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Angels, VC race will go to the swift

Brad Cherniak, Financial Post =20 Published: Tuesday, September 08, 2009

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3D"Brad =20 Chris Helgren/Reuters Brad Cherniak=20 says angel investors are a segment of the capital market that could = trigger a=20 renaissance for small business

In many ways, with a few isolated exceptions, the venture capital = community=20 in Canada is acting like a boxer who has knocked himself out.

Dwindling investment volumes are beyond daunting, with no clear = solutions in=20 sight, and industry leaders have been reduced to pleading for a = "national tech=20 strategy," or for blue chip panels to be convened by the government to = discuss=20 the plight of innovation in Canada and to seek solutions. Frankly, these = ideas=20 make my blood run cold.

The U.S. venture capital industry provides a good case for why = pushing the=20 trajectory of the VC galaxy too close to the government supernova is a = dangerous=20 thing. There is increasing chatter about the industry in that country = coming=20 under full regulation of the Securities and Exchange Commission, for = unapparent=20 reasons.

The value-add of doing so is even more unapparent, and could threaten = the=20 unbridled spirit of the industry. Apparently, few remember the VC = industry came=20 into being as an

organic response to the failure of government and traditional = financial=20 institutions to stimulate business development during the Depression and = the New=20 Deal.

To a small business owner, this must sound like a step back into the = Dark=20 Ages for early-stage capital. But hang on, there is another segment of = the=20 capital market that could trigger a renaissance even before the Dark = Ages take=20 root -- angels.

Historically, this has been a large but amorphous collection of = individuals=20 that defied aggregation and generalization, tethering the industry to = the=20 fringes of the capital markets. Angels were like Yetis, everyone knew of = one,=20 but wouldn't share their names or how to get in touch with them. = Commonly angels=20 are considered to be a retired business executive or entrepreneur who = have=20 upward of $1-million to invest in fledging companies or struggling = entrepreneurs=20 and their crazy ideas, as a hobby or even to give something back for = their own=20 business successes. This notion is quaint, and largely irrelevant.

Investing is about creating returns, plain and simple. Anything else = is not=20 investing; it is either charity or entertainment -- both of which are = valid, but=20 separate and distinct concepts.

The dividing line between angels and venture capitalists is blurring = to the=20 point of non-distinction -- the critical distinction for small = businesses is=20 angels have cash and possibly the will to spend it.

The aggregate pool of so-called angel capital is far larger than that = of=20 institutional venture capital in both Canada and the United States, = although=20 definitive statistics on the subject don't appear to be available. In = recent=20 years, individual angels increasingly are clustering into informal,=20 not-for-profit organizations that offer central administrative, deal = sourcing=20 and structuring, and even political advocacy services, while retaining = their=20 individual rights to decide whether or not to make a particular = investment.=20 These organizations are developing and facilitating investment = assessment and=20 valuation processes and methodologies that will rival that of the = VCs.

I propose renaming the angel sector "Independent Venture Capital", = and=20 collapsing the wall betweem the two. Whichever side were to end up with = the=20 power would be fair game -- the race, as always, should be to the swift. = Benefits would be broad and multifaceted:

- The IVCs would invigorate the VC world with new ideas, energy and = cash.

-VC firms could gain access to the collective insight and experience = in the=20 angel market.

-Angels could gain higher profile, better access to deal flow and = more=20 resources -- political and otherwise -- to represent and benefit its=20 investors.

-Both groups can begin to see themselves as partners pursuing good = returns on=20 investment in early stage companies. Another effect might be the sorely = needed=20 improvement of the image of VCs in the eyes of entrepreneurs.

-And for those rugged individualists who refuse to be a part of any = larger=20 movement, they can remain as they are, outside the purview of the = defined=20 industry--individual investors, or even angels.

In any event, the angel sector will continue to be a vibrant, active = and=20 important segment of the North American risk capital markets for small=20 businesses. I hope it becomes more and more efficient and accessible and = I will=20 look for signs of this at the National Angel Capital Organization's = annual=20 summit in Toronto Oct 14 to 15.

Equally, I hope the venture capital community somehow can regain its = mojo=20 without direct government intervention, or even its helpful hand.

Brad Cherniak has spent more than 20 years as a principal, advisor = to and=20 investor in private companies. He is cofounder and partner at Sapient = Capital=20 Partners, a Toronto advisory firm to companies from early stage to = $50-million=20 in revenues . His column appears monthly in the Financial Post. He can = be=20 reached at brad@sapientcap.com

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