Category: Mergers & Acquisitions

2011: Glass Half-Full or Half-Empty for Canadian VC?

Editor’s note: This is a cross post from Mark Evans Tech written by Mark Evans of ME Consulting. Follow him on Twitter @markevans or MarkEvansTech.com. This post was originally published in February 14, 2012 on MarkEvansTech.com.

Some rights reserved by waferboard

First, the good news about Canada’s venture capital landscape. In 2011, investment activity climbed to the highest level in four years ($1.5-billion), a 34% increase from 2010, although it is still significantly below the record activity ($2.1-billion) reached in 2007.

The bad news is there’s still not enough supply to meet rising demand, plagued by “continued weakness” when it comes to fund-raising.

The good news-bad news scenario was spelled out in the Canadian Venture Capital Association’s annual report. For those of us in the glass half-full camp, the increase in investment and the number of deal is cause for optimism.

As well, 2011 saw a spike in M&A activity with 34 deals, including two each by Google, Facebook, Zynga and Salesforce.com. And there was a flurry of incubators and accelerators established, including Extreme Startups last week.

Before anyone gets carried away, Canada’s venture capital landscape is a long, long way from being solid, let alone robust. There’s still not enough venture capital for seed, series A or major rounds. And don’t expect U.S. investors to pick up the slack.

In a press release, CVCA president Gregory Smith said there is concern about whether enough fund-raising can be dong to support the demand for investments. This situation was illustrated by the fact new commitments to Canadian VCs were flat last year at $1-billion.

“Canada has a historic opportunity to become an innovation leader,” Smith said, adding that “in order to act decisively on this opportunity, we must first overcome challenges to supplying VC funds that, in turn, supply entrepreneurs.”

So what’s the solution? How can Canada’s venture capital community do a better job of supporting the startup community? There is not easy answer to a problem that has been around a long time and doesn’t look to be changing any time soon. It’s not going to be an easy fix from government or U.S. investors or institutional investors waking up to the idea of venture capital investing.

Perhaps the answer to the problem is this: success. If more startups and mature high-tech companies are acquired, that could (emphasis on “could”) encourage investors (angels, VCs and institutional) to get more involved. Success has a strange way of helping people to see the light or new opportunities that they otherwise would have dismissed or not seriously considered.

That said, success is a double-edged sword. Without enough financial support, it is hard for startups to have enough powder to become acquisition targets. If they’re not interesting targets, there’s no acquisitions and, likely, less interest from investors.

So which side of the fence do you sit on? Are you bull or a bear about Canada’s VC landscape?

Editor’s note: This is a cross post from Mark Evans Tech written by Mark Evans of ME Consulting. Follow him on Twitter @markevans or MarkEvansTech.com. This post was originally published in February 14, 2012 on MarkEvansTech.com.

February 14, 2012
The Untold Story of Kobo

So I read most of the news this morning around Kobo and the links being passed around. Generally I was miffed. When folks in the startup scene complain about media doing a lame job covering entrepreneurial stories, this is a great example. The story being published in the media is “Indigo sells Kobo”, “Indigo builds Kobo”, etc, etc. All Indigo, all the time. Probably due to PR agencies spinning the story that way, and also due to lazy business journalism. Well, having chatted with a bunch of folks involved with Kobo, I have a different take on the Kobo story:

Mike Serbinis

If you are in the startup scene in Toronto and you have not heard of Mike Serbinis – shame on you. He is another example of an amazing entrepreneur in the community who has been wildly successful. The first company he started, DocSpace, was an internet leader in security. He founded it in 1997, and went on to sell it to CriticalPath in 1999, for whom he was CTO and EVP marketing for some time. Throw in a master’s in engineering, a few patents, and you can see why folks were pretty excited about his return to Canada, joining Indigo in 2006.

The Indigo/Shortcovers/Kobo story is as such. In 2007, 2008 Serbinis starts lobbying Indigo about the coming sea of change called “ebooks”.

In April of 2008, Shortcovers is created within Indigo. Shortcovers is an online ebook store and mobile app meant to work across the plethora of new smarter devices – Apple, Android, BlackBerry, Palm, etc. Access to books on any device.

This date is important, April 2008. If you think this is just another dumb Canadian “me-too” play, you should look up the launch date of the Kindle. The Kindle launched in November of 2007. And Amazon blew the Kindle launch, and had no stock available until April of 2008. Every attempt before April of 2008 at ebook readers and online ebook stores had been nothing short of disasters, ripe with lost capital. Let me double down on this point:

ebook Sales 2007-2010

In 2007 and early 2008 it was NOT obvious that ebooks would be a big factor, and that Indigo should meaningfully go after the ebook space.

So Mike Serbinis, within Indigo, stared at this in 2007/2008 and said “Indigo should enter the ebook space”. Wow – those are some big brass entrepreneurial balls.

So they create Shortcovers. Shortcovers name was from their original “gimmick” in that they let folks buy books a chapter at a time. Shortcovers was a pure ebook store & software client. No hardware. They were originally intending to put their ebook app on as many devices as possible. No hardware. So somewhere in 2009, things change.

Kobo is Created

Serbinis then goes on to do the unthinkable. At some point in 2009, he see’s the only way for Shortcovers to get critical mass adoption is to launch its own hardware. Whattt????

Shortcovers is a software company. Serbinis is a software exec – CIO & EVP Online at Indigo. Indigo is a brick and mortar retailer. They have ZERO hardware background. That’s a big-ass, high-risk pivot folks!!

So he goes off with his “lets build a device” vision and convinces Indigo to spin them off into their own business, but also gets Indigo to cough up another $5mm as part of a $16mm round where he gets Borders, RedGroup & one of the most famous Asian investment firms around – Cheung Kong Holding.

In early-mid 2009, it probably looked like launching a new ebook reader was a good idea. By the end of 2009 though, everybody and their sister was launching a new ebook reader. Check out this article:
http://www.zdnet.com/photos/ces-2010-top-10-new-e-book-readers/382181. Everybody I know who went to that CES said “maannnn, so many ebook readers”.

I remember talking to Dan Leibu, CTO of Kobo, who in early 2010 was nervous as hell about launching their own device. He said something to the effect of “if we had known so many ebook readers were going to launch, we probably wouldn’t have launched our own”.

Kobo launched in July 2010, well after many of the above devices were in market. How did they do? The rumour on the street is that Kobo cracked $100mm in sales in its first 12 months. $100mm in revenue in its FIRST YEAR!!! They only raised $16mm in their A round and built a $100mm revenue company in 12 months. That is simply unbelievable. How about you other startups, have you done 10X your initial investment in revenue yet?

And how did the rest of the industry do? Anybody know where the Skiff Reader, the Plastic Logic Queue, the Alex Reader, and so on and so forth ended up? Probably not with $100mm in sales and a $315mm acquisition.

And that my friends is why I’m miffed at the coverage on Kobo. This is a wild and crazy story entrepreneurial story full of big risky moves. Its a story of an entrepreneur doing things that only great entrepreneurs can do – even making elephants dance. And its a rare story in Canada, and as such a story that deserves proper coverage.

November 9, 2011
Everyday be hustlin’

Some rights reserved by concheven

Congratulations to Hussein, Kristaps and their team at adParlor.

In case you missed it, Toronto-based adParlor has been acquired by AdKnowledge. adParlor is the second Canadian acquisition for AdKnowledge, who acquired Vancouver’s Super Rewards in July of 2009 for a reported $50 Million.

They managed to build one of “the largest [Facebook] Ads API vendor” and do it here in Toronto.

“We’ve established an office over here where we now have 11 employees, and we’re all based and comfortable in Toronto. We do have our business development manager in San Francisco way more than he’s here in Toronto.” – Hussein Fazal (LinkedIn, @hussein_fazal) on Mixergy

Even more impressive is that they built a site, that manages over one billion impressions a day, without raising outside capital. This is freaking impressive. I’m sure there was likely a combination of SR&ED credits, IRAP money, and others. Every entrepreneur should take note: A billion daily impressions without venture funding. Go read or watch Hussein’s interview on Mixergy, he talks about the 2 pivots for the company, the hard decisions, staying in Toronto. He doesn’t talk about all of the successes like the MaRS AlwaysOn trip, the CIX Top 20, but their relentless hustle and drive built a great business with massive traction.

“no one has hustled harder, stayed humbler, and executed better than him.” – Anonymous VC Comment about Hussein & adParlor

Thanks for building a fantastic example for Canadian entrepreneurs.

November 3, 2011
The Upside Of Canada’s Startup Buying Binge

Editor’s note: This is a cross post from StartupCFO written by Mark MacLeod, it is a response to Mark Evans’ post The Downside of Canada’s Startup Buying Binge. Mark MacLeod is a Partner at Real Ventures, Canada’s largest seed VC fund. He is also an advisor to some of Canada’s leading startups including Shopify and others. Follow him on Twitter @startupcfo or StartupCFO.ca. This post was originally published on September 14, 2011 on StartupCFO.ca.

Some rights reserved by Jonathan Gill

Mark Evans posted recently about the downside of Canada’s recent startup buying binge. Year-to-date, we have had 22 exits in Canada. But save for outliers like Radian6 and Algorithmics, most have been relatively small. Mark correctly argues that there are long term negative implications to these early exits: losing talent to the US and not building mid to large scale companies that can really bolster our tech scene.

Can’t argue with that and I have posted in the past about the importance of large tech companies to our ecosystem. But, exits are like pizza, even when they’re bad (small) they’re good. Why?

Returns to LPs: Returns in the Canadian venture industry since inception are negative. Some funds have delivered returns, but the industry as a whole has not. That won’t work if we want to attract non-government LPs who are motivated by returns vs. policy, job creation. So, any exit that contributes towards fund performance is good.

Generating repeat entrepreneurs: The reason (I believe) why many of our exits are relatively small is that the founders behind those companies have not had a positive exit before. As an investor, you should not bet against human nature. And I think it’s perfectly natural for an entrepreneur that has the opportunity to sell early and pocket a few million to do that. The trick is to keep that entrepreneur in the system and working on the next company. The next time, that same entrepreneur will set his or her sights much higher.

Eliminating borders: It used to be an uphill battle to convince US investors to come up here. Now with the elimination of witholding taxes on exit and with our companies doing great things US investors are coming up here more often and earlier in the startup lifecycle.

So when you think about what’s happening now, my hope is that we are setting the stage for long term success and the creation of some tech giants right here in Canada. To enable that, investors need to do more of the following:

Give Canadian Startups more capital: This might be ironic coming from a guy at a seed fund, but it’s a well known fact that Canadian startups raise less than their US counterparts. I think it’s fine to operate with small $ before product/ market fit but as soon as you are ready for goto market acceleration you need serious fuel. Canadian investors and entrepreneurs need to continue building strong syndicates that include US investors that can write big cheques.

We did that at Shopify. The investor group there includes two large tier 1 funds that can help Shopify become a giant in its industry.

Enable founders to take cash off the table: As a founder you’re more likely to “go for it” if you can sell some shares and not have to worry about cash. This is common practice in the US. We need to do it more up here. It does not make sense early on but series B and up, I think it makes sense.

Surround our CEOs with mentorship: When you look at the truly giant tech companies, they are almost always founder-led. So that tells me that we have to surround our founders with peers, mentors, coaches, advisors to help them make that transition from founder to CEO.

We also need tech companies going public here in Canada, but that’s another topic for another time. So, I say bring on these early exits and realize they are setting the stage for great things to come.

Editor’s note: This is a cross post from StartupCFO written by Mark MacLeod, it is a response to Mark Evans’ post The Downside of Canada’s Startup Buying Binge. Mark MacLeod is a Partner at Real Ventures, Canada’s largest seed VC fund. He is also an advisor to some of Canada’s leading startups including Shopify and others. Follow him on Twitter @startupcfo or StartupCFO.ca. This post was originally published on September 14, 2011 on StartupCFO.ca.

September 14, 2011
The Downside of Canada’s Start-up Buying Binge
Editor’s note: This is a cross post from Mark Evans Tech written by Mark Evans of ME Consulting. Follow him on Twitter @markevans or MarkEvansTech.com. This post was originally published in September 12, 2011 on MarkEvansTech.com.

Some rights reserved by SteelToad

There has been a lot of euphoria and happy dances recently about the flurry of Canadian start-ups being acquired. The list includes Zite (CNN), Five Mobile (Zynga), PostRank (Google), PushLife (Google) and BackType (Twitter).

The positive news is that the flurry of deals (22 and counting, according to TechVibes) provide a huge boost to Canada’s start-up ecosystem, which needs all the support it can get. Acquisitions reward start-up founders, encourage venture capitalists and angel investors, embolden entrepreneurs, and provide a healthier landscape for people like myself who provide services to start-ups.

In short, Canada’s start-up ecosystem is on a roll and, hopefully, these deals will make things even better and more active.

But there is a downside to these start-ups being snapped up. Many of them are early-stage companies with interesting technology but perhaps not a lot of customers or revenue. Rather than a business being acquired, it is the ideas, intellectual capital and, as important, the people that are being purchased. Many acquisitions are fuelled by the need to add strong talent to jump-start the growth of a business or service. Zynga, for example, was looking to boost its mobile development capabilities so buying Five Mobile was a quick way to do it.

The problems with many of these deals are two-fold:
1. Many start-ups are snapped up before they get a chance to gain real traction and evolve into small or medium-size businesses that employ dozens or hundreds of employees. It means the loss of an opportunity to build a high-tech community that features a “middle-class” between start-ups and large players (most of them U.S.-owned) such as Microsoft and IBM. In an ideal world, some of these start-ups would grow into an Open Text or, heck, a RIM.
2. Many of these deals involve some or all of the start-ups’ employees moving out of Canada. PostRank’s employees, for example, moved to the Mountain View, CA. after the Waterloo-based company was acquired by Google. It’s an M&A-driven brain drain when the best and bright entrepreneurs, developers, etc. get sucked south of the border. Granted, many of them will likely return to Canada with more experience and some dollars in their jeans but, in the short-term, it’s a loss for Canada’s high-tech and start-up community.
I recognize that, in the scheme of things, these are nice “problems” to have. After all, it is better that start-ups are being acquired and investors rewarded as opposed to no M&A activity, which afflicted the start-up landscape for far too long. My point is it is also important to recognize there is a downside, even though it is something we can happily accept.
September 12, 2011
Did we hit a billion?

Today IBM just announced the $387MM acquisition of Toronto-based Algorithmics. It begs a couple of open questions. Is Algorithmics after being sold to Fitch for $174MM in 2004 still a Canadian startup? Can a 30 year old company like MKS be considered a startup? Is Eloqua who’s HQ moved to Virginia still a Canadian company?

If you imagine that Algorithmics is the second Canadian software startup acquired for more than $300MM in the past 6 months. Then to answer Dan Morel’s question, if this was “The One Billion Dollar Year” for Canadian startup acquisitions, yes it is. Only if you consider Algorithmics still a Canadian startup and 30 year old MKS a startup, then combined with Radian6 the acquisitions total just over $1B, everything else is icing on the proverbial cake.

Congratulations to the Algorithmics team and alumni.

Adding to the TechVibes list of Canadian Acquisitions:

1/5/2011 – Victoria’s Flock acquired by Zynga

1/6/2011 – Edmonton’s Attassa acquired by YouSendIt

1/31/2011 – Toronto’s Adenyo acquired by Motricity for $100 Million

2/8/2011 – Toronto’s MyThum acquired by OLSON

3/3/2011 – Toronto’s CoverItLive acquired by Demand Media

3/11/2011 – Vancouver’s Sayvee acquired by Bandzoogle

3/26/2011 – Waterloo’s Tiny Hippos acquired by RIM

3/30/2011 – New Brunswick’s Radian6 acquired by Salesforce for $326 Million

4/7/2011 – Waterloo’s MKS acquired by Parametric Technology for $292 Million

4/8/2011 – Toronto’s PushLife acquired by Google for $25 Million

4/27/2011 – Montreal’s Tungle acquired by RIM

4/28/2011 – Montreal’s Coradiant acquired by BMC

5/10/2011 – Toronto’s Conversition acquired by e-Rewards

6/3/2011 – Waterloo’s PostRank acquired by Google

6/7/2011 – Toronto’s DealFrenzy acquired by Intertainment Media

7/8/2011 – Toronto’s FiveMobile acquired by Zynga

8/30/2011 – Vancouver’s Zite acquired by CNN for an estimated $25MM

9/1/2011 – Toronto’s Algorithmics acquired by IBM for $387MM

September 1, 2011
The Story of Quack.com and How It Changed the Canadian Startup Ecosystem

A few weeks past I posted about the hockey stick growth of exit in Canadian startups. Well, let me give some interesting colour to some of the cause of that growth.

Quack.com is a company that most of you probably know very little about, despite its relative fame in the hey-day of the dot com boom. Back in the day when I was a student at Waterloo, I remembered Quack.com coming on compass and having some great recruitment events at the local pub, The Bomber. That was the last I heard of them. Little did I know that Quack.com would eventually help permanently alter the Canadian eco-system.

Quack.com was a Silicon Valley based company. They built a really cool IVR service, cutting edge stuff in 1998 when they were founded. Steven Woods was co-founder, CTO and Chief Product Officer at Quack.com. Dan Servos later joined quack as its SVP Alliances and Sales. In the year 2000, they sold to AOL for a hefty $200mm price tag. Big exit, even by that era’s standard.

A few years later Steven Woods & Dan Servos were at it again. Classic serial entrepreneurs – Steven started another company, NeoEdge which Dan joined. Not quite as big a success as Quack.com, but not every venture leads to a $200mm sale of your company.

Fast forward to 2008. Dragged from the startup world kicking and screaming, Google steals Steven Woods and hires him as site manager and engineering lead for Google Waterloo. You have to understand how big this is. Steven Woods is a 2x entrepreneur with a big, big exit under his belt, also serving as an advisor & investor to several startups. He is a big deal in Silicon Valley, let alone in Waterloo where he should be recognized as an entrepreneurial god. Only the duo at 295 Philip St hold more entrepreneurial street cred than him in Waterloo. Not only is his startup background a big deal, but he has a fricking phd in computer science. An immense example of reverse brain drain if I’ve seen one. Which is ironic, since Quack.com/Steven Woods was famously ripped as being a big cause of Canadian brain drain when they hired 50 Waterloo grads in 10 months before selling to AOL.

Check out what started to happen shortly after he came to Google Waterloo:

1. Google acquires Toronto-based company BumpTop for $30m.

2. Steven Wood’s old colleague, Dan Servos, ends up as CEO of Social Deck.

3. Shortly thereafter, Toronto-based Social Deck gets acquired by Google.

4. Toronto-based Zetawire gets acquired by Google.

5. Toronto-based Pushlife gets acquired by Google for $25mm.

6. Waterloo-based Postrank gets acquired by Google.

(and now Dan Servos lands as COO of Locationary. Hmmmmm…)

Steven Woods & Dan Servos have been machines, invigorating the Canadian startup ecosystem with new possibilities. Via his role at Google, Steven Woods has provided a real source of opportunity for entrepreneurs in Canada to do something with their company other than “move to the Valley”. 6 exits probably at near $100m in total money in under 2 years. Dan Servos has provided huge leadership to Canadian startups like Social Deck, Locationary, etc. This should be massive motivation to entrepreneurs. If you have success, find ways to be like Steven Woods and Dan Servos and help the ecosystem continue to grow. Don’t be like this.

August 18, 2011
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?

August 17, 2011
BackType acquired by Twitter

Congratulations Christopher Golda (@golda) and Michael Montano (@michaelmontano) on Twitter acquiring BackType. We’ve written about BackType since their acceptance in YCombinator (fortunate that we didn’t give iPartee their previous startup too much attention). This is another amazing acquisition of Canadian startups by a Silicon Valley company (make it 16 acquisitions since Jan 2011 see TechVibes). I think Dan was right, this could be a $1B year for Canadian startup acquisitions.

The BackType team had already relocated from Toronto to San Francisco. And it looks like the relocation to the Twitter offices should be much easier:

Our team’s relocating to the Twitter office. We’re very excited to not only join an amazing company that’s changing the world, but to continue building products in pursuit of our shared vision with Twitter.

Finally, I’d like to thank all our investors and advisors, especially Y Combinator, Toni Schneider and True Ventures, Josh Felser and David Samuel from Freestyle Capital, Manu Kumar, Chris Sacca, Raymond Tonsing and Seth Berman.

What is amazing/disappointing is that there are no Canadian investors along side the group of amazing investors assembled by Chris and Michael.

July 5, 2011
Clark Kent works at CPPIB

Some rights reserved photo by Greenog

By now you have heard Microsoft is purchasing Skype for $8.5B, a company which was spun out from eBay in 2009 for $2.75B. In 18 months nearly $6B of value was created for investors, many of whom are Canadian pensioners. Faster than a speeding bullet, a courageous $300M investment in Skype has turned into nearly $1.1B. I for one would like to know who to thank at CPPIB.

This is not an apples to apples comparison, but the Skype investment tops the results of every fund CPPIB has invested in. If one factored in IRR this deal would blow everyone out of the water. Other Canadian pension funds are ramping up venture funds (e.g. INKEF). Wonderful news given the paucity of capital available in the Canadian ecosystem, however I would argue that Silver Lake, Andreessen Horowitz, and Index Ventures were important stakeholders – so perhaps what we’re really looking at is the Fantastic Four. It follows that Canadian LPs should concurrently invest into independent funds who will source opportunities and ensure alignment with entrepreneurs.

CPPIB Returns

May 17, 2011