the companies the smaller the ROI is. So there is no point going for mildly interesting companies, you are trying to hit the home runs. You are actively trying to find the next Facebook.

Does a startup really have only one shot?

It depends whose perspective that is from. As an investor, I think a startup only has one shot because every time you do an iteration, that means you have to raise more money and the time to an exit goes longer. So, once I’ve gone into an investment and you fail during an investment round (ie. create a down share price or even the same share price in the next round), that’s not going to change.

As a startup, you probably don’t care about the investor from this perspective. You’re worried about staying alive, paying bills and keeping the team together. So for you iterating, or the ugly word – pivoting, is all fine for you, as long you are still around in five or six years.  For me I watch the struggle take so much time to get an average return and know that as an investment opportunity you are dead to me – a zombie.

Can you describe your due diligence and investment process?  What’s important for a startup to know about it?

I think most due diligence and investment processes are the same. In our BaseCamp we teach the companies that they need to have six things.

One, that they need to have a pretty clear idea what the product looks like.

Two, ideally they know exactly why the customer is dying to have it and is not just mildly interested. Hopefully they also know who the customer is that is dying to get the product.

Three, is team, team, team, team, team. Everyone hears that, but I think we should start teaching startups that it includes boards and advisory boards, and that as a person building teams you get known by the people you hang out with and that becomes important.

Four, is how do you protect your idea from the competition?

Five, is deal structuring. 

Six, is exits.

Points five and six are the ones we really focus in on because remember – the product does not matter.

In your view, is Canada a fertile ground for tech startups?  If so why and in what ways is Canada unique and competitive in this regard? Are you investing in Canadian startups? If so, why? If not, how come?

The answer is that it depends. If you are taking on the world, growing stupid fast, need a pile of capital and absolutely grab market share as soon as possible, Canada is absolutely the wrong place to do a startup. We don’t build companies that way. But if you are going to take a year and a half to test and prove theories, if you are going to blow up your product idea in a small Canadian city, you are going to use tax credits and SR & EDs in addition to all the different government grants – if you have the luxury of taking your time Canada is an awesome place to build a startup. It really depends on the kind of startup you are dealing with.

Yes I am investing in Canadian startups, in fact I am in eighteen deals with Canadian startups right now. This is because of the deals that are presented to me, and I have been comfortable with it. It is hard for me to get into deals with US companies as I do not have my US holding company structure set up, although I am about to do my first two down there. My investing thesis is one where I do put some money in, but the real value for me is when I get shares for my time. This means that all the companies I have been involved with all feel that I can move the needle and so that has been an important part to my personal investing thesis.

About Randy Thompson

R Stewart Thompson (Randy) is a builder of companies, angel investor and leader of Canada’s largest and most active angel group. He is currently invested in seven companies and has been working in the startup venture space since 1992 when he started the first ISP in Alberta. In 1999, he started working on developing angel groups in Alberta, beginning with an organization that matched deals for Western Canadian investors on the Internet.

In 2001, Randy began to work as a venture capital advisor to the Province of Alberta and started the Alberta California Venture Channel, bringing together investors and companies in both regions. He is the founder and CEO of VA Angels, where over the past nine years the group has done 57 deals worth$28.5 M. In addition to this work, Randy is the Entrepreneur in Residence at NAIT and a member of the A100. Recently Randy was one of three finalists chosen as the Top Angel of the Year in the 2012 Canadian Startup Awards.

Social Outposts: Twitter | LinkedIn | AngelList

Chris HerbertChris Herbert is the founder of Mi6. Mi6 is a B2B (Business to Business) marketing and business development agency dedicated to helping companies build their brands and develop commercial relationships. He is the founder of ProductCamp Toronto and the Hi-tech community Silicon Halton. He tweets under the handle @B2Bspecialist.

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