Last week, more than 450 angel investors, entrepreneurs, and other key industry players came together at the annual NACO World Angel Investment Summit in Montreal, which combined keynote addresses from successful angels and founders with networking and panel discussions, ranging from AI, to talent acquisition, to the rise of Canadian FinTech.
The four-day event is mostly aimed at angels, but is also known to end with more than a few deals signed between angels and founders who pitch them during networking breakfasts, lunches, and cocktail events.
“The event has grown from 120 participants when I started five years ago,” said NACO CEO Yuri Navarro.
The Summit also offers business opportunities for legal firms specializing in startup immigration law, says Dentons Canada Startup Program director Andre Garber. “Being at the NACO conference keeps us attuned to the current issues that angels face in Canada,” he said. “Certain angel groups can make an even bigger impact by investing in and supporting top international founders in relocating their headquarters to Canada.”
For some startups and angels, a big draw is the announcement of the NACO’s annual awards. This year’s winners were Portl Media for Most Promising Canadian Startup of the Year, Hykso for Most Promising International Startup of the Year, Daiya Foods and Michael Volker for 2017 Exit of the Year, and Sophie Forest of Brightspark Ventures for 2017 Canadian Angel of the Year Award.
— Brightspark Ventures (@BrightsparkVC) October 5, 2017
The conference panels focused on the challenges of, but overall healthy state of angel investing in the country, starting with the opening cocktail and pitch session where Quebec Minister of Economy, Science, and Innovation Dominique Anglade expressed her pride in the recent announcement of Quebec’s $100 million investment in AI development and the importance of accelerating Startup Visas.
Day three’s Attracting the Best in the World session, however, ended on a less optimistic note after a comment on how proposed Canadian tax changes could discourage business owners from investing corporate profits in passive asset classes, and make Startup Visas — which require minimum $75,000 Angel investment or $200,000 VC investment — and diversity hiring moot points for many Canadian companies.
According to Ekagrata CEO Prashant Pathak, the proposal will make it harder for angels to invest in Canada and for startups to raise capital.
“The tax structure will be unattractive for people doing angel investing in Canada,” said Pathak. “Trump, no Trump, whatever. The fact is, you have to embrace diversity, but we cannot be ignorant to the fact that there are certain economic structures that America has created. And if you want to think about it as an entrepreneur, we have to say we can recreate that structure in Canada.”
Allen Lau, panelist and CEO of Toronto-based Wattpad, however, was optimistic about the ability of Canadian companies to compete with the US in attracting talent.
“Don’t go and sit with angel investors until you’ve A/B tested your product. Don’t have the wrong numbers in the slide because your slide is out of date. It’s like preparing to go to the Olympics.”
– Magaly Charbonneau
“I believe Canada has a much better chance of creating startups today because the cost in San Francisco is so high right now,” said Lau. “In Silicon Valley, if you are running a 10-person company or 100-person company, you’re not going to get the A-player, or even the D-player. You’re going to get the G-player, H-player because Facebook and Google are getting the A and B-players. The D-players are going to Uber and Airbnb. When some of my investors asked me to move the company to the Valley a few years ago, my answer was there’s more talent there in sheer number, but my advantage is I’m one of the biggest fish in a smaller pond and I’ll be able to attract all the A-players in my market and outrun a similar company in the Valley.”
Pathak and panelist Semyon Dukach of One Way Ventures disagreed. “If that were true, the Valley would be famous for several giant companies and no startups,” said Dukach.
“How many unicorns come out of Silicon Valley and how many come out of Canada?” added Pathak.
But Lau sees potential in immigration and population growth. “That’s why we have to grow from 35 million to 100 million or 300 million.”
Dentons Canada’s Garber says there are still advantages for startups to choose Canada over the US, and the firm’s team of immigration lawyers has seen an increase in business. “If you start a company in Canada under the Startup Visa Program, if your business fails, you still keep your permanent resident status.”
The Attracting Talent panel overlapped both with the How Women are Changing the Face of Angel Investing breakout session, and the day three keynote by Skip The Dishes founder Joshua Simair, who sold his Saskatchewan and Manitoba-based online food delivery platform to Just-Eat.ca in 2016 for $110 million. Skip The Dishes caters to cities with populations ranging from 100,000 to one million.
While Lau insisted on the advantage of being a big fish in a small pond, he added that there’s a critical mass necessary to do so.
“Today, data is what users were in the era of the social network.”
“Extremely rarely will you see a highly successful tech company coming out of a town with 500,000 people,” said Lau. “Skip The Dishes proved that they can do that. But below that, it’s probably getting harder. You can’t build a tech company in a 5,000-person small town. There may be two Java developers there.”
Other highlights included the day one keynote Coveo CEO Louis Têtu, former CEO of Taleo, and chairman of Pedal MD. He explained the science of his investing strategy, his application of the rule of 40, and the metrics behind why he avoids the gaming industry and other non-sticky investments.
In 2001, when he raised $35 million for Taleo from Bain Capital for 36 percent of the company, he credits the company’s ability to break down key metrics.
“We understand how much it costs to acquire a customer, how much that customer will bring to us on an annual recurring basis, what’s the gross margin of that customer, and therefore what’s the recurring gross margin using an NPV with discount rate of 15 percent – how that customer is sticky,” he said. “That’s why I hate the gaming industry, because it’s not sticky. Because how can you land a customer and cross-sell and upsell?”
As for the rule of 40 – that growth rate and profit should add up to forty percent – Têtu explained that in his experience, in order to grow efficiently, you need gross margins anywhere from 68 percent to 80 percent and a growth rate minimum of 30 percent.
“30 is good, 40 is better, 50 is great,” he said. “Above 60 is exceptional. We see it with Shopify in Canada and some others. Very high retention rates are fundamental because if I don’t have a product that customers will continue to use and pay me for, I need to replace the business every year. From a net retention perspective, anything above 110 is good. We prefer 125-150. I’ve got about 130.”
He also advised angels to not be afraid of losing money as a company scales, because as long as the math supports the growth, you’re creating value.
“Seventy percent of companies pitching at seed stage today say they’re doing AI, but less than five percent of them actually need AI in there.”
– Jeremy Barnes
“If we’re an early stage company, we’ll send roughly $1.50 to acquire that customer. We’ll go as high as two to one. We understand how much upsell that customers going to give us. And if you’re using those metrics, essentially those are companies that on the public market will be rewarded, and even on the PV side, will be rewarded at a multiple of anywhere between four and eight times revenue. So fundamentally, if you start doing the math, even if you lose $10 million a year, you’re effectively at a minimum creating a shareholder value. Any investor will do that all day long.”
Têtu’s latest investment, Pedal MD, which manages doctors’ schedules, runs a cloud-based messaging platform and will soon use AI to optimize the deployment of resources within hospitals. It linked directly to his keynote address with the day three panel AI is Eating the World. While hospitals are paying $16 to $30 a month per doctor for the use of the platform that comes with insight into their own facility, he said some provinces don’t care about the aggregated view of the medical industry in Canada that the app could provide.
— stradigi (@StradigiDev) October 4, 2017
AI is Eating the World panelists Alec Saunders, Microsoft Business AI Principal; Stradigi CSO Carolina Bessega; TandemLaunch general partner Helge Seetzen; and Element AI chief architect Jeremy Barnes all agreed that datasets are often overvalued. “Today, data is what users were in the era of the social network,” said Seetzen.
According to Bessega, “A company that’s main purpose is to acquire data and get data, that’s probably not a good investment, unless there will be a lot of other people who will be interested in the data because it’s difficult to acquire.” Two examples that work are when there are huge data sets involved, and when companies can label raw data to make it easier to crunch as a buyer, she added.
“Know the names of angels. Don’t downplay the risk.”
– Sylvie Pinsonnault
The panelists also agreed that AI will continue to grow, but that it’s misused. “Seventy percent of companies pitching at seed stage today say they’re doing AI, but less than five percent of them actually need AI in there,” said Barnes. “So if they say they’re doing AI and they don’t need it, it’s a big red flag.”
Saunders gave the example of a robot built by a Microsoft team, “a screen that you put up in the lobby of a hotel that could essentially act as a virtual concierge – nifty idea,” he said. “We went and talked to the big hotel chain owners and they all said the same thing: “I can hire a concierge for $40,000 a year. I don’t think I need this.”
The same rule of usefulness extends across industries, as Power Financial executive co-chairman Paul Desmarais III demonstrated when he referenced American company Addepar in a second-day session The Rise of Canadian FinTech. Addepar is an independent financial services platform that allows companies to consolidate client accounts from multiple banks.
“We’re an investor in Addepar, but it was because we were a user of it that we understood the benefit of it and value of it,” said Desmarais III. “When we’re looking at investments, from a strategic standpoint, we ask if there’s something that we can use. Because if we can use it, there’s value for other people. It’s sort of like a due diligence check.”
Desmarais III and fellow panelists Brendan Holt Dunn of Holden Family Office and Hurt Capital director Claudio Rojas agreed that there is still lots of opportunity in FinTech, despite a suggested industry bubble especially in insurance – but you’ll most likely have to be patient with your investment.
— National Angel Cap (@AngelCapCanada) October 3, 2017
“Assets scale over a long period of time. And the time that it takes to create trust in a consumer is a lot,” said Dunn. “What we find is that the average person opens an account with $10,000, but has $100 000 in investable assets, in another account. And it takes three, four, five years for them to gradually transfer those assets. So the long lead times in order to sustain these things are really complicated.”
As for advice to founders, several sessions echoed the advice of seeking out angel networks that offer mentoring pre-funding, said Probal Lala, founding member of Toronto-based Maple Leaf Angels.
“Don’t go and sit with angel investors until you’ve A/B tested your product,” said Intel Security Group BD Specialist Magaly Charbonneau. “Don’t have the wrong numbers in the slide because your slide is out of date. It’s like preparing to go to the Olympics. Once you have a great team and the data, your chances of closing are much higher.”
Sylvie Pinsonnault, VP of innovation and innovative manufacturing at Investissement Quebec, added, “Know the names of angels. Don’t downplay the risk. Either you think we’re stupid or you are naïve. Be concise and brief. Too many presentations last two hours and you finish and think, what was that again?
Next year’s NACO summit will take place in Toronto, Ontario.
Feature photo via Twitter