What is PowerHaus Technology Ventures (VCC) Inc.?
PowerHaus Technology Ventures is an angel investment pool created for the purpose of investing in promising new technology companies that have immediate commercial potential.
What’s special about this Fund?
A competitive selection process augmented by post-investment support provided by participants in the PowerHaus Network will provide more than just capital to promising companies. Selection criteria will focus on near-term cash-flow and customers to position the investors for early acquisition.
What kind of return on investment can investors expect?
Our objective is to achieve a rate of return of at least 15%; however, this will depend on the length of time that shares are held. Initially, returns will be less since it can take over eight years for companies to mature. Share value should then rise as more exits take place. These returns do not take into account the tax benefits. For example, investors who hold their shares for five years and sell at the same price as the purchase price, would still make a tax-free annualized return of 7% (i.e. $10 back on a net $7 outlay in five years).
How can you assure these high returns?
There have been several studies on angel returns. One study looked at the outcomes of over 1,100 angel-backed ventures, and found that the average return was an IRR of 27% (i.e. 2.6X the investment back in three and a half years). However, that short timeframe is skewed because more than half the investments failed in less than three years. Only 7% returned more than 10X the investment. Other studies have shown similar outcomes with returns ranging from 18% to 36%. Most studies conclude that to achieve these returns, investment portfolios should consist of at least 20 companies, which is why angel funds are becoming popular.
How are the shares valued?
Shares are valued as per the Net Asset Value per Share. The Net Asset Value is based on the valuation of all investments and any other assets such as cash less any liabilities. Investments are valued at cost except for those companies that are not performing, in which case they are written down in value. For those companies that have done recent financings, the most recent per share value is used. For those that are doing very well, no increase in value is attributed; hence, the valuation tends to be conservative.
How much money is being raised now?
In the current round (to February 15, 2016), $500,000 (max) of new capital is sought. That will allow the Fund to invest in five to ten companies over the next year.
Who manages the Fund and what are the management fees?
The fund is managed by an independent board. Unlike venture capital funds that charge a 2.5% annual fee and a 20% “carry” on profitable exits, Management has waived the annual fee and receives only a modest honorarium based on keeping expenses low. A 20% carry is paid to management and others that assist in due diligence and oversight but only on profitable exists that have returned at least 10% per annum. Simon Fraser University also participates in the carry.
How does the Fund work?
Investors purchase shares in the Fund, which then re-invests the money in new business ventures. All investment decisions are unanimously approved by PowerHaus Technology Ventures’ Board of Directors, which is elected annually by its shareholders.
How are investments identified?
Companies will apply much like they do for angel funding, but with the understanding that they are receptive to more than just money. Regular screening and selection meetings will be scheduled. The Fund also works with VANTEC – the Vancouver Angel Network. Every month, more than ten companies present at the monthly VANTEC meetings. Additional deals come to us from New Ventures BC, universities, the Keiretsu Forum and from other angel investors. There is a steady flow of quality deals to choose from.
How much does the Fund invest in companies and what is its share?
The Fund’s average investment in each company is $50,000. Since it will be first-in, the Fund’s share will be in the 5-10% range. Having other co-investors provides additional coaching and follow-on investment resources to accelerate the growth of the companies.
Why is the Fund needed?
The main source of risk capital for entrepreneurs starting new ventures is private business angels who invest their own money and time. A fund, such as PowerHaus Technology Ventures, which has many angel investors, acts as a catalyst and often a deal lead in attracting sufficient capital.
How do governments assist?
Investors in funds, such as PowerHaus Technology Ventures, will receive a 30% refundable tax credit from the Government of British Columbia. Furthermore, the Government of Canada will allow taxpayers to deduct the full price of their investment from their income for tax purposes if they, for example, donated their shares towards a worthy cause (such as a University Trust) or placed it into a self-directed RRSP.
Is investing in technology companies risky?
Yes. It is a fact that the majority of companies will fail before they can be sold to a buyer. Many angel investors have lost all their capital because they invested in only a handful of companies. While early-stage investing is risky, the returns on the successful companies are usually more than ten times the original investment. However, this occurs less than 10% of the time. It also takes much longer to achieve an exit than what is commonly believed. Many “overnight success” stories have been in the making for more than ten years. Very few companies are created, built and sold in less than five years.
What is PowerHaus Technology Ventures doing to lessen the risks?
By creating a “pool” of investments, scrutinized by a very experienced team, we spread the risk across a wider number of good opportunities. Studies have shown that returns in excess of 18% are possible if a portfolio consists of at least 20 companies. This allows us to share in the rewards of those companies which become home-runs, and offset those that do not make it. These studies also point to three success factors: 1) extensive due diligence combined with domain expertise and careful selection, 2) co-investing with others and 3) post-investment oversight and support. Best practices have shown that better investment terms (i.e. preferred share liquidation preference, extended vesting, etc.) ensure better financial outcomes. The Fund has adopted these practices.
How long will the Fund operate?
The Fund is an “evergreen” fund and has no specific timeline. It will continue to grow and develop over time as long as there are investors and good companies to invest in.
How do investors get their money back?
Investors are compensated in several ways:
How and when and at what price can I redeem my shares?
Investors may redeem (i.e. sell their shares back to the Fund) after a period of at least five years, but only from payouts that the Fund has received from its investment. Redemption opportunities will be offered to investors on a first-in basis. The redemption price is set close to the Net Asset Value/Share and is the same as the price at which the Fund sells shares to new investors.
Investors can get their entire investment on tax benefits alone. How does that work?
If investors use an RRSP, they can get a tax deduction of up to 44% (depending on their marginal tax rate). This, when combined with the 30% refundable tax credit from the Government of British Columbia, gives them 74% of their capital back within a year. Then, after holding shares for at least five years (possibly longer depending on liquidity events within the Fund), they can redeem and re-invest (i.e. do a rollover) and get the 30% B.C. tax credit again. Some early investors in the Fund have already done this, thereby getting back more than 100% of their original investment while, of course, still having a growing investment.
What are some other benefits for investors in the Fund?
Investors are welcome to join the monthly VANTEC meetings and other networking events throughout the year. There are opportunities for investors to co-invest alongside the Fund. Often, the Fund’s investors take board seats or provide advisory services to the investee companies. Investors also benefit by learning about best practices and meeting other investors.
Does the Fund administer its own RRSP and TFSA accounts?
Investors can hold their shares in any self-administered accounts that accept private company shares. Most banks will only do this for select clientele. Many full service brokerage firms will also handle such accounts. However, the Fund has established a relationship with Western Pacific Trust to better serve its investors efficiently and at competitive service fees of only $125 per year.
What is the minimum investment?
The minimum purchase amount is 1,000 shares at the current offering price of $10.00 per share. Using both tax credits, the actual at-risk cash outlay would be less than $3,000 – giving investors excellent leverage.
Who should invest, and how much?
Investing can be fun; however, there are no guarantees that these investments will generate returns that will be available to you when you need them. Therefore, only those who can risk losing their capital should participate.
Is there a broker’s commission?
Yes, if one is used. But it is only 3% (we want to ensure that most of the capital is invested).