PV LP Q&A Interview with Patricia Lorenz
Patricia Lorenz is Chief Operating Officer of Avertus, a leading company creating mobile EEG devices and software for collecting and analyzing data from brain activity and creating interfaces for marketing, robotics and discovery focused research. As COO, she is the company lead on hardware development, quality systems, regulatory matters, and finance within this neuroscience company.
She is an MBA, CPA in the US and Canada and a DVM who is a strategist, entrepreneur and investor. She has held senior roles in operations and finance in the software, food processing, consumer products distribution, diagnostics, retail and publishing industries and gained IP experience running a university patenting and licensing office. In April 2018, Patricia was included in Canada’s inaugural ‘Inspiring Fifty‘ women in technology and innovation.
Chief Operating Officer
Patricia Lorenz is an accomplished angel investor with broad experience in accounting and financial management, commercialization of technology, investment evaluation and strategy, and non-profit management. In addition to running a university patenting and licensing office, she has had previous senior level operating and financial experience in a vast array of industries. Most recently, Patricia was included in Canada's first crop of 'Inspiring Fifty' women in technology and innovation.
Q: How does PV fit in to your technology investment thesis?
A: As an angel investor, there are certain high-growing companies that do not come through our network. PV’s funds have given me access to companies that I would not otherwise have the opportunity to invest in through my own channels.
I have never been terribly keen on funds, but I was attracted to PV’s model and the teams active outreach to potential investees. While they have a defined sweet spot and revenue expectation for the companies that they engage with, they also track earlier-stage companies that show potential. By forming these relationships, PV opens the doors to longer-term prospects and a broader base of exciting companies for their investors. The partners also had previous experience in the software industry. I think successful investors invest in what they know.
Richard Swenson, who is responsible for managing and investing Yale University’s endowment assets and investment funds, wrote two books on portfolio management. In them, he expresses concerns regarding the venture industry with one exception: companies that both co-invest their own capital to ensure that their interests are aligned with their investors and take their percentage only after their investors have had their capital returned. Plaza Ventures exemplifies this methodology. I feel confident that the PV partners interests are aligned with my own and, as a result, I do not have to worry about their dedication to making successful investments and exits.
Q: You have led a diverse and successful career. What growth lessons can you share with entrepreneurs currently scaling their businesses?
A: I encourage companies to focus on their development milestones while being careful of overpromising and underdelivering. Disciplined investors seek companies and operators that actually accomplish what they set out to achieve, particularly on those bold claims often made in initial meetings.
While you must prioritize growth and delivering on promises, be weary of overexpansion. Growth, particularly within the software industry, is very important. Oftentimes, however, when a company’s growth is accelerated by substantial amounts of capital, their spending ramps up and their business model changes very quickly and radically. If not managed properly, over-expansion can lead to capital constraints if revenue fails to grow as quickly as anticipated and new employees can be less productive if either the mission or the “how” loses clarity as leaders become more distant from day to day operations.
Investment preferences can also change quickly and landing the next round can take longer than initially expected. BuildDirect, a Canadian company, is a good example of this. While the company had generated significant revenue increases in the last several years, it did not achieve profitability because costs far exceeded revenues. They relied on debt and equity financing to fund their operations and had a high run rate. As a result of this, the company was required to file for bankruptcy in late 2017 after a financing round fell through. For this reason, it is important for entrepreneurs to understand what is required of them to scale and to balance growth objectives with a model that allows for survival if the investment climate changes.
My work in the diagnostics and device field has also taught me to take advantage of government programs – particularly those programs that can bring in potential new talent and help develop new products or services. Programs such as Mitacs and the Industrial Research Assistance Program (IRAP), for example, have been wonderful assets to Avertus. The former allows you to leverage funds and work with students that you may choose to hire at a later point in time, the latter also helps with current team expansion.
Unless one has Uber-like pools of funding, entrepreneurs should not ignore regulatory issues. Those matters are often much more challenging to resolve later on than they are to get right from the beginning. Companies should implement standards and qualities systems, as well as risk management practices.
On software, it isn’t sufficient to just obtain assignments of copyright/IP ownership in your employment or subcontracting agreements. Copyright also provides “moral rights” to creators. Moral rights is the right to have your name associated with a “work” and the right to the integrity of the work. So someone with moral rights can affect how you describe your product brand and can make improvement hard to implement without substantial rewrites. Moral rights can’t be assigned – they can only be waived. If you are subcontracting to a company, you need assurance that the company has obtained waivers of moral rights from its employees.
Similarly, companies with many founders should consult attorneys on capital structures that recognize and reward different levels of founder contribution over the first five years or so to avoid problems if people leave or when investors are engaged on strategic matters.
Q: You have served as Director for the National Angel Capital Organization, and Chairman of the Board of Angel Investors Ontario (formerly the National Angel Organization – Ontario). During your tenure at NAO, you were able to help create over 3,200 jobs with less than $10M of government funding. What gaps have you identified between government funding and private investment, and do you feel existing government funding is sufficient to support the next generation of entrepreneurs?
A: I do not think existing government funding is sufficient—in fact, I believe much of current government policy is problematic. At Angel Investors Ontario, we persuaded the provincial government and the Federal Development Agency to support the development of formal angel groups. AIO would hold competitions for funding grants of up to $50k to non-profits with angel led boards, to foster entities that would allow angels to meet and engage with companies seeking investments. The groups had to have a core group of angel investors to qualify. The funding would support a manager and sometimes an assistant or paralegal to coordinate meetings and due diligence. Robust conflict of interest policies and external audits were requirements to assure proper accountability and that each angel investor made his or her own investment decision. AIO Ontario gathered investing statistics and reported them in aggregate to the government. These numbers would include total dollars, initial versus follow-on rounds, sector distribution of investment, number of group members and jobs created.
Most groups were regional in nature, composed of angels interested in investments but also giving back to their communities by supporting and mentoring the next generation of entrepreneurs. Each group interacted with one or more Regional Innovation Centres, which provided programs to help early stage companies become “investor ready”. The program that FedDev had to match angel investment with low interest repayable loans also helped investee companies grow.
Unfortunately, overall, the amount of investment by the government to support the development of local business has dropped from what it once was. Back in the 1980s, Canada spent 8-12% on business-led investment, on par with the US. While the US has maintained support for businesses at around 8.4%, Canada currently sits at 2.3% – lower than all but a few countries tracked by the OECD. Most of that money supports large employers, who are often subsidiaries of foreign multinationals, and the 2.3% has remained relatively flat for the last 5-10 years. From this point of view, the Canadian government has provided very little support to private businesses.
But it really should, because business funding with public money provides a better return than many other usages. Between 1998 and 2012, the federal government put $98 billion dollars into academic led research, thinking it would create a commercialization bonanza. However, during that same period, licensed revenues from universities only grew from $19 million a year to approximately $67 million a year – a poor return.
In contrast, a 2012 study on IRAP, showed that for every dollar you put into IRAP, the government gets $11 back through payroll taxes and in income taxes on new hires, as well as in additional sales. That’s a much greater benefit to the economy overall.
Academic research and business funding once had similar levels. Compared to a country like China, which focuses on applied research, Canada tends to focus on fundamental research. Fundamental research is important, but Canada has failed to capitalize on it. Similarly, producing PhDs is important, but not if they are under-employed.
I think the government should put as much money into IRAP as they put into the academic system if they want to catalyze the growth of Canadian headquartered companies.
While Canada has a lot of incubators and accelerators that provide early funding to small companies, most focus on young entrepreneurs who lack experience. While they are important, we should also realize older entrepreneurs with business experience for decades created new Fortune 500s (also known as the International 500). These operators have a better understanding of their markets and often have contacts with both suppliers and customers. It’s a lower risk investment opportunity for the government and private firms. Entrepreneurship is important at all levels.
Q: As a successful female entrepreneur and investor, how did you find your place in the well-documented gender imbalanced landscape of finance and tech? What advice do you have for women in tech?
A: I was part of one of the first groups of women admitted to Yale University. Because of this, to some extent I’ve always been accustomed to being ‘one of the few,’ a mentality that helped me navigate the field. In terms of operating in the angel investing space, the diversity of my education and work experience was a significant asset in boosting my credibility. My background in accounting and tax, understanding of science, and interest in many different industries has allowed me to dig deep and directly take part in the due diligence processes, helping me speak the language of business and arguably outweighing any biases in gender. I originally gained operating experience representing the interests of investors.
My advice for women in tech is to gain technical skills, become a problem solver, and learn to think strategically. Develop an understanding of your company’s goals, identify what is required to achieve those goals and position yourself at the forefront of those efforts. Go beyond what is expected of you within your individual job description and find ways to contribute. Management is always looking for someone to find solutions to the onslaught of problems (both hypothetical and real) that arise when building a company, so don’t be afraid to think beyond your current role. Raise issues of concern but also suggest solutions. By proving yourself as a performer, you leave nothing for people to criticize.
Q: In your opinion, what sets apart a good entrepreneur from a great entrepreneur?
A: Because we live in a diverse world, I think it’s important for entrepreneurs and companies, particularly in Canada, to have an international outlook. Our market is small and there is a lot of room to grow outside of Canada. In addition to prioritizing sales growth, entrepreneurs should also be focused on growing shareholder value.
I like entrepreneurs that take a balanced approach to their operations and strive for stability. Particularly, they make sure not to create instability by neglecting certain areas of their business. Great entrepreneurs make sure there are trustworthy individuals overseeing functional areas that they cannot attend to personally. Effective management is very important.
I do not believe in leaders that are abusive to their employees. This is probably more of a human trait, but I think that if you’re abusive to your employees then you create instability for the business, which is a terrible management practice. To achieve a company’s ends, management needs to create passion in their employees. The importance of this philosophy is starting to surface through movements such as #MeToo and Time’s Up.