Another Monster Raise – Paymentus Closes Big Round From Accel-KKR

Yesterday we posted about iLoveRewards closing a big growth round from Sequoia. Well today, another JLA Ventures company did a big round of growth money as well. Paymentus raised a big round from Accel-KKR, rumoured to be at $20mm. That’s $45mm in capital to two Canadian companies in a very short period of time. I imagine John Albright, @johnalbright, has enjoyed a celebratory cocktail or two after seeing two portfolio co’s do big growth rounds. Lets also not forget the story of Dushyant Sharma who looks well on his way to yet another entrepreneurial highlight reel entry. And of course big hats off to GrowthWorks for being the initial funders of this company and providing funds to Canadian companies when many others were not. PR post is here.

Paymentus Corporation, a leading electronic bill payment, presentment and customer communication technology and services company, today announced that it has received an equity investment provided by Accel-KKR, a technology-focused private equity investment firm. The investment will be used by Paymentus to accelerate development, drive growth, and enhance the footprint of its real-time payment network.

Paymentus’ unified, SaaS platform delivers enterprise bill payment, presentment and revenue management technology through a self-service model, simplifying, automating and streamlining the bill payment process.

I found an old post from Rick Segal, @ricksegal, about the initial investment JLA did in Paymentus, which I think is a valuable repetitive lesson for all entrepreneurs about how to build a big successful company (something Dushyant has done a few times now):

We invested in Paymentus for a number of reasons. Our basic business thesis was that there are a number of places where (surprisingly) automation of paying certain types of bills is still in an evolving state. Paymentus has identified a number of these market segments and came to us with some great traction, proprietary technology, tons of industry knowledge, and an impressive plan for growth.

Dushyant did all the right things as a start up. Self-funded until he hit milestones that started to prove out the business stood out to the investors as well as a very clear and deep understanding of the bill payment and presentment business.

We’ve done the list of acquisitions and celebrated, I think next up its time to tally the list of big raises, as I think there are more companies “going big” than we give credit.

Trying to understand incubator math

Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

Some rights reserved by quinn.anya CC-BY-SA-2.0
AttributionShare Alike Some rights reserved by quinn.anya

Incubators are not a new addition to the financing and support for startups and entrepreneurs. On the surface, incubators and accelerators seem like a low cost way for VCs and government support organizations to cluster entrepreneurs and determine the top-notch talent out the accepted cohort. The opportunity to investing in real estate and services that enable companies where the winners are chosen by the merits of the businesses being built. It feels like a straight-forward, relatively safe bet to ensure a crop of companies that are set to require additional growth capital where part of the products and personalities have been derisked through process.

However, its not as simple as putting small amounts of investment into a high potential company. An incubator is a business and it’s sole purpose should be to make money.

What are the basics of an incubator?

The basic variables in setting up an incubator business are:

  • Cost of the expertise, facilities, services and other overhead
  • Amount of $ to be invested/deployed
  • Number of startups
  • Equity being given in exchange for cash
  • Return on the total investment

There are cost of operations: real estate, connectivity, marketing, programs and services for the entrepreneurs, and the salaries of the individuals to find the startups, provide the services and build successes. These costs are often covered by governments, in exchange for the impact in job creation and taxation base. We’ve seen a rise in incubators that are funded on an investment thesis, where an individual or a set of “limited partners” provide the initial investment in exchange for an investment in the companies being incubated.

How much do incubators cost?

The goal is to efficiently deploy capital to produce successful investments. I’m going to explore how incubators make money by making a few assumptions based on the incubator/accelerator models we’ve seen in Toronto, Montreal, Palo Alto and New York.

Basic assumptions:

  • Capital Investments: 10 startups x 20k = 200k invested with an assumed ‘post-money valuation’ of $2.2MM
    • This means you now own 9.1% in 10 startups each with a post-money valuation of $220k
  • Support Costs: 10 startups x $10k = $100k
    • This is the cost of real estate, furniture, telecommunications, internet connectivity, etc.

Alright, we’re planning to deploy $200k and it need to provide approximately $100k in services just to provide the basics for the startups. We’ve spent $300k for the first cohort and and that is before you pay any salaries, host an event, etc.

Additional costs:

  • People:
    • $100k per year salary for one person to rule them all. Call them executive director or dean or something.
    • Assuming you’re not doing this to deploy your own capital, the person or people in charge probably need to collect a salary to pay their mortgages, food, etc.
  • Events – Following the model set forth by YCombinator or TechStars we have 2 main types of events. Mentoring events where the cohort is exposed to the mentors and other industry luminaries to help them make connections and learn from the experience of others. The other event is a Demo Day, designed to bring outside investors and press together to drive investment and attention in the current cohort, plus attract the next cohort of startups.
    • Mentoring event: $1k for food costs with 25 founders
    • Demo Day: approximately $5k
    • Assumption: 10 mentoring events plus a demo day per cohort adds $40k.

The estimated costs are approximately $340,000/cohort. Assuming 2 cohorts/year plus the staffing salary costs, an incubator is looking at $780,000 that includes 40 investments and a total of $4.4MM post-money valuation. If we assume that I’m a little off on the total capital outlay, and we build in a 30% margin of error this brings the annual budget to appromimately $1MM/year to operate.

How do incubators make money?

Incubators make money when the startups they take an equity stake in get big and successful. The best exits for an incubator come when one of their startups is acquired. Why acquired? Because the path to getting acquired path is shorter than the path to going public which would also allow the incubator to divest of their investment.

Let’s do the math. If your running an incubator hoping to get respectable returns on the $1,000,000 you’ve laid out above, let’s say it’s not the mythical 10 bagger but a more conservative 3x, the incubator needs one of the companies to exit at near $30,000,000. It can be one at $30MM or any combination smaller than that totalling $30MM. This needs to happen before any dilution and follow-on funding for your cadre of companies. You have to assuming that they can make it to acquisition on the $10,000 and services you’ve provided. For more on incubator math, check out there’s an incubator bubble and it will pop.

The bad news is that it isn’t as simple as that. Startups are not just something that exist in a vacum. There are a lot of unknown variables that can make or break an incubator.

  • percentage of startups that fail (or turn into zombies) in the first two years after investment
  • time frame return is expected
  • how many startups currently produce that kind of return annually
  • total number of startups that receive investment in any given year
  • total number of acquisitions in any given year
  • avg. number of years a startup takes to get to acquisition (because they aren’t going public)
  • avg. price a startup sells for (I bet those talent acquisitions drag the average way down)
  • what do VC’s currently spend on their deal pipeline?

It is the unknowns that are where the gamble exists. You can tweak the numbers all you would like but assume startups have a no better fail rate then any small business. The common thinking on that is 25% of businesses fail in the first year, 70% in the  first five years? If just more than half of those companies are alive in one year you are doing well. If one out of those 20 is acquired in 5 years and you get 3x return do you succeed? Do you have to run the incubator for the 5 years at $1MM/year to be able to play the odds?

Maybe this is why so many incubators focus on office space, it’s easy to show LPs what they are getting for their $5MM for 5 year investment, plus an impressive number of “new” startups that have been touched by the program (often without an exit, you know the way incubators make money).

What am I missing?

Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

Aaarggh – VC Funds Are Drying Up?

Yesterday and today I’ve been trying to make sense of two different data points that came out on the Canadian business scene.

One data point confirms that we are having a banner year across Canada. Check out the numbers:

* Q2 private equity deals worth C$5.7 bln in Q2
* Total deal value more than in all of 2010
* Deal volumes up 40 percent over Q2 2010

(Side nostalgic note, I love that Berkshire bought Husky, it was actually my first co-op job and I have always had huge respect for Robert Schad – a giant amongst Canadian entrepreneurs)

As you know from several of my posts on exits, this and this, the startup high tech scene are big contributors here.

So, this means that we are returning capital on investments made into companies in Canada, right? Which means, since there is a healthy market for exits, folks should be willing to supply funds to VCs to start companies…. right?

Well, according to CVCA, it looks like VC fundraising fell flat on its face.

Smith said slow fundraising by venture capital funds was undermining deal-making, with new commitments sliding to C$132 million in the quarter, from C$308 million last year.

“VC investment, which has historically been the catalyst for knowledge-based economic growth, cannot effectively do this job until we take determined steps to ensure more stability,” Smith said.

Falling fundraising is part of a continuing trend.

In 2010, new commitments fell 24 percent from the previous year to their lowest level in 16 years. They fell further in the first three months of 2011 against the first quarter last year.

WTF!?!?! Did VCs forget to cut cheques to their LPs? Are the companies getting bought out not VC funded? Something feels out of whack here. Are there simply not enough fund-makers ala Radian6 to make a reliable return on investment? We are doing some digging to get to the bottom of this. It does resonate that entrepreneurs should focus less on VCs for funding and need to be looking towards angels & incu-ellerators for their early stage funding needs.

UPDATE: This article from the Globe really outlines how VC funds have been in long decline.

Year VC invested/Companies Financed
1998 $1,511,000/807
1999 $2,617,000/810
2000 $5,876,000/1,007
2001 $3,747,000/720
2002 $2,583,000/663
2003 $1,613,000/615
2004 $1,677,000/545
2005 $1,699,000/558
2006 $1,701,000/406
2007 $2,051,000/402
2008 $1,406,000/388
2009 $1,039,000/337
2010 $1,129,000/357

These numbers tell something interesting – apparently in Canada its gotten more expensive to start companies??? In 1998 $1.5mm resulted in 807 companies getting financed, while in 2008 $1.4mm results in 388 companies getting invested. What gives?