Alternative investments can be trickier to evaluate than traditional companies because so many of the traditional signposts aren’t there, but if you’re able to help a valuable start-up develop its potential, the payoff can be worthwhile.
“You’re going to have very, very few companies out of all the start-ups that are out there that are going to be wildly successful like a Facebook and a Google,” said Joe Morin portfolio manager at Canso Investment Counsel and the chairman of Skunkworks.
“When we look at venture capital investing, for every 10 companies that you invest in, you’re looking for one or two of those companies to be really home runs for you. On a portfolio basis, you’re looking to earn an outsized return compared to what you would get on the public market.”
To Sion Balass, a partner with venture capital firm The Group Ventures, anyone looking to participate in the venture space needs to understand what stage they’re investing in, and they need to feel comfortable with certain amount of risk and uncertainty.
“We’re an early stage investor, so when you look at particularly seed to Series A investing, the first thing we recognize is that there’s not a lot of quantitative data to base your decision to invest or not,” he said.
“They haven’t been around that long, they don’t have that much traction in sales, they’re doing something nobody’s done before, so comparables are complicated. (You’re) really basing your investment on a lot of qualitative data: the management team, leadership and entrepreneurial skills, ethics.”
Eva Lau, a prominent angel investor and former Wattpad Corp. executive, agrees the management team is the first thing to consider when looking at a venture or start-up, since those are the people will “make the idea become a viable business.”
But product-market fit and scalability are equally important.
A company like Little Canada, which recreates famous landmarks and cityscapes in miniature scale, has good product-market fit, for instance, because it addresses a need for more tourist attractions in Canada, she said.
“We are a very unique country (in) that half of the people in Canada were not born in Canada; we have a lot of new immigrants and they can’t wait to appreciate this country,” said Lau, whose venture fund, Two Small Fish, focuses on early-stage investment.
“Little Canada is the best way and the easiest way for them to appreciate the beauty of this country in one location in one tour.”
Another key consideration to keep in mind is around the stage to invest in, give that start-ups tend to raise capital in several rounds.
Round A tends to be early on, with fewer investors, lower valuations and more risk, because the company still hasn’t posted any revenue.
Round B begins when the company starts to get some traction and generates sales, bringing a different group of investors. The company still isn’t cashflow profitable at this stage, but it’s starting to make money and needs a more sizable investment to take its growth to the next level – and to Round C.
“With each subsequent series of investing, more and more progress should be made on the monetization of the business – a revenue growth model, a cashflow growth model, earnings and so on,” said Morin.
“At each later stage there’s got to be better visibility into those things to attract that next group of investors.”
To Lau, it’s also important to know who is backing a venture, and she’s often wary when she sees a company that has several investors investing small sums of money.
“What that means to me is there is not a group of investors putting enough skin in the game … (they) are kind of testing the water; there aren’t any people who are actually committed to run this journey with them,” she said, adding that as an entrepreneur-turned-investor, she knows the importance of the guidance and mentorship that comes along with funding for start-ups.
“We’ve learned a lot in the journey, made mistakes, had a lot of wins,” she said.
“For me, not only do I want to recycle my knowledge, I really want to put my money behind those companies that have an opportunity to become massive. That’s why I want to invest back into this space.”