StartupNorth

Category: Startups

  • Startup Blood Bath – What a Recession Feels Like

    Today looks like a bit of a blood bath on the markets, so I figured it is as good a day as any to talk about what an economic downturns feels like for startups. I was “fortunate” enough to launch a company the day Lehman collapsed in 2008 (Sept 15th!!), and got to see the first hand impact of the downturn. We also were raising a B round during that time.

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    Most media seems to paint the picture of this post-apocalyptic world where suddenly all funding disappears and everybody wakes up and the tide has gone out and everybody is naked. I disagree. To me, the downturn felt more like death by 1000 paper cuts, such as:

    • Your churn will climb. Partly because of non-payment, failed credit cards, canceled credit cards, etc. If you do churn reports, “cutting back” and “not feeling the value” will increase as reasons.
    • Suppliers/Partners will stop paying you in a timely way, some never. Your average AR period will start to run at first slightly longer, then much longer. You’ll probably need to hire a baseball bat.
    • If you have physical product, distributors/channel will send back inventory because they are getting rid of any “risky” inventory and focusing on basics, i.e. products & goods that move easily like toilet paper and milk.
    • Conversion rates will start declining for every marketing trick you try (except lowering price). And with that, cost of acquiring customers goes up. You’ll also probably just invest more into marketing as an initial reaction to declining customer counts.
    • Your ISP (or any low margin, commodity supplier you use) gets “acquired” by 3 different entities in 12 months and start having annoyingly regular outages.
    • Angel investors, or anybody holding debt, turn into vicious debt collectors. As terms reach they demand outrageous interest. Now you are paying 2 employees worth of interest per month.
    • You are forced to lower price, at first by small amounts, and then gradually more.

    So if you increase churn by 2%, increase acquisition costs by 10%, chop price/revenue by 10%, do you know what you have???

      A Broken Business Model that is Not Fundable.

    More good news, VCs and angels get caught in this churn. Exits disappear (2008 VC backed M&A was down 54% from 2007!!!) and with it RoI. Many “busted business models” appear in the portfolio, and soon they have to get written off. It gets nasty. VCs who are dying stop feeling like the Fred Wilson-ian brothers-in-arms company builders, and they start to feel more like debt collection agents. SELL YOUR COMPANY! MERGE WITH THIS CRAP COMPANY! LETS PARACHUTE IN A NEW GOLDEN CEO! PAYCUTS! WHY ARE YOU GUYS GETTING PAID?

    The Good News

    Here’s the first good news. Only two things on the planet can force you to die: 1. YOU – You Give Up & 2. Debt Gets Called.

    The second piece of good news. Some businesses do great at managing downturns. Why? Execution and a little luck. You can track all the little death by a 1000 paper cut stuff I listed above, see that the world is changing and manage it. If people stop paying you or start delaying on payments, you gotta get out there and do some hard nose collecting. If churn starts to rise because of credit card defaults, try to bill in new ways – use different billing dates, bill in multiple smaller chunks, etc. If you have to lower price, get a new product out or a range of products so you can defend average price. If you see it coming and are fast enough, you can react and your company can survive.

    The third piece of good news. All of this starts happening before big market moving catastrophes happen. Bad “paper cuts” were happening months/weeks before Lehman collapsed. In the summer of 2008 other startups I knew were having churn & credit card payment issues.

    There are a lot of folks who survived 2008/2009 and built profitable businesses around Canada. Would love to hear some of your thoughts.

  • Where are the Canadian VC bloggers?

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    I’m awarding Mark MacLeod (@startupcfo) of Real Ventures the Canadian VC Blogging Superhero Badge. Mark is producing world-class class content focused on SaaS Math including:

    This is content that every entrepreneur looking to understand the basic metrics and mechanics of a SaaS business should read. Mark is the one Canadian VCs producing must read, world class content. It is the first time a Canadian VC has been producing content since Rick Segal switched teams (we’re much happier with Rick playing for the entrepreneurs). Rick’s post on Inside the Process is still the de facto standard for understanding the fundraising process from a VC perspective..

    I keep wondering why more Canadian VCs don’t produce content.  It’s not like they don’t have access to blogging tools or the understand of how they should be used. For example, Inovia Capital uses their blog as a promotional tool for their portfolio and their activities in the community (not to pick on Chris, John, Kevin and team because they are really an amazing entrepreneur friendly firm that any entrepreneur would benefit from having involved in your company).  We have others like Boris Wertz blogging about his portfolio and his analysis of the industry including his support activities like StartupVisa Canada. It is just that in comparison to quantity and quality of US investors exploring the power of the medium to reach potential entrepreneurs. We have had some other interesting attempts like DigitalPuck.ca and The C100 to bring together Canada focused investment discussion. The other very interesting blog is Mark R McQueen’s blog (@markrmcqueen). But why are there only 2 Canadian VCs writing interesting content for the medium they are investing in?

    Using the terrible “the Canadian market is one-tenth the US market” you might deduce there should be only 10 interesting US VCs blogging. Bullshit. Larry Cheng provides a list of 100 VC blogs by traffic, some of which like Rick’s blog are no longer active. Here is my short list of 30 very interest US VCs blogs you should be reading (or at least on your radar).

    1. David Skok (@bostonVC)
    2. Fred Wilson (@fredwilson)
    3. Mark Suster (@msuster)
    4. Paul Graham (@paulg)
    5. Dave McClure (@davemcclure)
    6. Albert Wenger (@albertwenger)
    7. Brad Feld (@bfeld)
    8. Roger Ehrenberg (@infoarbitrage)
    9. Ben Horowitz (@bhorowitz)
    10. Mark Andreessen (@pmarcablog)
    11. Chris Dixon (@cdixon)
    12. Jeff Bussgang (@bussgang)
    13. Nivi and Naval – Venture Hacks
    14. David Hornik (@davidhornik)
    15. Fred Destin (@fdestin)
    16. Josh Kopelman (@joshk)
    17. Will Price
    18. Bill Gurley (@bgurley)
    19. Mike Arrington (@arrington)
    20. Ed Sim (@edsim)
    21. Seth Levine (@sether)
    22. David Cowan
    23. Scott Weiss (@W_scottweiss)
    24. Bijan Sabet (@bijan)
    25. Lightspeed Venture Partners
    26. Mark Peter Davis (@markpeterdavis)
    27. Mike Hirshland (@VCMike)
    28. Larry Cheng
    29. Rob Go (@robgo)

    Maybe if you compare at the Q2 investment comparison it’s $7.5B by NVCA vs. $328MM by the CVCA where Canadian investment is 4.37% or the US VC market is roughly 23x bigger. It doesn’t matter. It seems that an interesting blog with insight and analysis of the market and trends is a requirement to differentiate and attract entrepreneurs in the US market.Why not here? Are Canadian VCs just lawyers, bankers and accountants with no real insight into market trends or company operations that can help entrepreneurs? I don’t believe that. So why are only 2 Canadian VCs actively blogging and providing insights? Is it that there is a limited number of potential deals and VCs already see every interesting deal? Is it that they are worried about competing against US led deals and don’t want to expend the effort to write a high quality blog? Do Canadian VCs not understand the medium?

    It doesn’t matter. This is an open call for any Canadian VC to become an active blogger on StartupNorth.ca we’d love to have you write insightful pieces about the funding, market and landscape to help educate and inspire entrepreneurs.

  • Wave Accounting closes $5MM from CRV & OMERS

    Wave AccountingLooks like US VCs are continuing to look at deals in Canada. Wave Accounting announced a $5MM Series A led by Charles River Ventures (CRV) with follow on participation from OMERS Ventures. It is great to see Devdutt Yellurkar (LinkedIn) looking north of the border. Devdutt has an amazing track record at CRV and previously at Rho Ventures, Sterling Commerce and Yantra Corporation. Guessing based on the press release that Devdutt will join Peter Carrescia (LinkedIn, @pcarrescia) from OMERS Ventures on the Wave Accounting board.

    Great news for startups, we’ve now seen Matrix Partners (TribeHR), Union Square Ventures (Kik & Wattpad), CRV (Wave Accounting), Bessemer (Shopify), Freestyle/Greylock/Embracardo (GoInstant) and one other Sand Hill Road firm all make active early investments in Canada. This doesn’t include the Canadians that have raised during stays in the Valley during YCombinator and 500Startups – Vidyard, Upverter (True Ventures), BackType (True Ventures), Kiip (True Ventures), Rewardli (500Startups) and others.

    This is great for Canadian entrepreneurs.

  • EmmaActive launches at DEMO

    EmmaActive, based in Abbotsford BC, is bringing to market an in-image ad unit that consumers will love. The platform turns images across the web into interactive units and enables crowd sourced tagging of photos. Publishers just have to drop a couple lines of javascript on their site to activate the untapped inventory.

    In image advertising is heating up with GumGum, Stipple, Luminate, and a few others vying for pole position and racing to deploy with publishers. The other dark horse is Facebook who might syndicate image tagging along with Facebook Connect. Of course, we’re rooting for the home team. Congrats to Nathan Leggatt and the EmmaActive team on the launch.

  • 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.

  • Kanetix acquired by Monitor Clipper Partners

    Kanetix, Canada’s first online insurance marketplace provides over a million quotes per year to consumers looking for insurance, yesterday announced it has been acquired by Monitor Clipper Partners, a Cambridge based private equity firm that manages $2B in capital.

    Co-founded in 1999 by George Small and Gregory Ellis (who will retain significant stakes in Kanetix), the Toronto based company will now be led by Yousry Bissada who has joined on as CEO and Andrew Lo who has joined as Chief Information Officer.

    Yousry and Andrew previously grew Filogix from $3M to $60M in revenue. Monitor Clipper Partners leveraged recapitalized of Filogix in 2004 successfully exited for $212M to Davis & Henderson in 2006. It is encouraging to see experienced repeat teams growing Canadian companies.

    Here’s to a repeat performance.

     

     

  • 72 Hours Later….

    I loved this infographics from Ken Seto, @kenseto, et al at Massive Damage, who launched Please Stay Calm a few days ago in the Canadian Apple app store. Some very useful comparative info for aspiring game makers on local Canadian app downloads.

    Also I have a new request. From now on all startups should have a picture of a zombies missing an arm beside their ARPU. Especially in really serious board meetings.

    How Zombie Killing Sells.

  • Holy Schmoly – iLoveRewards Rumoured to Raise $25mm Round

    As you know, something like 10 of the past 12 articles on startupnorth have been grumblings either in the article or in the comments about lack of Canadian startups trying to go big and how the ecosystem here can’t really support it.

    Well check out this hot rumour we’ve heard. Apparently, Razor Suleman and the folks at iLoveRewards are doing a MONSTER round from Sequoia sized at $25mm… with none other than Alfred Lin of Zappos fame stepping on to their board. Is that big enough to settle the anti-early-exit crowd? That’s a first class round for any company anywhere.

    More good news – apparently Canada gets to keep a big chunk of the company. Razor and the sales and marketing team are heading down to San Francisco, while our beloved Canadian engineering brains will not get drained.

    Seriously, it had been a while since we last talked about iLoveRewards in 2008 with their also very impressive $4.7m series A round led by JLA . They are one of those companies that have silently dominated their industry, picked up lots of awards but stayed out of the mainstream startup spotlight. Kind of the classic 5 years later you’ve got an overnight success story, like this one.

    I want to ask “Why didn’t iLoveRewards raise this round in Canada?” but really, they just got took a big round from one of the most renowned, deepest pocketed VCs in the world. I just don’t think most Canadian late stage investors are going to beat Sequoia money, so I’m not sure its even a relevant question.

    But it is a perfect example to ask a far more relevant question “should we care about our companies raising money locally?” – shouldn’t CEOs care far more about value than about where it comes from and live with the resultant potential location issues. I’d love to hear the inside story one day on what the bidding looked like on this deal.

  • Quota is not a dirty word

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    “We are ALL in sales” – Dale Carnegie

    I used to think that quota was a dirty word. It struck me as restricting freedom and potentially forced the exploitation of trusted customers and prospects to drive the bottom line results. But I was wrong. In reality, a quota is a number that is useful to incent certain behaviours. The trick is to incent the appropriate behaviours. It is a contract between a sales person and an organization about how to compensate behaviours based on outcomes.

    “Quota is a direct path to clarity and accountability.” – Shawn Yeager

    So many entrepreneurs can benefit from contracts with defined outcomes. I was chatting with a startup last week about the numbers he agreed to with his VC to unlock the next tranche of funding. He mentioned that he wasn’t going to meet the numbers, but he still expected the VC to unlock the funding. My advice to him was very straight forward, it was to figure out how to achieve the agreed to numbers, or immediately open a conversation with the VC about missing the numbers due to changing market conditions and see if the tranche can be renegotiated. In the case of this entrepreneur, the numbers were in the funding contract, and I fully expected the VC to hold the entrepreneur to deliver on these numbers. The numbers and metrics exist to help assess the risk and the ability of an entrepreneur to deliver.

    The secret with an early stage company is to set appropriate metrics, quotas and growth numbers that incent the correct behaviours out of entrepreneurs. The good news is that there are a lot of examples of SaaS, B2B and consumer metrics that can be used.

    There are a lot of different sources of metrics and numbers. Each of the numbers needs to be considered in corporate revenue goals, past historical performance, current product development stage, market share, budget, etc. The targets and growth numbers need to be established.

    I’ve taken to requiring all of the startups I mentor, to establish 3 metrics that we discuss in our mentorship meetings. Each of the metrics must be clear enough for me to understand, for example:

    • Number of paying customers
    • Number of registered users
    • Churn rate
    • Number of pageviews or unique visitors

    And each metric should have the current measurement, the predicted growth rate and the actual target number. I try to start each conversation around the metrics. And any issues related to the market conditions, learnings, corrections, etc. Then together we set the targets as part of the planning for the next meeting. This may include a redefinition of the metrics. The trick for me as a mentor is to try to help identify what metrics I think are most useful for the startup and founder to focus on next.

    What are the metrics other entrepreneurs track? How do you set your targets and quotas?

    What are the metrics and growth rates that investors like ExtremeVP, Real Ventures, iNovia Capital, GrowthWorks, Rho and others want to see from prospective early-stage companies?

  • Startup Offspring

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    We’ve been focusing a lot on exits recently. Some folks have asked “why celebrate”? So many are $30-$50mm exits, who cares? $30-$50mm exits = VCs dying = ecosystem dying… or so goes the logic.

    Let me tell the story of Redknee. Redknee creates billing software for telecos. Started in the late 90s by 4 mid-20s, Waterloo grads who had worked at Telus & Nortel – Lucas Skoczkowski, Vishal Kothari, Dan Macdonald, and Rubens Rahim. Without taking any VC money, they IPO’d in 2007, raised something like $30-40mm out of the IPO, and now have a market cap of about $70mm. I.e. modest success, not great success.

    Here is the list of who is where now from the early days at Redknee:

    • Shailesh Lakhani – was director of operations, now VP at Sequoia India
    • Shyam Sheth – product manager, then product manager at Google, now co-founder of Fixmo
    • Tony Mak – was a sales engineer, moved on to VC side at OATV, now founder of Everpic (SF-based startup)
    • Kristin McClement – was product management, now heads up product and super early employee at Payfone (hot New York startup)
    • Bohdan Zabawskyj – was CTO, now CTO of a hot Toronto startup that I think I can’t name yet, and also advisor & investor to several other startups
    • Jeff Zakrezewski – was a dev team lead, then was managing partner at 5-Mobile (acquired by Zynga), now Chief Architect Zynga Toronto
    • Brian Glick – was a product manager, early guy and now lead product manager at YouTube
    • Dalia Asterbadi – was marketing, now founder of RealSociable
    • Jason Tham, Jason Yuen, Sean Kirby – product & development, now founding team at Nulogy
    • Karthik Ramakrishnan – was a product manager & sales engineer, now heads up product at BluTrumpet and at HatchLabs/IAC/Xtreme

    So let’s tally that up – 1 modestly successful startup equals roughly 6 new companies founded and 2 new startup investors and some other people in influential places. I am forgetting people as well.

    Success begats success. Probably more than money begats success. And that is why we need to celebrate even the modest victories.