Angel Meets Angel: East to West
Derrick Hunter and Mark Dobbin—NACO’s Angel Investor of the Year spoke to us about what angel investing is like from their Western and Atlantic Canada bases.
As angel investors, Derrick Hunter and Mark Dobbin have a lot in common — a passion for backing early-stage startups and a mission to ignite catalytic sparks for economic growth.
Sprung from storied entrepreneurial families, both have borne the scars of failure and savoured moments of sweet success in the seed-capital trenches. But they had never met, as investors on opposite ends of the country — Hunter in Calgary and Dobbin in St. John’s — that is, until now, when NACO brought together these two winners of its Angel Investor of the Year honours — Hunter in 2019, Dobbin in 2020 — to share the lessons of their craft.
“There is nothing more rewarding than to see a company you have supported from a very small level grow into something substantial.”
By Gordon Pitts for NACO Academy Magazine
They discovered differences in methodologies and varied approaches to working with entrepreneurs, and yet they ended up in the same place — as key actors in diversifying regional economies built on oil-and-gas production. Although both invest beyond their home markets, each has a goal of seeding local ecosystems where young Atlantic or Western Canadians don’t have to go outside their backyards to pursue their dreams.
“This is an incredibly rewarding profession, in the level of satisfaction from watching the journey and helping the journey,” says Mark Dobbin, 61, the founder and president of Killick Capital Inc. “The level of job satisfaction can’t do anything but drive the passion for it.” Dobbin has experienced passion — he was an early supporter of Verafin, now a fintech powerhouse in St. John’s that exited in a $2.7 billion deal. Derrick Hunter, at 56 the CEO of Bluesky Equities Inc., interjects: “There is nothing more rewarding than to see a company you have supported from a very small level grow into something substantial.” Hunter, with a more varied portfolio of 80-plus companies, believes he may have four unicorns in the making, but it is a long journey and there will be twists and turns. And Dobbin argues that the number of unicorns is not always the proper measure of success in this game. If you are always swinging for the fences, you miss out on a lot of good ones, some great doubles and triples.
These hits can be close to home or on another continent. Dobbin focuses on Atlantic Canada but is venturing farther west, including the Toronto region. Hunter’s hunting grounds span the world. Consistent with his go-broad approach, half his companies are in Alberta, but others are found across Canada, in the U.S. and Europe, including an engineering-services startup in Africa’s South Sudan. Only four of his Bluesky investees are energy-technology businesses in Alberta, and just one of Dobbin’s is related to offshore oil and gas. The two investors roam across the technology spectrum, from cutting-edge medical innovations to plotting the unique genetic makeup of Newfoundland and Labrador’s population.
Both come to the angel-investing world from different places. Almost 20 years ago, Dobbin was running a publicly listed company targeted in a hostile takeover. He ended up doing mergers and acquisitions work out of St. John’s and decided to start a fund, focusing first on aerospace, the old family business. (He is the son of the late Craig Dobbin, who built a large helicopter services company.) He found that early-stage investing was the best route in the local economy, and he built on that. And he took some hits. “We chewed through a lot of capital, particularly in early days and we learned as we went.’” His first stake turned out to be a flameout, an industrial company with what seemed to be a world-beating process. When it failed spectacularly, he concluded it was a mistake to try to scale up without a strong go-to-market strategy. “Don’t scale at the wrong time,” he says ruefully, and make sure your cash burn rate doesn’t outgrow your investors.
Coming out of that failure, he takes a disciplined approach to every deal: “We have to understand the value proposition, the problems [entrepreneurs] are trying to solve. Many young startup founders are very bright, but I can’t understand what they are offering.” Another factor: There has to be somebody with a budget to devote to solving the problem in question. “There are a lot of elegant solutions, but nobody is willing to pay for them. Above all, he has to like the management team and its potential. Basically, “we pick and back management teams and all else is secondary.”
By contrast, Derrick Hunter feels he cannot adequately assess management teams on the due diligence he performs on such a wide range of companies. Each prospective investment, however, is put to his 10-step business test, including such factors as scalability and the total addressable market for the innovation.
Hunter’s approach too comes out of hard experience. His family arrived in Alberta in the 1890s, and his three children are sixth-generation Albertans. Creating entrepreneurs is a sacred trust. Hunter spent time in the oil-and-gas industry before the challenging economics of being a private operator nudged him toward real estate, and then into broader angel investing. He made mistakes early by taking large stakes in a few early-stage companies. For one, he invested a substantial sum in a company with a financial technology that seemed to be a winner and took a seat on the board. “It became my problem if it couldn’t meet payroll on a Friday,” he says. The downfall came when the company commercialized its product at the same time as a major Silicon Valley competitor. “It just destroyed the market for everybody.”
Hunter began to sour on his eggs-in-a-few-baskets approach. He “got religion” when he heard a seminar speaker from a U.S. fund who outlined a portfolio approach to angel investing that would beat the market indices. Hunter now puts small amounts into a lot of different companies and then doubles down on the winners. He takes no board seats and aims to walk away from the ones that don’t perform. Says Hunter, “In the last ten years, we put a lot of bets on the table.” Among Hunter family’s business and philanthropic interests, angel investment operates as a separate unit. “We build a pretty big funnel in examining about 300 seed-stage deals a year and usually investing in about 15. We do not typically write a very large first cheque,” he says, citing a usual range of $50,000 to $100,000. “The first investment is kind of an option on the subsequent rounds, so we get a chance to watch them perform.” And, he adds, the Bluesky team is hands-off regarding operations.
Dobbin says that in Atlantic Canada, he doesn’t see anywhere near the deal flow that Hunter encounters from his Calgary base. He sits on boards and often mentors the local companies he backs, providing important balance to the skills of the founders. He sees it as his role in the region. “They are very strong in some areas but less in others. And as we move farther afield, we tend to significantly reduce our involvement.” In less familiar areas, “we tend to co-invest with people we trust.” Co-investment with strong partners lies at the core of the Dobbin methodology.
Meanwhile, Hunter purposely avoids mentoring, which doesn’t fit into his wider portfolio strategy. If entrepreneurs want his opinion or an introduction, his team will certainly take a meeting, but with the volume of deals, he cannot be a mentor. The one exception lies in his role with the Creative Destruction Lab (CDL), the national incubator program that offers mentoring as a core service to entrepreneurs. Both he and Dobbin are active in CDL in their respective regions. Dobbin likes that he can rub shoulders with other investors, providing exchanges of ideas.
But Dobbin’s most fertile knowledge source may have been Verafin. He grasped the value of a strong management team from working with three former Memorial University graduate students who developed an artificial-intelligence solution for detecting financial fraud and sold it to the North American banking industry. The relationship was one of continuous learning and it was a two-way street.
Derrick Hunter hasn’t had a winner the scale of Verafin, yet his numbers are impressive: As of the start of 2021, Hunter could point to 10 exits, 11 Series A venture capital rollups and just seven bankruptcies. The exit values vary from 1.1 times invested capital, to 16 times. And the internal rate of return has far outpaced general equity markets. The 16-times winner was a Toronto company with “the best management team I have ever seen in a startup.” Consistent with Hunter’s approach, “I hardly knew these guys when I wrote the cheque. But they really understood their market, picked their niche and worked it hard,” Hunter says. “It was a remarkable thing to see.”
When it comes to what the government can do to get more of these winners, Mark Dobbin is particularly concerned with the public sector’s inconsistency, as programs fall in and out of favour. “It is a kind of a crapshoot sometimes in participating in government programs — in who you get and how they apply the rules.” He argues that governments should learn from their successes — and they have succeeded best from outsourcing the angel-investment function to the private sector. Done right, “it is the most efficient job-creating capital deployment that a government can do, and they can actually make money from it.”
Hunter emphasizes that the barriers to angel investing are more cultural than legislative: It’s a challenge to get Canadians to buy in. He is an evangelist to potential investors in Alberta, who are often more comfortable in sectors like energy and real estate. And yet, angel investing “is an asset class that produces market-beating returns while providing economic-development impacts.”
Both men agree that one reason for the reluctance is that Canadians don’t celebrate entrepreneurs nearly enough. Calgary is on fire with breakthrough companies, but no one is telling these stories in any depth. Local newspapers, for example, are shadows of their former startup coverage. Indeed, Hunter sees NACO as a key communicator in these stories. Hunter also cites emotional barriers in the hard-pressed energy economy: “It is hard to make displaced oil-and-gas workers understand that there are lots of really good things happening.”
Yet the enthusiasm of the two men is contagious. Their companies are like their children — they love to talk about their achievements, but they are reluctant to raise one above another. Dobbin does point to a few promising ones, such as Sequence Bio, a pre-revenue company engaged in sequencing the genome of 100,000 Newfoundlanders, building on the singular makeup of the population. There is a smart-thermostat company called Mysa, which seems poised for a breakthrough, and CoLab, which develops engineering collaboration software for 3D design and has drawn interest from the Korean car industry.
As for Hunter, he has embraced medical technology, a busy sector in today’s Alberta, and now has a strong cohort of such companies in his portfolio. “As a layman, it’s hard not to become excited about what these technologies are capable of doing,” he says, citing research activity in gut biomes and brain stems, just for starters.
The bottom line is that angel investing is good for investors, entrepreneurs and communities. Both Dobbin and Hunter are not only investing heroes, but active citizens in championing local enterprise. Both are big advocates of research universities, Dobbin with Memorial University in Newfoundland and Hunter through his family’s support of University of Calgary’s entrepreneurial hothouse. But it is also a lot of fun. Hunter’s team has this gigantic white board in the office and every time they invest, they attach the company’s logo to a magnet on the board. The group gets together over beers on a Friday afternoon, looks at the white board and debates the companies’ prospects.
These businesses could be anywhere in the world — and for Hunter, they often are — but a lot of them are right under our noses. Derrick Hunter, like Mark Dobbin, sees his mission as seeding homegrown aspiration: “There is no reason for my university-aged kids to think they have to go to Toronto or Silicon Valley to see this kind of company.”
– Gordon Pitts is the author of “Unicorn in the Woods: How East Coast Geeks and Dreamers Are Changing the Game”.