I love it when newspapers provide great examples of economic geography. In just the past few weeks, I’ve seen a cornocopia of great articles that really exemplify why economic geography is so amazing. We have Adam Davidson’s Making it in America cover story in the Atlantic (which I’m currently forcing 200 students to read and then write about its connection with the transition to Post-Fordism in the American sunbelt), and the NYTimes’ fantastic investigations into Apple’s use of Chinese labor and even Paul Krugman is getting into the game, talking about clusters and such.
And now, just a few seconds ago, I saw an article in the Ottawa Citizen about the lack of angel investors in Canada’s Capital City. I’ve touched on this topic before, and I’m happy to say that I’ll have a chapter in volume 22 of Advances in the Study of Entrepreneurship, Innovation and Economic Growth on it. It’s called “A Series of Unfortunate Events: The Growth, Decline, and Rebirth of Ottawa’s Entrepreneurial Institutions” because I’m a sucker for titles that contain other titles.
So, credentials: established. The article in The OC basically bemoans the lack of angel investors in the Ottawa region. In essence, in addition to the lack of medium and late-term venture capital investment that plagues the rest of Canada, Ottawa also has a problem in that there’s very little early-stage seed money to help entrepreneurs transition from a raman-based development process to something more resembling a real, human, life. In 99% of cases, this money comes locally from either the investor’s family and friends, and after that, by a wealthy individual looking to get in at the very early stages of a firm with huge growth potential.
The article seems to place the blame on the fact that the area’s richest individuals aren’t acting as angel investors. That’s barking up the wrong tree. First, local tycoon Terry Mathews does invest in startups, they’re not necessary local. He’s Murchock to an A-team of super-smart and motivated technology workers. He brings them together, gives them resources, and points them to a problem he’s identified as needing to be solved.
But the biggest point that this article misses is what happened to the angel community in Ottawa. There used to be one! Indeed, it was one of the most active in the country, made up of successful Nortel execs looking for something to spice up retirement and successful entrepreneurs looking for some post-sell-out fun. Indeed, the large federal workforce in Ottawa meant that it was fairly easy to find a friend willing to invest a bit, since they have pretty nice salaries and the best job security in the world. Ottawa saw a whole bunch of angel investment plays, both formal and informal, throughout the dotcom boom when everyone and their younger brother was starting a web startup. Everyone was going to be the new GeoCities!
But the crash happened. Firms that had taken on angel investment went under and obviously, the angels lost their dollars. However, the sadder story is what happened with companies that had taken on venture capital. The venture capitalists (I’m imagining them as something like this) structured the deals to protect them at the cost of the original founding entrepreneurs and the early angel investors. In the death spiral of the dotcom age, they were able to force the company to sell or liquidate and take back their entire investment, often leaving those orignal investors with nothing. This had the effect of mostly shattering the local network of angel investors. Those that had money left to invest became very gun shy, hesitiate to go through that again. Upsell altert: the forthcoming chapter discusses why a community of angel investors is so critical.
This has caused a decade of entrepreneurs, an entire generation, to be unable to get any early stage angel investment. They’ve had to re-adjust their growth strategies to be able to use only organic revenues to grow the company. Essentially, they chose business strategies that would let them grow without needing any investment. Companies like Shopify, Trustifier, or Klipfolio (note: maybe I interviewed the founders of these firms, maybe I didn’t. I’ll never tell) took a cloud-based or Software as a Service route as a way to lower initial startup costs and provide a predictable path to growth. When they realized they couldn’t get anglels
So, the problem of Ottawa is not just there aren’t enough deranged millionaires throwing pennies down from their air-zeppelins. Rather, it’s the fact that many medium sized potential investors, people who could write a check from $10,000 to $100,000, either got burned a decade ago, or have been hearing stories about how other people got burned a decade ago. It’s a bigger problem than just a lack of investors, it’s a lack of will. That’ll take much longer to fix.
