StartupNorth

Month: September 2008

  • On Sunday, Jevon announced that Brightpark, one of Canada?s most famous technology VC?s, has begun doing contract web work.

    This is the second VC-incubator in Canada, in the last year, that has moved to doing contract web development. Not long ago, STN Labs (located in my company?s hometown of Guelph) made a similar move. STN Labs once touted itself as being a solution to the ?VC Problem in Canada? ? they were hybrid VC 2.0 / Angels that came in early and had real operational experience. Well it didn?t work: STN unofficially stopped investing and is now primarily doing contract web-work.

    Jevon mentioned Ventures West and Celtic House in his blog post ? hinting at how Brightspark?s announcement fits into the bigger picture of VCs in Canada.

    There are big differences between Brightspark and STN versus Ventures West and Celtic house. The latter two were both traditional, large scale VC?s, while Brightspark and STN were both recently propped up for getting in at early stages, being hands-on, and also doing incubating.

    Over the last two years, I?ve heard many fellow entrepreneurs talk about how the the old style of VC investing is dead. Conversationally, the Brightspark and STN models were, last year, seen as the solution for the problem.

    Turns out that neither was right. All VCs, big, small, traditional, or innovative: all are having trouble.

    Focusing again on the bigger picture, it?s interesting to look at what is similar between all four VC?s mentioned here and to look at the VC?s in Canada that are still actively investing and think about what?s special about them.

    I?ve met Mark and Tony from Brightspark and consider them friends ? I know them both as brilliant people, the kind of guys with whom entrepreneurs would be honoured to work. I don?t see this as a sad move for Brightspark, both Tony and Mark are walking success stories who get to work on projects that are driven by passion. They?re still doing that.

    In the general sense, it?s pretty simple to see what?s going on in the big picture (even ignoring this recent announcement from Brighspark):

    We don?t have a surplus of interesting businesses with numbers that will make VC?s happy.

    At the same time, Canadian VCs talk about how they invest with the hopes that only 1 out of 10 businesses that they fund will be slam dunks, while at the same time they are too risk averse to invest in businesses that have only 1 in 10 chances of succeeding. No business can filter through this impossible sieve: returns of the size demanded by large VCs require small startups with high risk. Many of the VCs I meet in Canada think that they can get around this impossible sieve problem by being smarter investors: every VC I know says that they will not have 1 in 10 success rates ? rather, they aim for success 4 or 6 times better than this rule of thumb. Looking at their past history, however, they all admit to success rates much worse than the same rule of thumb.

    Of course this has a cyclical effect. With funding scarce, working as an employee at startups in Canada, pretty much across the board, is not a great way to get a high salary. And although salary is only part of what makes a job great, it is ? realistically ? an important part. So we get a brain drain. And as funding is more scarce, and success stories even more scarce, less technology grads are willing to take big risks and pitch big adventures to investors. It?s just too scary. Less funding means entrepreneurs are being more careful, taking smaller risks, and growing more slowly. Startups now build leaner teams, hire less experienced executive teams, and release products every two years instead of twice a year.

    All these facts lower the possibility of grand slams.

    American VCs aren?t doing something to make themselves magically better ? it seems to me that it?s just that many of them control much larger sums of money, and from a distance it?s easiest to see what only the most successful ones are doing. Larger pools of money allow the larger VCs to keep their eyes out farther in the future, holding out while this sub-economy recovers.

    Advice to Canadian entrepreneurs: look towards the growth of Angel groups, raise as much money as you can to weather the storm, tighten your vision, look towards less standard Web 2.0 business models, and be patient.

    Advice to Canadian VCs: don?t worry I am not presumptuous enough to think I have any idea on how to advise Canadian VCs.

  • CollectionBuddy.com – BrightSpark is back to catalog your collection

    Back in January we broke the news that Brightspark, previously one of the most visible VC firms in Canada, was changing how they did business. Instead of looking for deals to invest in, which they complained were too few and far between, they would instead create web-based businesses themselves, or they would partner with other entrepreneurs to start businesses. Which BrightSpark would have an operational role in.

    Tomorrow Toronto based Brightspark 3.0 will be announcing their first new business, Collectionbuddy.com, which is described like this: 

    Collectionbuddy?s ambition is to be the world?s largest living, user generated catalog of collectible items – The definitive encyclopedia of collectibles.

    It is a tool for researching any collection or collectible, from McDonald?s toys, Airport Postcards to Delftware pottery.

    The site?s content is user generated in much the same way as Wikipedia. The categories of collectibles are very similar to that of eBay?s.

    Brightspark is also announcing that they are able to help build web-apps for your startup.

    I have to admit, it is a little bewildering to see one of the most aggressive and interesting VCs in Canada turn in to a web consulting shop in the last 8 months. I am not sure why they didn’t just drop the Brightspark name completely and start fresh.

    When I spoke to Mark Skapinker in January, he lamented that they literally just could not find enough good deals here in Canada and that was the primary reason they had for heading down this path.

    In the last year we have seen this re-creation of Brightspark, turmoil at Celtic House, a gutting at VenturesWest (read the comments for some interesting analysis), and rumors are swirling about several other firms. This is a time of change, and we have to work hard to make sure that it is good that comes from it. You can’t blame Brightspark for not getting creative at least.

    In the coming days I plan to chat with the BrightSpark team to find out how this transition has been going, and if it has been worth it.

     

     

  • Akoha Starter kits – get'em while they're hot

    Montreal based Akoha, who are going on stage tomorrow at the TechCrunch50. We have previously profiled their angel round and I have been watching their progress closely. 

    We can’t say much about what Akoha is, but what I can do is give you all an exclusive invitation to get a free starter kit. These kits, which will only be available until tomorrow, will be mailed out to you right away. 

    Head over here to the Akoha store (powered by Shopify.com) and sign up for the starter kit, and remember to tune in to to Akoha’s presentation tomorrow.

    I also came across a vote for who will be the most promising startup presenting at TechCrunch50. You can vote for Akoha, as they are neck and neck for 1st place.  

  • Weekend Reading – September 6, 2008

    Read this week’s Report on Business with inspiring interviews from Austin & Hamnett Hill along with 7 other great Canadian serial entrepreneurs.

    PlanetEye sent out a mysterious email. Apparently ‘something big’ is in the works, so you’ll probably want to head on over to the site next week and see for yourself.

    Peerflix, a company founded in 2004 by Danny Robinson and Billy McNair, was acquired by LiveUniverse.

    Xtranormal launched a private beta.

    Size matters… for follow on rounds.

    Speaking of which, Inscape Software raised a $7M Series B from Solidarity Fund QFL, Rho Canada Ventures, and Garage Technology Ventures Canada.

    Mark added 5 DOs when raising capital, to compliment the 7 DON’Ts.

  • Introducing the StartupNorth Event Calendar

    We get emails just about everyday asking for a calendar of startup events across Canada. And it is a damn shame for entrepreneurs to miss a chance to meet up just because there is no event calendar. So without further ado, head on over and check it out. Right now, we just have Toronto events listed, but we’ll be adding Calendars for all the other great regions across Canada as soon as possible.

    We are using Google Calendar so people across the country can collaborate on this project. If you already use Google Calendar and would like to occasionally contribute by posting events, contact us and we?ll provide you with this super power.

    Updates: Edmonton is now onboard (thanks to Cam)! Montreal coming soon (thanks to Heri)! And Waterloo too (thanks to Thom)! Note: If you also live in these cities and are interested in contributing, please contact us as well!

    ___________________________

    Mea Culpa. I pulled the image that originally accompanied this post. Why? Well first off, I wasn’t particularly satisfied with it to begin with. While this Calendar Project is something we?ve been thinking about for a while now, the image to accompany the announcement was just something I rushed out this morning. Yes, of course it was just a joke. No, this was not my finest work with Photoshop. For those of you curious what all the hoopla is about, you can find the image posted here.

    My hope is for this Calendar Project to help get more people (men AND women) out to events and as a result working together building great companies. I?d hate for anyone to feel left out. Two of the many things I love about Canada are its inclusiveness and that people call things how they see them. I wouldn?t change either of these things for the world.

    I hope you find the calendar useful. See you at an upcoming event.

    Jonas

  • 7 avoidable capital raising mistakes

    Mark McQueen, the guy behind Wellington Financial is quickly becoming a blog rockstar, and his latest post is no exception.

    Mark deals in the Venture Debt business, a similar product to that of Silicon Valley Bank and a few others. He is the kind of guy you might end up talking to down the road when you need some growth capital. Who knows. All I know is that when I have asked Private Equity guys about Mark and Wellington, they have always gotten a little scrappy, so I take it as a good sign.

    Here is his post, 7 avoidable capital raising mistakes. It is worthwhile advice for anyone pitching to VCs, angels or potential business partners.

    In this first attempt to stick to the script, we?ll address seven of the more obvious mistakes that entrepreneurs make when trying to raise capital (this is not to sound patronizing, but to help make the capital-raising process a success):

    1. False Sense of Urgency

    Imagine the excitement when the email comes in: ?Can I see you tomorrow to discuss a new deal?? As a firm that prides itself in operating in real time, the natural desire is to say ?yes?. Drop everything and see what the fuss is about. Our natural request is for a corporate overview or something similar – gives us a chance to learn about the business prior to the session. Unfortunately, not everyone is as prepared for the request. If you don?t have the powerpoint / business plan ready to share, you shouldn?t be booking meetings for the next day.

    Worse, if you aren?t currently looking to raise capital, there?s no need to try to get on a VC?s dance card for 24 hours from now.

    2. Hurry Up and Wait

    The ugly sister of #1 above. When you book a meeting with a capital provider, you have to assume that they?ll like the story as much as you do. Why else are you pitching the story? Which means they will invariably ask for detailed financial information. Like the financial model that formed the backbone of the powerpoint presentation. Far too often, the response is: it?ll be a couple of weeks. Why the rush for the 1st meeting if the financials weren?t ready?

    We always wonder about that. What will take a couple of weeks? Did you not have a forecast when you presented the business plan? Or are the forecasts not yet sexy enough for sharing?

    The other mistake is the: let?s get the NDA signed up right now. But 10 days sometimes goes by before the first volley of information is sent. Any hint of disorganization is a bad first impression.

    3. ?Not Board Approved?

    Then there are the financial models that ?haven?t yet been approved by the Board?. Having had the meeting, and received the financial forecasts, VCs are often told that the budget they?ve been given hasn?t yet received the sign off of the company?s Board of Directors. But you should still value/analyze the business on the basis that this is the working forecast.

    Which begs the question: if the financial budget that is being shared with would-be capital providers isn?t Board-approved, what is it? Management-approved? Does the Board even know you are talking to potential outside investors? And how does this budget compare to the one that is currently ?Board approved?? Is it better or worse?

    4. The Five Alarm Fire

    Unlike #1 above, this meeting truly is incredibly urgent. The problem is, no one comes clean about just how urgent it is until the meeting is underway.

    Imagine the scenario. Company (or Agent) requests a meeting. It goes well. Good story and strong management. The problem is, they ?need to close? the financing in less than two weeks. Huh? Whatever it is, acquisition, deposit, customer order fulfillment, etc. The timeline is critical. Assuming it is a new story to the firm, and not a follow-on, I can?t think of any institutional firm in the country that can do the primary due diligence, negotiate the deal, draft legals, and cut a cheque in 8 or 10 business days.

    Serious case of lunch bag letdown. Having spent two hours on an interesting meeting, it turns out there is no way to do the deal.

    5. Cell Phone Conference Call Pitch (aka persons of no fixed address)

    This is a personal favourite. The virtual powerpoint presentation. They usually come via a known referral, who is less concerned about you wasting your time than you might be.

    The scheduled one hour pitch comes from someone you?ve never met, and they sound as though they are lying down the entire time. They are relaxed alright, almost too calm. It can be disconcerting.

    As the pitch continues, your mind wanders and you ask yourself – do they even have an office? How do they oversee the staff if they?re always elsewhere? What city are they calling us from right now? And why are they looking for money from us, residents of a foreign country? How do we due dili the deal if there?s no office? Etc.

    just think of how it looks in a police report on television: the assailant had no fixed address (i.e., no job, can?t cover the rent, parents kicked them out of the basement long ago). Has a certain aura to it.

    6. Thanks For Nothing

    It may strike you as hard to believe, but this happens from time to time. A meeting is booked. The story is told. It goes well. Due diligence is done, and a term sheet is issued for a potential financing. Then, radio silence from the person who was looking for the capital. Perhaps they found the money elsewhere. Perhaps they changed their mind. Perhaps an existing investor did the deal instead.

    That is generally just fine by us, as we look at 500 opportunities a year and understand that just as we can?t give every company money, not every company utilize our services.

    But to have gone through the process to size up an opportunity and issue a term sheet, just think of how easy it would be to pen a two sentence email saying: ?thanks, but we are going a different direction?. The VC market is small, and while folks keep confidential business information to themselves, a reputation for rudeness is worth avoiding. It is so easy to say ?thanks but no thanks?.

    7. ?These Forecasts Are Ultra Conservative?

    I?m sure you are surprised that people would use the phrase ?conservative?, particularly at a time when 80% of private companies are missing their forecasts. But, you?d be wrong if you didn?t think it happened every week. At some point during the pitch, someone from the company says ?these forecasts are conservative?. Sometimes you?ll get the ?ultra? modifier as well.

    This is certainly the ?#1 guaranteed to generate a laugh? line in the business. It is almost as good as the follow-up ?I know everyone says their forecasts are conservative, but these really are.? Just like you would never say ?I?m really good in bed? on a first date, just hide the conservative nature of the forecasts for the due diligence period. Some VCs won?t take a second meeting if they hear that line in the first go ?round; they assume, fairly or not, that you?re wet behind the ears.

    If the entire pipleine is already contracted, have the VC figure that out during due dili and say ?wow, are these ever conservative forecasts!? You?ll catch a lot more fish that way.