How to Invest in Startups Like Two Small Fish Ventures: Bank on Network Effect, Canadian Startups, and Stewardship
Brightspark is the first VC firm in Canada to democratize venture capital investments. In this series, we put the spotlight on exceptional Canadian startup investors and share their stories.
Deep-rooted History in Canadian Tech
Angel investors Eva and Allen Lau know a thing or two about fast-growing businesses. Since the early 90s, they’ve worked with many influential Canadian startups including Delrina, the company co-founded by Brightspark’s Managing Partner Mark Skapinker, where they both started their careers.
After Delrina sold to Symantec in 1995, Allen stayed on for five more years – but something in both Allen and Eva had changed. Having lived through Delrina’s massive scale-up, the two felt bitten by the startup bug and connected with Brightspark. Eva joined Brightspark and became more involved with early-stage companies while Allen went on to co-found his first startup, Tira Wireless, within Brightspark’s portfolio in 2002.
From there, Allen started Wattpad in 2006 and Eva joined their team soon after. While the journey was often challenging in the beginning,these challenges left the two with unique business experience. Having fostered a global community of over 65 million users, to-date, Wattpad has raised about $118 million from investors across Canada, Asia, and the U.S according to Bloomberg.
In late 2014, Two Small Fish Ventures (TSFV) was founded by Eva Lau and Allen Lau as their personal angel investment vehicle. By mid-2015, TSFV expanded into an evergreen angel fund with Eva Lau as the Managing Director.
So far, their fund has generated a 4x increase in Net-Asset Value for their investors. We checked in with the couple to get their perspective on the growth of Canada’s tech ecosystem and what it means for the investment landscape.
Canadian Tech Investment Faces a New Normal
According to Allen, “When we started at Delrina, the Canadian tech landscape was very different than it is today. Back then—and even 10 years ago—when a company raised a large amount of funding, it made headlines, because it happened like once a year. Today, it seems as if new Canadian companies get $50 million in funding every other day. It’s the new normal.”
Says Eva Lau: “Since the ecosystem has matured so much here, deal access is not as exclusive as it was ten years ago. In the Delrina days, who was able to invest in tech startups? There was almost no deal flow, and investment opportunities were mostly open exclusively to financial institutions.
“Now, because there have been so many successes in Canada, more entrepreneurs are exiting and giving back, and we see a lot of different people who want to have deal access. Investing in startups is no longer an institutional thing.”
Brightsparks’ impact in 2017 echoes this point - with online investor platforms like Brightspark's "Spark", what used to be a closed-off tech investment landscape is now opening up. At the same time, more angel investors like TSFV are injecting new capital into Canada’s startup ecosystem. A quick look at the National Angel Capital Organization’s latest report counts more than 40 angel networks in Canada (up from 29 just five years ago.)
Meanwhile, Many Traditional Institutional Investors Still Use Outdated Investment Strategies
And while Eva considers that angel investment is no longer an “exclusive, elite thing”, she sees a knowledge gap as many tech-industry outsiders and big banking institutions still consider early-investment as too high-risk or too inaccessible. “New investment models like Brightspark’s are trying to solve that problem,” says Eva.
She points to a typical investment for an angel of around $50,000 as an interesting way to improve a portfolio’s diversity. With the right match to the right opportunity, risk is high but the potential for a meaningful return is much, much higher.
“Imagine if [early on] our portfolio manager had recommended we invest five percent of our assets in very high-risk, high-return, long-term perspective investments for our RRSP portfolio...I think our portfolio mix would look very different today. ”
Picking winners can seem like a gamble, but as seasoned investors, Eva and Allen have developed a very simple thesis to help inform their high-risk, high return opportunities.
Invest With An Ear To The Ground
Eva believes, “We are privileged to have had experience growing [companies] from [their] infancy to such a large-scale network. We made tons of mistakes, but those mistakes ultimately led to wins. And now, we want to help create many more Canadian success stories. We want to help companies that can benefit from our specific expertise.”
According to the two partners, they’ve grown thanks to a genuine mission to help new entrepreneurs with active engagement in the startup community. The TSFV website defines a clear investment thesis: a focus on early-stage Canadian internet companies with strong network effects. They like to see a product that has at least beta launched with some early traction and user growth, and only co-invest in a round of funding that has found a lead investor. Finally, they only invest in companies that make the world a better place.
The Lau’s prefer to act as “active investors”. To find their investments, they engage with founders at events, mentor through accelerators, get involved in investment committees, and collaborate with other angel investors. It’s a challenging workflow, but one that’s not surprising for a couple deeply involved in the industry.
They walk the line between investor and mentor in order to act as stewards for the early-stage Canadian tech ecosystem. While this approach works for them, interested investors can benefit from the same ear-to-the-ground access to high-opportunity investment through businesses like Brightspark.
A Blossoming World of Opportunity
If you ask him directly, Allen Lau will tell you that he believes Canada is the front-runner to be the next Silicon Valley. Successful companies are inspiring new investors, and there’s no end in sight to the momentum that is building. Eva adds: “Even though Toronto is not the capital of Canada, many of Canada’s biggest companies are headquartered here. All of that makes Toronto a unique hub for fintech and medtech.”
What do the Lau’s believe is unique in Canada? In Eva’s opinion, “[A] global stage of innovation. Ethereum, for example, was born in Canada. There’s a huge density of blockchain experts here: there’s the Vector Institute, the Uber Research Center, Professor Hinton. Fintech, medtech, blockchain, and machine learning - they are all driving innovation in Canada. Toronto’s big advantage is diversity: 51% of Torontonians were born outside Canada. That helps companies target globally and understand different aspects of global culture.”
"We have all the right ingredients: talent, capital, ecosystem, people."
The stars are lining up for Canadian investors: New investment models are opening up channels for private equity, Toronto has become a vibrant angel investment field, and investing in startups is no longer an elite, exclusive club. And as Toronto is poised to become the next Silicon Valley, the next wave of high-growth companies will likely be funded by experienced angels like the Laus, as well as VCs like Brightspark.
For those looking for exciting new ways to diversify their portfolio, according to the Lau’s, there’s never been a better time to examine the industry around us to help foster Canadian tech.