‘This is our superpower’: Allen and Eva Lau on spotting start-ups with an edge

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Once a builder, always a builder. Such is the mantra of the serial entrepreneur.

Those who have founded, grown and exited companies often become captivated by the process of helping to build something successful from nothing. That explains why family-office clients are often current or former business owners who have amassed significant wealth and enjoy investing in early-stage firms.

Allen and Eva Lau are prime examples of the (serial) entrepreneurial spirit in action. The husband and wife duo are the powerhouse team who drove the success of the social reading and content community platform Wattpad. From humble beginnings, the company has grown to more than 90 million monthly users globally. Wattpad collects billions of data points from its readers and uses trend and demographic insights to translate its most popular content into films and television shows.

The Laus exited the thriving business last year for $600 million in a sale to South Korea’s Naver Corp. Now they are committed to making direct investments and sharing their expertise to help grow Canada’s tech sector.

“We built the company from the ground up and raised more than USD $120 million in venture funding,” Allen Lau recalls of his time at Wattpad. “Now we would like to leverage this unique experience … to help other entrepreneurs in Canada turn their dreams into big successes.”

They look for ‘product-oriented people’

The Laus founded Two Small Fish Ventures to achieve that vision. The venture fund’s mission is to support growth-oriented Canadian technology start-ups and early-stage companies.

They have the backing of institutional investors such as CIBC and Canso Investment Counsel Ltd., along with several family offices. Two Small Fish Ventures has built strong relationships with the likes of Creative Destruction Lab at the University of Toronto’s Rotman School of Management, the University of Waterloo start-up incubator Velocity, and a range of entrepreneurial networks from coast to coast.

The couple aim to add value to transactions by leveraging their extensive experience with early-stage start-ups, along with their ability to vet opportunities and find commercial jewels with the potential to deliver lucrative returns on investment.

Canada is behind Silicon Valley in terms of producing growth-stage innovation companies, but the seeds have been planted. We have high-skilled immigrants, good schools and the capital is there.

Allen Lau, serial entrepreneur

So, how do two of Canada’s most successful tech entrepreneurs make their own investment decisions?

“We look at whether the entrepreneurs involved are product-oriented people,” explains Eva Lau. “Are they gritty, and do they know how to build companies that bring disruption to their industries — and are they data driven? Founders need to understand the power of data to shape strategy.”

That means engaging with companies that are using digital technologies in completely new ways. Artificial intelligence, machine learning, blockchain technology and quantum computing are more than buzzy terms to the Laus. They’re innovation-based criteria on which to evaluate potential unicorns.

A few of the Laus’ successes

“We’re looking at companies bringing transformative tech to the market,” Eva Lau says, adding that the duo mostly eschew the temptation to work with entrepreneurs that only fit a certain mold.

“There will never be only one way to find opportunities,” she stresses. “Sometimes entrepreneurs will come to us and say … can I share my idea with you? If this person is from a high-growth company and has caught the entrepreneurial bug, we’re always happy to have a chat and, if it’s the right opportunity, we’re always happy to back them.”

In terms of its key investments, Two Small Fish Ventures has had many winners. Two of the more notable are Toronto-based media and technology firm Bitstrips — which was acquired by Snapchat parent company Snap Inc. in 2016 — and SkipTheDishes, acquired that same year for a reported $200 million by British food ordering and delivery service Just Eat PLC.

But Eva Lau points to Ada Support Inc., a brand interaction platform that allows organizations to automate conversations with customers and employees, as one of the standouts. What started as an angel investment in 2016 has proven particularly lucrative — the company now boasts a valuation of about $1.2 billion.

In that case, Ada changed its initial strategic direction and the company eventually found success in the customer support space.

“They went with a consumer price point that was very appealing, even for a start-up, because they wanted early adoption so they could get the data set to understand how customers interact with chatbots,” Ms. Lau explains of the company’s pivot.

Canada has the goods

It’s a good example of a company that, like Wattpad, leveraged data to refine its business model and grow its user base, while promoting user engagement to slowly drive bottom-line results. That was a strategy that served Wattpad well, so it’s no surprise that Ada fell well within the Laus’ investment sweet spot.

But why invest in start-ups that, by their very nature, have a high failure rate when the duo could simply grow their wealth through more passive means?

“This is our superpower, and we want to leverage it because we have the ability to spot the gems before other people see them,” explains Allen Lau. “Canada is behind Silicon Valley in terms of producing growth-stage innovation companies, but the seeds have been planted. We have high-skilled immigrants, good schools and the capital is there; we just lack the Googles and Facebooks. We want to use our experience to … help Canada win in style.”

But, as Eva Lau notes, investors have different comfort levels with very early-stage companies. Some want to be hands-off, while others want to be actively involved in a company’s development. “It’s not one-size-fits-all,” she says, adding that investors need to clearly understand their risk tolerance and the preferred scope of their investment.

Allen Lau says that family offices can play an important role in helping their clients invest in start-ups, but they need someone on their team — or to work with dedicated funds — who can accurately assess risks and opportunities. While some companies will return 100 times or even 1,000 times an initial investment, the start-up failure rate is high.

“If family offices want to get into this asset class, they need to build a portfolio,” he says. “They can’t just invest in five start-ups and hope that one will be a home run.”