The Investment Side of the Startup Equation

In July, commercial real-estate company CBRE released its 2021 Scoring Tech Talent report, in which Edmonton cracked its top 50 tech markets (at #38!) for the first time. Many founders, either regrouping after a layoff or deciding to leave a job, embraced entrepreneurship. But as much as founders can put in the sweat to build a product and a company, there needs to be investment that gives the visionaries the runway to realize their dreams. Startup TNT, with its Thursday night meetups and biannual investment summits, is working hard to take the lead in bringing investors and founders together. The Rainforest spoke with Startup TNT founder Zachary Storms about his vision for building up the investor community through education and, of course, investing.

Interview by Joel Magalnick
​
Joel Magalnick
As you were starting Startup TNT a couple of years ago, what was your goal for getting people involved as investors? 

Zack Storms
I look at what we're doing as a Startup TNT community, and I really think this is our core mission: to be the best angel investors that we can be and build the best angel investment community that's supporting our strong community that we can possibly build. So having the happy hour every Thursday is about bringing entrepreneurs together, bringing members of the community together. But it's also about ensuring that investors are part of that community and view themselves as part of the same community as the entrepreneurs, and getting a lot more people that have the means excited and involved and more sophisticated in raising capital. When I look at the happy hour plus the summit and the summit program, it mixes those two things together really, really well. Building community, building sophistication, and then raising money. 

Joel 
You talked about the people with means, but there are a number of people here who are at the start of an investor journey and being more active in not just the startup community, but understanding some of the pitfalls of investing, and some of the risks. Because clearly there's a lot of risk. 

Zack 
At the moment, there are still financial thresholds set by the Securities Commission that we have to follow in terms of who can invest with us. However, I am 100 percent of the belief that there's a lot more people out there that don't currently meet the definition of an accredited investor that absolutely should be part of the investor community. They can totally have the means to write a $5,000 or $10,000 check once or twice a year. 
Even people with the means, angel investing is a pretty big deal, like even if you're writing $25,000 or $50,000 checks into a single company. Through Startup TNT you're getting a taster of the full experience and writing a $5,000 check, which is a much more approachable number for most people. 

Joel 
What does that look like from an education perspective and how you're trying to teach people to be investors? 

Zack 
We are firm believers that the best education for this type of activity is hands-on, experiential trial by error, trial by fire. Get in there and understand it. We do some classic workshops and more traditional academic-type of settings or book learning, like here's some references, here's some workshops. We'll come together, we'll have discussions. We include for the investors about to eight hours of formal workshops. But a lot of the education is really peer-to-peer, happening as issues come up and we discuss them as a group. Every time you negotiate a deal with these companies, it's a unique experience. There's a set of conditions where, well, because of X, Y, Z, the founder doesn't want to have this type of clause or they're not sure if they want it to structured as convertible notes or straight equity, or there's one investor that wants to win and they really like equities, so now it’s an equity deal and that’s the way we're doing it because they're going to write the biggest check and they want equity. All those negotiations are best learned and taught by just practicing. It's a continuous experience. 

Joel 
From the feedback that you've gotten, what have people been learning? Like from the complete dummy who knew nothing about investing and got involved? 

Zack 
We actually launched this ambassador program specifically for just those people. We call it the Startup TNT Ambassadors, and they're basically investors that are really enthusiastic, who believe in the mission, who want to put in a little extra time, who want to become prominent local investors in our community. And that's what this is really all about, building sophisticated investors that understand and are confident negotiating an early-stage deal, and then can bring other investors along. That's actually the really challenging part, is finding that person that can negotiate the deal has respect and they'll be like, “OK, this deal is kind of the terms are set. We can all go in it now.” 

Joel 
What does sophistication look like to you? What does that mean? 

Zack 
That's a great question, Joel, because I've been investing as an investor myself for a number of years and I'm not sure if I would call myself sophisticated. To me I would define sophistication in this sense that angel investing as an individual is like a part-time hobby. But as an industry, it's kind of like a professional sport. There's lots of terminology that most people don't understand. You have to get in there to learn it. What does this mean? What are the impacts, these decisions? So people that really understand the differences in the deal structures, the ins and outs of due diligence, what are you really looking for. As an angel investor that has a regular job and is doing things on the side, can you look at a deal with the same quality and sophistication as a professional investor that is a venture capitalist and does this full time? The answer is probably no. But as a group, our goal is to be equal to those sophisticated investors by sharing the work and sharing the knowledge. 

Joel 
When people are investing as a group, do they decide among themselves different roles that they're going to take on? 

Zack 
Oh, absolutely. That's one of the beauties of investing as a group. We have some pretty impressive people that joined the investment team. Some of these people have built a traditional business, some of them are franchise owners that now own 15 restaurants, or some of them have made a lot of money in real estate. They've done massive real estate development projects, or some of them are recently exited entrepreneurs that just sold the business. So a lot of them actually have finance backgrounds. But it's great to have these different perspectives coming in. We have a list of about, I don't know, 65 points that you might consider in due diligence. You probably don't have time to look at each one of these points in extreme detail. But what are the major ones that we want to cover and who is best positioned to cover this for us? One of the most interesting calls I was on was with somebody with an H.R. background that just went really deep into the whole hiring process and how the founder thought about hiring and their people experience in relationships. I think a lot of other investors wouldn't feel comfortable doing that. But this person has a deep background and it just brought out a whole new aspect of the experience, which was really cool. 

Joel 
What kind of role do investors at higher levels take in mentoring some of the people coming in or even some of the people who might have been investing for a while but trying to get to that higher level? 

Zack 
There's two main ways for them to get involved. One is through those education sessions where we do workshops with the investors. We've done a couple where we basically bring in seasoned, professional investors from VC firms to share their process and answer questions, have a discussion with us, just straight up participate as an investor. But they also realize that this is a big part of the learning opportunity for the entire group. So they are there as a resource and have knowledge for everybody, as opposed to too strongly expressing their opinions, letting the group work through things. These seasoned investors have to be a little bit careful, because they know that if people know they're seasoned, whatever they say they could have an outsized influence on the group. So to find that balance, listen to all voices. And often what we find is that the new investors have significant insights. They have a good understanding of what makes for a good deal, what to think about. It's a lot of that nuance around negotiating things like valuation, deal structure, where that extra sophistication comes in. 

Joel 
Has Startup TNT, being only two years old at this point, seen any successful exits, or seen any spectacular failures? 

Zack 
As one investor said to me, we're in the honeymoon phase still because the investments are all recent enough that everyone's still excited about them. Some of the key metrics for success at this point is that they're hitting new milestones, they've increased revenue, they've increased the number of employees. Other investors have co-invested with us. As a group, we've invested in some of the same deals that very prominent local investors have invested in. Some of them have actually graduated from Y Combinator. We ran a deal before Y Combinator invested. And that's all really exciting. And that's why I would say it's a honeymoon phase, because no one's gotten any money back yet. But these are all confirmations that we're interesting. Other sophisticated investors out there like these deals, too. The deals that we've invested in have raised over $10 million in follow-on funding outside of our group. So these are all credibility signs for now that give us confidence. But to your other question, no, we haven't had any actual exits yet. And honestly, a quick exit might be three years. It's like five to 10. So time will tell. Time will tell. 

Joel 
I've often thought about investing and the level of patience that investors have. And are you seeing at this point, especially from the first summit [in February 2020], we're about a year and a half after that, do you see any signs of impatience or are investors feeling like they're in it for the long haul and coming back to do more deals?

Zack 
We get quite a few repeat investors at the moment. So people enjoy the experience. They come back. At this point, I think that people are still excited about what we're doing and I hope they stay excited to get more excited. I do think that if we do this for a long period of time and no one's getting a return on their investment and then five years goes by, a decade goes by, yeah, that becomes a problem. But honestly, you need to do this to test this whole process out properly and see the impact. You have to be in it for the long haul. So you have to have a 5-to-10 year vision. Some people say you have to have a 20-year vision. We try to discuss being realistic in your expectations and really understanding that it is a 5- and 10-year game at the minimum, not a 1-to-2 year game. 

Joel 
Are you seeing specific types of companies arise, especially in light of the pandemic? There was a lot of pivoting and a lot of rethought on directions people wanted to go, from what I’ve read.

Zack 
We've invested in a lot of different types of companies, anything from some deep hardware companies to health, tax and medical device companies. Quite a few B2B SaaS companies, even some B2C companies, which also makes us pretty interesting as a group, because a typical VC will be a little bit more focused for the most part on a specific general vertical or sector. I view this as a focus on Alberta and the Alberta community, although we're trying to grow into becoming a larger brand than just Alberta.

Joel 
Do you have any last thoughts on where you see the investment programs going and where you hope to see Alberta on the map three years, five years from now? 

Zack 
My ultimate goal is that we have Startup TNT and we here, more broadly speaking in Alberta, are actually pioneering a different approach to angel investing, into venture finance in general, that becomes recognized around the world as a uniquely awesome approach to raising a lot of capital, especially for jurisdictions like Edmonton that are less visible on the global stage. We're definitely growing. I see the reports coming out there that we're getting a little bit more visibility, but we're still an up-and-coming smaller ecosystem. So what is the appropriate way to build a great startup community and ecosystem like that and raise money for your local community? I think Startup TNT is positioned, if we do it right, to become a global leader. That's my long-term vision.