Canadian VCs are being cut loose, and that’s a good thing

Mark MacLeod just wrote a post about Canadian VC that cuts to the chase

If there are any clouds on the horizon, they relate to the disappearance of the US / Canadian border when it comes to VC. When I first entered the startup World, you had no choice but to raise seed and series A in Canada. Only then could you tap the US funding markets. That’s no longer the case.

[ . . . ]

There is a perception (rightly or wrongly) that US investors are better than Canadian ones. And that given the choice, founders would raise in the US. Whether this is true or not is not the point. It’s the perception and with the borders coming down it represents a real risk to Canadian investors.

Mark did it in the nicest possible way, so a lot of people may not have noticed that he just condemned the entire Canadian VC model. It was something I didn’t even have the guts to do lately, so I was surprised to see Mark call the spade a Spade and get on with the conversation.

The border is gone and the game has changed. Mark argues that Canadian VCs need to pay up more, build their brands and build their networks. That’s a great start.

Canadian entrepreneurs have been told for years to step up and build global companies. It was hard and confusing to hear at first, but I think we’ve managed to do it. Whether it is Tobi in Ottawa, Kirk in TorontoRyan in Vancouver, Oleg in Toronto, Mike in Toronto, Kenshi Wilkins and Eric in Vancouver, Yona in Montreal, Temo in Montreal etc etc etc [I’ve missed so many here — more to come on David’s Hot Shit List] — I would argue that Canada is producing more world-class entrepreneurs more quickly than ever before.

We’ve spent the last 10 years being told we weren’t bold enough and need to think bigger. The argument has shifted and our startups now know what it means to be world class and they are doing it.

It’s time for the Canadian VCs to step up and do the same.

It doesn’t take nearly as much to get a US based VC to take a look at a Canadian deal anymore. If they have never done a deal in Canada before they usually have a friend who is just a call away who has and it can be demystified pretty quickly. The legal headaches are gone as well.

If you are a VC in Canada, focused on the Canadian market, then you have far more competition for deals now than you did even a few years ago and the job is more thankless than it has ever been.

So here’s the challenge for the the new players in Canada. Rho, Celtic, OMERS, iNoviaRelay, Golden, Klass, Wertz, Round13, etc…

Entrepreneurs are going to start telling a story about under-paying, small thinking and isolated VCs. As US VCs roll off the redeyes in to Vancouver, Edmonton, Toronto, Montreal, Halifax and elsewhere it should be you who is bringing them to town to see great deals which are priced right and which are built to succeed from right here in Canada.

The challenge is that you, like the entrepreneurs you fund, now have to be world class. That probably means being on a plane more often and pulling the trigger on deals within days, not months.

Nobody should start a VC fund in Canada today unless they want to work as hard or harder than any startup founder they will fund.  It is no longer a job for ex-bankers and management consulting dropouts. The job is hard, mostly thankless, and more competitive than ever.

That’s why I love this shakeout we have undergone and the one that is continuing today. VC in Canada had to go through the wringer so that we could end up with a handful of the best and most capable operators who can help springboard Canada further on to the world stage. We aren’t going to do it through myopic provincial funds, big corporate funds or economic development agencies.

It’s going to happen through hungry hustler GPs who have something to prove and only a little time to do it in.

Canadian VCs need to be startups themselves, because in the end only Startups can save venture capital in Canada.

Find a cofounder

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When Jevon and Jonas and I first met back in 2006 it was because we shared an interest in early stage, emerging technology companies. We were excited to have found other people in Toronto that were interested in the same things. Startups. Technology. Emerging business models. Funding. It was great. It was early days, it was easy to connect with others to figure out who was interested. And to move things forward. We wrote about the stuff we found interesting, hosted events that we wanted to attend (anyone remember StartupEmpire), and have tried to be tireless promoters of high potential growth technology startups in Canada. We’ve tried to connect engineers and designers. But as the community has grown we’ve done a very good job outside of repeated participation at events in connecting potential cofounders.

How do you meet a cofounder?

This is where Founder Dating comes in.

FounderDating brings together super talented entrepreneurs with different backgrounds and skill sets to start innovative new companies. All too often you know people with similar backgrounds and skills sets to your own.  We help you find co-founders with complimentary skill sets.

The thing that Founder Dating brings that are crucial:

  • High Quality – everyone is screened for quality and readiness. Applications and members’ identities are confidential (many have jobs still) but a few of the folks who are part of the network are founders or early employees from: Stackmob, Snapfish, Zynga, Gilt and Loggly, just to name a few.
  • Balanced – member base is 50% engineers/50% non-engineers
As Paul Graham says,Not having a cofounder is a real problem. A startup is too much for one person to bear.”  It’s true you want someone complimentary in skill sets, but you also want someone who is going to be able to weather the ups and downs with you.

What Founder Dating is Not

  1. They are not “speed dating for cofounders” – they don’t do speed dating, never have, never will.
  2. You do NOT need an idea to apply.  Just need to be ready to start something or at least work on a meaningful side-project (20ish hrs/week).
  3. This is NOT only for first-time entrepreneurs – a huge % of our members are repeat entrepreneurs
  4. FounderDating is NOT a meetup/event – per the above, we’re an online network and as first introduction to your round and the community you’re invited to an initial event but the power is in the network you become a part of.

We need to unlock Founder Dating for Toronto. Get on it!

Not all founders are created equal

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I was reading an excerpt from Noah Wasserman’s The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Kauffman Foundation Series on Innovation and Entrepreneurship) about Founder Dilemmas: Equity Splits and it struck home. Equity splits and distribution are often the key issues related to power imbalances, perceived injustice and tension amongst cofounders.

In Noam’s dataset, 73% of founding teams split equity within a month of founding, a striking number given the big uncertainties early in the life of any startup. The majority of those teams set the equity in stone by failing to allow for future adjustments to equity stakes if there are major changes within the team or the startup…

Setting the early equity split in stone is one of the biggest mistakes founders can make. With their confidence in their startup and themselves, their passion for their work and their mission, and their desire not to harm the fragile dynamic within the nascent founding team, cofounders tend to plan for the best that can happen. They assume that their early, high levels of commitment will last long into the future, rather than waning as the challenges of founding begin to sap their passion for the idea and for each other. They assume that no adverse events will change the composition of the team.They also tend to take a very short-term view of the factors that should affect equity splits.

Sometimes it just doesn’t work out, and a founder will choose to leave the company or have the choice made for them. The question is how do you create a set of agreements that is fair to all of the cofounders. Often we think that standard employment and shareholder agreements cover much of the difficult situations that we can encounter with cofounders. But as cofounders it starts by really understand what you each are looking for, and then making sure your agreements cover the specifics of your situation.

10 Critical Cofounder Questions

  1. How should we divide the shares?
  2. How will decisions get made?
  3. What happens if one of us leaves the company?
  4. Can any of us be fired? By whom? For what reasons?
  5. What are our personal goals for the startup?
  6. Will this be the primary activity for each of us?
  7. What part of our plan are we unwilling to change?
  8. What contractual terms will each of us sign with the company?
  9. Will any of us be investing cash in the company? If so, how will this be treated?
  10. What will we pay ourselves? Who gets to change this in the future?

A couple of things. I think all founders stock should vest. I like it when founders purchase their initial shares with a one-time acceleration clause for a small percentage at purchase (3-5%). I like when founders’ stock reverse vests with a traditional one year cliff. The initial vesting acceleration is because things can change at 6 months and it seems fair to value the capital risk that each founder has taken at purchase. And the one year cliff because it is standard. What I’ve seen a lot is founders that don’t do the small initial accelerated vesting clause.

The other thing I like to see is an Employment Agreement with Termination clauses, in particular, an acceleration on vesting regarding “Termination by the Corporation without Cause”. I like to see a single trigger acceleration with 6-12 months of stock vesting on termination without cause (I’m not alone). The goal is to be fair and to protect each cofounder and the corporation if things don’t workout.

What tips do others have for equity splits? acceleration clauses? terms? That as cofounders we should put in our agreements.

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