I hope everyone enjoyed the holidays! I was happy that we had snow this year up in Collingwood and we had great family time on the ski hills and snowshoe trails.
The Holiday break was also a great occasion to reflect on some of my work at Brightspark. In my capacity of VP, Investor Community, I have spoken to hundreds of investors over the past year or so. I am fortunate to spend a good part of my days working closely with very accomplished accredited investors who are desirous of diversifying their portfolio and have a keen interest in leveraging the outsized returns from technology start-ups.
My career has been primarily as an entrepreneur, complete with a couple of exits and now I am learning the fascinating world of venture investing. So here is a compilation of the three most common questions I get, coupled with the answers honed by a career in entrepreneurship and a year working with the experienced Brightspark team.
What returns can I expect?
It’s a fair question with a complex answer. While venture capital certainly has the potential to provide outsized returns given its high risk/high return profile, a lot depends on the experience of the firm’s executive team. The VC industry - as in most – adheres to Malcolm Gladwell’s 10,000-hour rule.
Brightspark has been investing in early stage tech for about 20 years and is one of the most experienced VC firms in Canada. In the past 10 years of investing, Brightspark has returned a 66% IRR and 7.3X on invested capital, which is significantly higher than other comparable investments.
Each portfolio company has the potential to return many times your investment, but it may also fail. Some Brightspark investors have seen upwards of 25X on their investments but, to maximize the probability of a healthy return, the name of the game is diversification.
Is the initial valuation fair?
Valuing early stage companies is very challenging and does not conform to valuations in the public markets. Brightspark’s experience in valuing early-stage companies is extensive and numbering in the 100’s and, given that the partners invest in every deal, everyone is aligned to get a very fair valuation for all investors.
Brightspark’s sweet spot is the portfolio company that is almost ready for VC primetime; however, there are still a couple of issues they are grappling with. And those issues are understood by Brightspark’s partners as resolvable either through the passage of time or with Brightspark’s operational input.
This positioning allows Brightspark to secure favourable valuations, typically under the $10 million threshold. Our hope is that the portfolio company will overcome these issues within, say, 18 months and be ready for Series A VC funding with a $25 million+ valuation.
When will I see a return on my investment?
With traditional VC funds where a large fund is raised and it, in turn, invests in multiple companies, an exit is not necessarily going trigger a payment to the investors as certain thresholds need to be reached in the fund as a whole.
With Brightspark’s single purpose fund structure that has one portfolio company per fund, investors see immediate returns upon an exit. In our experience, exits typically occur between 3 to 7 years; however, there are no guarantees that, if there is indeed an exit, it will occur between these goalposts.
For example, one of Brightspark’s earlier investments is Hopper out of Montreal. Brightspark was its first investor in 2007, so it has been 10 years. However, a couple of weeks ago Hopper announced that it raised $82 million given that it has scaled to over 10 million users and sells more than $1 million in flights per day. While an exit has not been realized in the typical timeframe, equity holders should be extremely happy with their investment and their patience may indeed be handsomely rewarded.