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?
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.
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?
I love when entrepreneurs tell me that raising capital in Canada is hard (it is). I love it even more when they tell me that they think “they should move to Silicon Valley” because raising money will be easier (it isn’t). It helps me determine which entrepreneurs are too egotistical, too delusional, too uninformed to really be effective raising money.
There is a venture capital scene in Canada. It’s different than the scene in Silicon Valley or New York City. But there are people making investments in entrepreneurs. According to the CVCA in 2010, there was $484MM invested in IT in Canada (2010 Q4 VC Data Deck from CVCA [PDF]) with $271MM going to software & internet companies. There are issues like US Funds making larger investments than Canadian funds (looks like $2.5MM vs $1.1MM average deal size) or that US companies raise more ($8.2MM vs $3.6MM). But these are just the nature of the game. There are structural issues. It could be better. But to say it is nonexistent, that’s just wrong or lazy. And both are bad qualities in early stage entrepreneurs.
I was asked by an entrepreneur about who where the funders in Canada. Here is my short list of companies that are writing cheques or are in the process of doing diligence on companies, i.e., prepared to write a cheque. There are a lot of companies like OMERS that are stage agnostic, but I’ve put them in the growth side given their deal history (in the case of OMERS it’s $1.5MM in WaveAccounting).
So if you think it’s easier raising money in NYC, Boston or California. My advice is get your ass on a plane and try. Because it isn’t as easy as you might think.
But don’t say that there is no Canadian VCs or venture capital money. Because that just makes you look like a moron.
Suck it up, it’s hard raising money. Maybe you should talk to the Canadian investors and figure out why they don’t want to write you a cheque!
Who else is actively placing money with Canadian startups? No grant money, we’ll do that in a separate post, but who else is actively doing convertible debt or equity placements? How to define active? Either >3 deals in diligence or has deployed more than $50,000 ($25,000/placement * 2 placements). That seems fair.
Once upon a time @jevon wrote a vision on how to rebuild the startup scene in Canada (below). Its relatively amazing how spot-on Jevon proved to be in hindsight, and how much the Canadian eco-system moved in that direction – more smaller funds with a incubator/accelerator look and feel, and lots more community.
But, anecdotaly, despite some great new sources of funding, we aren’t quite there yet. When I get asked about the latest, greatest startups in Toronto (here or abroad) I end up pointing at a lot of companies that are yesterday’s news, 1-2 year old companies now. Partly my fault as I need to get out and network a bit more, but regardless – we need more. More companies being founded. I know some great folks who are still sitting on their asses getting underpaid at their shit job full of bad office politics. Well the time is NOW. You gots to do what the late Michael Ignatieff told you to do – RISE UP:
Great – you are motivated. Watching Michael Ignatieff will do that to you. So now what? How do you approach the super early days of starting a company?
I’d like to pass on a framework that I picked up from founders I’ve worked with over the years. Its not quite as thorough as anything Steve Blank has written on the topic. But it also doesn’t need a 2 hour lecture and/or a $50 purchase of his (very good) book – Four Steps To the Epiphany.
Basically divide your idea into 4 big areas – product, people, market, financing. Each of these has a burden of proof for you to iteratively solve as the founder. You keep iterating, from baby steps, through to giant steps. Ta da – that is it, the whole framework in two sentences! Taking that framework, the below is how I’d start to tackle the first 90 days of my brand new idea.
The Baby Steps – Day 1 through 90
Things will feel messy, you won’t even have realized that you took the heroic step to do a startup. If you’re a coder, you’ll start hacking away at something new at night. If you are not, you’re probably talking to folks and sussing out how to get it done. The biggest goal here is taking the big emotional leap of “doing a startup”. You have to start telling people you are doing a startup, even if you haven’t quite left your current job. And you need to get yourself personally ready for the leap.
In the four areas I mentioned above, here is what you need to get done:
1. (Finance/Product/Market) Start putting a pitch deck together – principally put together three things:
-The Problem Statement: what is the problem you are trying to solve?
-The Customer: who has this problem and needs it solved?
-The Market Size: try and take an approximate guess at the size of the market you are chasing.
2. (Product) Start on a very raw prototype. For a web app I’d usually get the single core feature done + some lightweight graphic design. For hardware, I’d buy a MakerBot and get a 3D printing done. NOTE – if you are a not a technical co-founder, pay somebody to build the prototype. You don’t need to have a full engineering team in place to get a prototype built.
3. (Finance) Figure out if you need financing, how much financing you need to get to a certain stage ($50k to build a prototype, $400k to launch for instance), and then list who can finance this idea. Light manufacturing & SaaS web businesses are going to have very different funders. Figure out that list, do some deep digging and find out who the angels are for a given category.
4. (Finance) Get your personal financial situation under wraps. Most of your initial costs are going to be the cost of your own time, so make that time cheap. Also, make sure you have ample time. If you are getting married, renovating a house, planning to climb Everest… you probably shouldn’t do a startup.
5. (Market) Think about who your customer will be and talk to some of them. Email them a survey and get some quantative feedback. Hang out with them and ask them to use your newly awesome prototype (which probably sucks, but don’t worry, get them to use it anyways). Ask them how they solve “problem x” and get some qualitative feedback/notes.
6. (Market) Do some really quick tests of the idea in the market. This is called Minimum Viable Product. Setup a Google Adwords and a landing page website. See how much click through you get for a given idea/wording and see how many get to some sort of “commitment form”. You could go as far as letting folks sign up for beta access for your product.
7. (PEOPLE) THIS IS THE MOST IMPORTANT ONE – network, network, network. Email anybody at startupnorth, we have good networks, especially David Crow, (@davidcrow). Go to every startup event possible in your area. If you live in Moose Jaw and there is no Startup Drinks event, create one. You may have to drink alone for a few weeks, but drinking alone is GREAT PRACTICE for your upcoming startup.
8. (People) From the above, you need to build a solid list of mentors, advisors and folks you can talk to about building your own business. Meet with them as often as you need.
This is the list. I’m not even telling you “go get a co-founder, go get $20k in funding, hire a great engineering team, etc”. No, start with baby steps. Get yourself motivated, get networked, prove to yourself that you can build something and meet influential people… these are the baby steps to get over the emotional hurdle.
Let us know what your first steps were and how you got your business going.
PS This note is doubly intended for all the RIM employees who just got laid off. Please go start something new, don’t join Manulife.
This study looked at the ‘visible’ portion of the Angel investor community – those that are members of Angel groups – as it is almost impossible to survey the entire Angel community. Different countries estimate the visible Angel community represents between 3% (US) and 12% (United Kingdom). Understanding this, the findings presented below represent only a fraction of the actual Angel investment across Canada. They do, however, provide us with the most accurate snapshot of the activity in the community that we have today.
Significant findings of this report include:
90% of companies funded by Angel groups in 2010 were new, not follow-on.
Angel groups collectively received around 1,850 business plans. 14% were considered in detail, 32% received investment.
Angels groups invested CAN$35.3 million in 88 deals; an underestimate as some groups did not report the amount invested.
Co-investors were involved in 58% of investments and invested at least a further CAN$29.4 million.
Angels invested in a wide range of industries but with a strong technology focus: ICT sector (43%), Life Sciences (18%), and Clean Tech (16%).
Ask a miner “What is Canada’s most precious natural resource?” and you’ll be sure to stump. The answer is easy… Canadians.
One of the tricks to Silicon Valley’s winning streak is that they back not only repeat entrepreneurs, but repeat teams. Just like one of those wonderful chocolate fountains you occasionally fortune upon at weddings, Silicon Valley recycles people. A team forms, builds a successful enterprise, people move on to try some new things, and projects that find traction attract back the core crew.
Is Canada effectively recycling people? Think long and hard, because if we aren’t the fountain is drying up – end of the party. I can name a handful who have ventured abroad and returned: John Green (@johnphilipgreen), Malgosia Green (@HeyGosia), Dan Morel (@dpmorel), Farhan Thawar (@fnthawar), David Crow (@davidcrow), Jeese Rasch, Zak Homuth (@zakhomuth)… the list goes on, but it could be longer. Maybe our friend Howard Lindzon (@howardlindzon) will start his next company in Canada?
What is bringing them back? Visa issues, sometimes. Spouses, more often. Schools for children, okay I’ll take it. But it would be much better if what brought our best and brightest home was opportunity. And the crazy part is, it is knocking. We have a safe multicultural inclusive country, close to major markets, with investment matching funds up the wazoo, and here is the most beautiful part – our nation is brimming with high caliber engineers (who are getting scooped up by Twitter, Facebook, and Google as you read this post).
Part of the challenge is funding. Canadian entrepreneurs are picking up and moving to New York, San Francisco, Boston, Boulder, and even Santiago (yes you read that right, Chile – in the southern hemisphere) for minuscule sums of seed financing so they can focus 100% on their startups vs their day jobs. Just ask Ken Seville (@civisidedotcom).
Myopic policies might attempt to discourage cross border exits, which are vital and create deep new linkages. Instead what we need to learn is that the opportunity is keeping the founders engaged once they head for warmer climates. I can guarantee, foreign direct investment will not thrive in the absence of results. To generate returns we need to recycle teams.
I am particularly excited about a handful of intiatives that address this gap including: Toronto Homecoming, C100, and Startup Visa. Let’s find ways to support their efforts.
Remember Ted Livingston’s insanely great donation to UW VeloCity, well it looks like it is being put to good use. The VeloCity team announced The Velocity Venture Fund. The University of Waterloo and the team at VeloCity are working to put that capital to use for students in the VeloCity residence. It looks like they are both testing their ideas (love this) to make sure students are interested before the full launch of a fund. They are running a contest for UWaterloo students that provides a seed grant of $25,000 + office space + incorporation.
It’s pretty cool. I am hoping to learn more about the Fund that is launching in the fall. Jesse Rodgers is a huge asset to UW.
What does this first version of the funding contest look like?
A hack weekend followed by a pitch night where 5 teams are selected and given $500
Those 5 teams come back in a month or so and have a chance to compete for $25 000 + incorporation + office space on their next co-op work term or following term (so for spring that will be fall)
That is all.
To qualify for the competition:
A current student at the University of Waterloo
Do you have to live in VeloCity? No. But it would give you an advantage.
I abhor the term “incubator”. I remember in fifth grade when our teacher brought in a chicken incubator to show us how chickens are born.
We waited and waited and waited a while longer still.
All the little Chickens were dead, it turned out. We weren’t quite sure why but most of us thought that one of the guys in our class with “anger issues” was somehow responsible.
So to this day when I hear the term incubator, I think of a sea of dead chickens and the broken dreams of little boys and girls.
So I was surprised when I walked in to Year One Labs today and, rather than chickens, I saw a lot of people. Not just any people either, but some of the best entrepreneurs I have met in years.
The current portfolio of Montreal based Year One Labs includes:
High Score House
HighScoreHouse was founded by Kyle Seaman and Theo Ephraim. The company is building a fun, entertaining solution to help parents use positive reinforcement to motivate their children.
Localmind was founded by Lenny Rachitsky and Beau Haugh. Localmind allows people (from the web or their mobile phone) to ask questions of people checked in at locations. Questions can be in real-time or not. The big vision is to empower people to know anything they need to know about any place at any time.
Localmind is currently available online at localmind.com.
Please Stay Calm
Please Stay Calm was founded by Garry Seto andKen Seto. The company is building a massively co-operative location based social game with a zombie theme. They have not yet released the game, but you can sign up for news at pleasestaycalm.com.
And you can learn more about the game and their progress on their blog.
as well as Assemblio and one other as of yet unnamed startup.
There are some things to love about Year One Labs:
The founders of Year One Labs have their own money invested
The founders of Year One Labs are experienced founders with good operational backgrounds. It seems clear to me that they know how to gradually disengage as the founders of resident companies get their feet under them. They aren’t constrained by awkward incubator contracts or “client service agreements” where a lot of resources go more and more unused as a startup outgrows them. That flexibility is important.
They have a bar built right in to the lobby
It’s not all ice cream and pie for these guys though, from the outside it is clear to me that follow-on financing relationships are always going to be tough for groups like this and keeping the lights on does become a heavy expense over time.
This sort of activity, much like Extreme Venture Partners in Toronto and the work that BootupLabs had been doing in Vancouver is the lifeblood of an early stage startup community. Whenever politicians give speeches and talk about things like the “IT Sector” and “knowledge workers” — this is what they are talking about. We have to find careful ways to support efforts like Year One Labs but also keep the market competitive enough that the best ones may rise to the top. In the current model of massive infusions of cash for real-estate and bureaucrats does not let the market pick the winners.
The entrepreneurs are the ultimate customers here and they will be the ones who make or break Year One Labs and every other similar effort in Canada.
The Federal Economic Development Agency for Southern Ontario announced a new Investing in Business Innovation program. The program offers matching for early-stage venture funding. This is a $190MM running from 2010-2014.
There are provisions for startups and angel networks. Since we’re StartupNorth, let’s try to deal with the startup side first.
Startups who receive a termsheet from a qualified angel investor (as defined by the Ontario Securities Commission) or venture capital firm (registered with the Canadian Venture Capital association) are eligible to apply for up $1MM in loan from the federal government.
Restrictions:
Start-up businesses will be eligible for repayable contributions up to $1 million for no more than one third (33? percent) of total eligible and supported project costs.
An angel and/or venture capital investor(s) must be committed to provide at least two thirds (66? percent) of the cash contribution toward eligible and supported project costs.
In-kind contributions related to mentoring, networking, and other business skills cannot be considered as part of the angel or venture capital investor’s cash contribution.
A maximum of one project per eligible start-up SME can be funded under the initiative.
Direct eligible costs for start-up businesses may include:
Labour, capital and operating expenditures;
Materials and supplies;
Consulting and/or professional fees (limited to market rate); and,
Minor and non-capital acquisitions (e.g., software).
All project activities must be completed by March 31, 2014;
Basically there is federal government matching loans up to $1MM for startups that are raising angel or venture funding in Southern Ontario. This is a fantastic start.
It’s great for startups in Southern Ontario, it’s curious that the program is only available in Southern Ontario. Why not all of Canada? How are the repayment terms set? Is this a zero percent interest loan from the Federal Government? Does the term sheet have to be equity investment? Is convertible debt eligible? How do startups “demonstrate they are using business mentoring, counseling, or related services”?
While Angellist is not the comprehensie list of global angel investors, it is the best list of Internet and mobile investors around. It has folks like:
The thing that makes Angellist so amazing is the self-service nature of first person connection. You don’t need to know the right people. It provides one click, direct access to the key players in the economy of emerging companies. It’s something that is missing from the Canadian scene. The best part of Angellist is that Nivi and Naval validate and reference check all of the angel investors, so the wannabes are edited out. This is an edited list of the best angels actively doing deals.
This a team that is deeply steeped in the Montreal software/internet/infrastructure startup scene. They have a combination of deep technical chops plus the necessary hands-on operations with early stage companies looking for a scalable business model with customers.
If this isn’t enough they’ve surrounded themselves with great advisors including Dan “I’m Everywhere Man” Martell, Rails core team member and Shopify founder Tobias Lütke and others.
