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Case Study – the Brightside Exit

by Basil Peters on December 1, 2008 · 2 comments

Helge is the most recent university student I have helped become a millionaire.
I invested three times in Helge’s company. My BC Tech Fund was the first fund to invest. When I invested the first time there was only Helge and one other person on the company payroll. This is a summary of Helge’s story.

Helge’s story

Helge came to Canada in 1998 when he was 19 years old. He completed high school, and an obligatory year in the military, in Germany. He came to Vancouver to study Physics at the University of British Columbia (UBC).

When Helge arrived in Canada, his first priority was to learn to speak English. When he first arrived from Germany, he had no idea where to stay or even how to get around the city. Because he was just learning to speak English, it was all very confusing.

His student project

This experience got Helge thinking about a way he could help other international students. Helge suggested to UBC’s Vice-President of Student and Academic Services, Maria Klawe,  that he start a student project to help other international students settle in at UBC. Maria liked the idea and introduced Helge to Dr. Lorne Whitehead. When they met, Helge did not even know that Lorne was in the department of physics.

Junior research assistant job

Helge made a good first impression, and Lorne he offered him a job in his lab as a junior  research assistant. Helge’s job included organizing the lab, maintaining the computer network and helping build prototypes. At this point, Helge had just become a second year undergrad.

Following some earlier work by Lorne, Helge built an early prototype of an experiment that Dr. Whitehead was working on to improve the contrast and brightness of Liquid Crystal Display (LCD) displays. At this point, neither Helge nor Lorne had any idea whether the idea had commercial potential or useful application in the real world. But, after building the early prototypes both Helge and Lorne became more and more excited.  The “eureka moment” came in 2000 when they had a prototype that actually worked.   They both realized this innovation could have an impact on an enormous market.

The start of a company

Helge began to visit universities across North America looking for the brightest minds who could help develop the potential of their high dynamic range (HDR) display technology.   He traveled back and forth across Canada and up and down the West Coast meeting people, hoping to find others that were also excited about their idea.

In 2001, the group received an NSERC Strategy Grant with Lorne has the principal investigator. Helge said the main reason they started the company in 2002 was because the research grants would not cover the costs of things like business travel, which were now becoming significant.

Helge and Lorne started a company called Sunnybrook with another student in Lorne’s lab, Michele Mossman, and an early angel investor, Don Graham. They renamed the company Brightside in 2004. Helge was the CTO from the first days in the lab until the company was sold in mid 2007.

Their first angel investor and financial partner

Early on in Brightside’s evolution Helge met Don Graham. Don is a well-known local angel investor. He made his first millions building Canadian Tire Franchises in Western Canada. Since retiring from his Canadian tire business, Don has been an active angel investor with an affinity for university spinouts. Lorne and Helge got Don excited about the HDR technology and he became their first investor.

Don and Lorne had worked together before on another university spin-off, so there was already a well established relationship and a high level of trust. Don agreed to fund the company in the first year without any formal documentation. Helge remembers Don coming in every month and having Helge or Michelle present that month’s expenses that were not covered by the grants. Every month, Don took out his checkbook and wrote a check to reimburse Helge and Lorne’s credit cards for the expenses they agreed were  appropriate. It was not a lot of money, some months only a couple of thousand dollars, but it was really what got the company started.

With the benefit of hindsight it’s clear that Don was more than just their first angel investor –he was really Helge and Lorne’s “financial  partner”.  Don also helped Lorne and  Helge build a board and attract additional angel investors.

My first investment

I first met with Helge when there were only two people on the Brightside payroll. They had recently moved into an incubator building on the UBC campus called the Darren  McGavin building. I can clearly recall walking into the office that first time and seeing Helge and one other student sitting in a room that was about the size of an average bedroom. The small room was still mostly empty.

The first prototype they showed me was small, dark and grainy - but I was hooked.
After I got excited about the potential for the technology, the next thing I wanted to do was look at the patents. I read them all and was impressed with the quality. Lorne Whitehead is an experienced serial entrepreneur, who understands the value of patenting ideas early.   Lorne is often described as UBCs most prolific generator of patents outside the life sciences.

I then spent a couple of weekends searching through the online patent databases to see if I could find any prior art. I found some other patents that give me some initial concerns.   But Helge and his partners were able to give me a reasonable degree of comfort. There are never any guarantees investing this early, but I was comfortable taking some risk and making an initial investment after this discussion.

Classic incremental financing strategy

I decided to become Brightside’s first fund investor. My recommendation to the team was they start small, deploy their capital effectively and then raise another round when they could demonstrate some additional progress. This was a classic incremental financing strategy. My first investment was $100,000 at a pre-month evaluation of $3.2 million.   This was at a higher valuation than I would normally be comfortable with for a pre-revenue company, but because of the outstanding quality of the patent filings, I stretched myself to the edge of my comfort zone.
Helge and his team delivered on what they promised and showed me a significantly better prototype about six months later. That milestone convinced me to invest another  $125,000 at a pre-month valuation of $4.2 million. We also agreed on with the milestone should be for the next round of financing.

Brightside continued to make good technical progress and when I saw the next version of the prototype – now a 37 inch model – I could not resist investing for a third time. I  invested another $100,000 at a pre-money valuation of $12 million.

It was not easy to invest in Brightside

It was a real challenge for me to invest money in Brightside. I was the first fund investor to invest, and other than Mike Volker’s WUTIF fund, the only fund to successfully invest in Brightside. The company’s DNA was highly resistant to fund investors. There were a couple of reasons for this. Don Graham, the company’s initial angel and primary financial partner in the early days, like a lot of angel investors had some very bad experiences with Venture Capital Funds in the early 2000’s.  Don had invested in a number of promising  early stage tech companies and had been subsequently either washed out by the VCs when they invested or seriously disadvantaged by the terms in the venture capital preferred share investment agreements.
Don is well known in the local community for his three-inch thick paper-based presentation on the evils of preferred share investment structures. It is impressive how many people he has presented that to in the local community. It’s pretty near certain that if Don Graham is on the board of a company, preferred shares are out of the question.

Aversion to preferred shares

In Brightside’s case, there was another interesting element. The University of British Columbia had agreed to license the technology to the company in exchange for equity, rather than their more typical royalty agreement.   This was a very significant advantage to the company because tech investors are highly resistant to investing in companies where the intellectual property is not ‘owned’ by the company.   In life sciences, it is more common for the company to have a licensing agreement with the university, rather than an assignment of the patent or outright ownership of the technology.   But for whatever reason, this is very unfamiliar to tech investors, and many consider any kind of complexity around the intellectual property to be a “death cookie”.
In exchange for UBC taking equity, instead of a royalty, the Brightside Board had given the university strong assurances they would not issue preferred shares.
Helge was even quoted in the Globe and Mail www.theglobeandmail.com/servlet/story/RTGAM.20050705.wangels05/BNStory/ as saying : “We have never and will never issue shares that have any kind of preferences at all. Basically, if you buy a share in our company, it doesn’t matter who you are, you are buying that portion of the benefits.”

For the BC Tech Fund, common shares were perfectly acceptable because of our conviction about alignment and being fair and equitable to the entrepreneurs and angel investors. In fact, both of my funds had been strong vocal supporters of common shares. Even though we were aligned on structure, Brightside was extremely challenging to invest in. In the BC Tech Fund, I had an investment committee and a board that had to approve investments.  As a result, it took longer me a little longer than individual investor to complete an investment.

Brightside’s CEO, Richard MacKellar wanted to close the round by the end of that month.  My fund had an investment committee meeting that was regularly scheduled for few days  after the end of the month. I politely asked the CEO for an extension. He told me that would not be possible - he was determined to close the financing regardless of whether my money was in.  The only way I could complete the investment was to go to the chairman of my fund, the legendary Dr. Don Rix and ask to borrow the money from him personally. Don agreed, and I paid him back from the fund once the investment approval was obtained. I have never heard of a fund, or a fund chairman doing that before.

Never did raise money from bigger VCs

Brightside did try to complete a traditional venture capital round after I invested the third time. Because my fund had already invested, I received many phone calls, and several meetings with VCs who wanted to invest in the company. I was enthusiastic to help because I wanted to see Brightside raise the capital they needed to grow the company. Despite my best efforts, and those of the company, not one traditional VC would invest in the company. Several liked the technology very much, but hated the fact the company will only issue common shares and just could not get comfortable enough to make the investment.

In total, Brightside raised a little over $7,000,000.00. Most of this money came from individual angel investors. This was augmented with a couple of million dollars of research money from the NRC during the early days of the project.

The sale to Dolby Labs

Brightside was sold to Dolby Labs in the spring of 2007 for US$28 million. This was around $9.00 per share. This exit produced an excellent return for my fund – returning about 300% on my investment in about three years.

The exit also made Helge, a multimillionaire. Professor Whitehead also received a great  deal of money for his shares in the company UBC also received over a million dollars for its original intellectual property contribution. In this case, university did far better with  equity then they would have done through a royalty agreement because the company’s sales were still very small.
Helge, now 29, is finally getting a chance to finish his doctorate. One day before the  transaction closed, he also had a son – his first-born.

Bright side is an excellent University Millionaire case study. Helge met the professor he worked with through a student project. That student project was the early expression of Helge’s ambition and capability beyond traditional academic pursuits. The project also gave Lorne Whitehead, his first glimpse of a promising young man (who was still learning  to speak English at the time.)
This is also an excellent case study because Helge got involved with the project when he was still in his first year as an undergraduate. This story shows that no matter how early you are in your university career, it is never too early to get started on a spinout company.  Helge started off as a junior assistant and wound up being a multimillionaire Senior  Research Manager for Dolby Labs all before his 29th birthday.

No traditional VC funding prior to exit

Brightside is also an excellent example of the way tech companies are being funded and sold. Today, at the early part of the 21st century, it is becoming quite common for companies to grow and be sold with only angel funding. This is usually done entirely with straight common shares and simple agreements.

Brightside today

Like a lot of 21st century success stories, Brightside was sold for several tens of millions even before the product made it to production. This was good for everyone involved. In  addition to creating some university millionaires, it produced an excellent return to the angel investors who funded the company. They will probably take their original investment, plus the gains, and invested into more early stage companies in BC. The acquisition also will enable this exceptional UBC technology to be adequately funded and  hopefully end up in homes and companies all around the world.

Today, the company is still in Vancouver and hiring more researchers, engineers and technicians to continuing the commercialization of the Brightside technology.

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Basil Peters August 31, 2011 at 10:07 am

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