StartupNorth

Category: Venture Capital

  • Let the Sparks Fly

    Earlier this week, Brightspark’s Mark Skapinker got “quoted saying some harsh things” in the Wall Street Journal. The gist of the post was that “the venture capital model was broken in Canada” and that “there are no significant repeat entrepreneurs here.” Understandably, passions were inflamed…

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    Wellington’s Mark McQueen took issue with several points in the article. JLA’s Rick Segal likened the WSJ post to friendly fire or getting hit from behind. Mark Skapinker has since posted a clarification of sorts.

    While the WSJ post was off message, there really is a problem up here. It is not a lack of good ideas or backable founders. The pool of available financing is drying up. A global problem, sure. But our pond is smaller, so we’ll feel the pain sooner.

    There are those who will argue the rules are changing, that to start something less funding is needed than ever before. Maybe so. But there is a difference between running lean… and starving. We are simply not feeding our young. It is beyond short sighted, it is economic suicide.

    Provincial governments seem to know this is happening, that there is a risk of losing a generation of entrepreneurs, companies, jobs, growth. They are announcing programs left and right (albeit with seemingly little industry consultation), but letting meaningless paperwork kill cross border deals.

    Financiers definitely know something is amiss, funds are not or can not raise another round. Instead of closing on a fresh $100M, they are closing up shop. But if they didn’t deliver returns, can you blame LPs? Typical venture funds need to deploy large amounts of capital to move the needle. They aren’t in the seed stage investing business, their business model does not allow it. It is possible that there just weren’t enough seed stage opportunities to choose from… maybe.

    So more early stage financing for more companies, it is easy to like the sound of that. Unfortunately, it is just not that easy. There really is not much money to be made doing this. Run the numbers for yourself, we have, it is not a particularly scalable venture so to speak. And still it needs doing.

    One thing is for sure: this problem isn’t going to solve itself…

  • Raising Money in 2009

    Is your startup considering raising money from investors right now? Unless you are the CEO of LinkedIn or Twitter, you know that now is not the greatest time to be asking for cash. But what’s it really like out there for people still trying to take on investors? Is it even possible?

    A down economy affects startups in several ways. On one hand, it could dry up your customer base. Startups in the financial, enterprise, real-estate, or advertising sectors are being hurt worst because customers are cutting back.

    But in addition to the challenge of finding paying customers, the other issue is that investors are scaling back. If it was hard to raise money in the past, it’s harder than ever now.

    Sorry, but it gets worse. Not only are investors scarce, but then there’s the issue of valuations…

    “Valuations are definitely taking a tumble.” says StandoutJobs CEO, Ben Yoskovitz, “If you’re doing a second round or a bridge round you can expect the valuation to be the same as what you had before or lower. I think a lot of companies are looking at bridge rounds from existing VCs versus new rounds to keep afloat, and existing VCs are keeping more money in their pockets to help out their existing portfolio.”

    The interesting feedback I received from entrepreneurs is that, even though things are tough, it is not any more difficult to get meetings with investors.

    Toronto startup lawyer, Suzanne Dingwall Williams of Venture Law Associates, agrees:

    “It’s still easy to get meetings with ‘investors’. But the trick remains sorting who is actually investing, and who is simply data mining. …. On the VC side, many VCs are either (a) out of money, (b) have money that’s only available to support existing companies or (c) are too busy looking at selling their stakes in the secondary market to be able to focus on you.”

    What’s a funding-ready startup to do? Here’s some advice we’ve collected from Canadian startup entrepreneurs and advisors:

    • Don’t worry about looking good. Money is scarce right now for everybody, so no one cares where you’re getting it from. If it used to look bad to do many small rounds in a row, to take money on the same valuation as you had before, or to scale back your team, well, do what you gotta do. If your startup is alive and stays alive for the next two years then you’ll be doing better than most.
    • Raise an internal round. The easiest way to extend your runway is to make drastic and deep cutbacks. Cut now and cut deep. Then move on.
    • Wait. If your company is growing when others aren’t but valuations are half of what you’re looking for, then it might make sense to keep bootstrapping, double your revenue, then ask for a better valuation. Or at least position yourself so it’s possible to do so.
    • If you are looking for seed money, forget about it and bootstrap. Get to revenue. Ideas and hype are worth nothing now. Paying customers, healthy cash-flow, and clear paths to profitability are more important than ever.
    • Make multiple plans. In the past, it would be bad form to go to a VC and say “we have plans for if we raise 100K, 1M, or 5M” because that would indicate that your plan doesn’t necessarily need a VC. Things have changed.
    • Pre-screen VCs. You can waste a lot of time right now meeting with investors that are doing their best not to invest. Ask around, search StartupIndex, and feel free to email me, if you’d like my opinion on who is ‘really investing’.
    • Use government funding. “The story for funding for 2009 is how to structure your business so it can attract government money. BDC just got another $300 million this week to deploy in the form of term loans and lines of credit,” says Suzanne. If you talk to experienced entrepreneurs, you’ll receive mixed reviews about BDC loans, but you’d be foolish not to look into them.
    • Give up. The businesses that never made sense are going to fail early. But there will be a bunch of businesses that might have been good yet will never see the light of day. It’s okay to put your startup on pause and work for a consulting company; we won’t judge you (as long as you have a secret side project).

    Is your company trying to raise money right now? Are you a startup investor? What has your experience been like? Let us know in the comments below!

  • Weekend Reading – January 17, 2009

    Nuclear WinterIn the News:
    Rypple in the Economist.

    Idee in Entertainment Weekly.

    And LoyaltyMatch on Fox.

    Well.ca founder Ali Asaria interviewed for Allentrepreneur.

    Warming your heart this Nuclear Winter:
    FreshBooks’ CEO on Distribution 2.0 Winners & Losers.

    Wellington Financial topped up their Fund III with $25M for a total $150M.     And, Wellington’s Mark McQueen continues to hilariously rail on the fund run by Kevin O’Leary of Dragon’s Den.

    First Round Capital held Office Hours in Vancouver this week. Any reports?

    Mark MacLeod says Just do it!

    b5media’s CEO Jeremy Wright took a IZEA (PayPerPost) Coke Zero offer. More paid posts to appear on b5 blogs?

    Why your web startup will fail! vs Why your startup will succeed!

    Netshelter raised $11M from Rho, GrowthWorks, and JLA.

    8 companies were funded by the Investment Accelerator Fund including: C2C Link, Echologics, IPeak Networks, Kneebone, Regen Energy, Skymeter, Nulogy, and Sysmos. What a great way to start 2009!

    Check out the StartupNorth Calendar for upcoming events in your city. Montreal ical feed is acting up, but we are working on it!

  • identi.ca gets funding, and a case of bad timing

    I learned through GigaOM this morning that Montreal-based Identi.ca has taken a round of funding from Montreal Startup. I was, and remain, a big supporter of Identi.ca and first covered it back in July, 2008.

    It appears that Montreal Startup is the sole funder in this round so I will assume that GigaOM is right and the amount of funding is probably in the $200,000 to $400,000 range.

    This is exciting news for the Canadian startup community, but just after hearing it this morning I came across this announcement from Google. In November 2007, Google acquired Jaiku, a “lifestreaming” service that resembles Twitter and which preceeded services such as Friendfeed which largely copy its functionality, and it was founded even before Twitter.

    Google is announcing today that they are going open-source and will be making Jaiku freely available. On top of that, you will be able to easily deploy it to the Google App Engine.

    I am not sure of the exact impact of Jaiku going open-source, but it no doubt has some impact on Identi.ca’s plans. I am confident that Evan and Montreal Startup will take this development in to account, and I certainly believe that there is more than enough room for a few open source applications to thrive.

  • Tech Capital doubles bets on Overlay.TV and PostRank

    techcapitalOverlay.TV and PostRank (formerly AideRSS) have both recently secured second rounds of funding from Tech Capital Partners, Overlay.TV raising $4.6M and PostRank raising a ‘significant round that will last well into 2010’. Also participating in Overlay.TV’s follow on financing were their other existing investors Edgestone and Celtic House.

    In the current environment, it makes tremendous sense to top up the portfolio companies’ coffers so they have all the fuel they need to reach an exit. Of course, we would never cheer on VCs throwing good money after bad. Fortunately for Tech Capital these two portfolio companies have been making nice progress this year. Jacqui Murphy, Partner with Tech Capital Partners had this to say:

    “We are very pleased with the progress the companies have made since our initial investments and are even more pleased to support them again.”

    Overlay.TV has secured a number of high profile partners and users including the Jonas Brothers (no relation). And AideRSS has rebranded as PostRank and released a number of exciting new enhancements including Google Reader integration and a Full Access API.

    Congrats to both Overlay.TV and PostRank on the recent raises!

  • Montreal Start Up raises another $2M

    Montreal Start Up announced today the closing of an additional $2,000,000 for its venture fund from the Solidarity Fund QFL, bringing total assets under management to $5,000,000. The Solidarity Fund QFL joins Investissement Québec, la Conférence Régional des Élus, and 20 of Montreal’s most successful entrepreneurs and investors who partnered with Montreal Start Up to address the need for more early stage capital and mentoring.

    “We have met with hundreds of entrepreneurs since our launch and the quality and creativity of the ideas we are seeing is constantly improving. We were having to turn down good deals because of the limited amounts of capital available to us. The support of Solidarity Fund QFL will allow us to support more of Montreal’s best startup companies.” John Stokes, Montreal Start Up

    Also revealed were Montreal Start Up’s four latest investments: Mobilize Central, KeenKong, The Book Oven, and Oneeko all of which are based in Montreal. These investments are in addition to its previously announced investments in Standout Jobs and Akoha.

    This is all fantastic news from Montreal, easily one of the most vibrant startup communities in Canada.

  • Yaletown Ventures closes $65M

    It might be the end of the world as we know it for venture capitalists. But Vancouver VC, Yaletown Venture Partners, announced their $100M Second Fund with $65M closing today. The fund is focused on early-stage investing in clean tech and IT in Western Canada.

    "The support that Yaletown has earned for its first two funds in extremely challenging market conditions, from institutional and technology industry insiders alike, is a strong endorsement of this team and its investment strategy," said Haig Farris, retired co-founder of Ventures West and one of Canada’s most respected angel investors.

    This quote by the retired cofounder of Ventures West says it all. A strong investment team with a strong thesis can raise money in down times. This is true of entrepreneurs and startups. Good ideas, good businesses and great execution make it easier for startups to raise money even in tough times.

    Yaletown has done a number of IT investments including:

  • Pipeline – US Venture Funding for Canadian Startups

    Looking for venture funding? Consider participating in the following initiative run by PWC and Burns & Levinson LLP.

    The US/Canada Venture Capital Pipeline links venture capital firms and investment banking firms based in the US with Canadian companies seeking financing. The event is designed to build relationships and create business opportunities between US investors and Canadian companies. This December 4, 10 Canadian IT companies will head to Boston to meet one-on-one with U.S. investors.

    The deadline to submit applications is November 14.

    Here are all the details. If you are interested in applying, please contact:

    Leonard Gold
    Managing Director
    Burns & Levinson Canada Co.
    Partner, Burns & Levinson LLP
    lgold(at)burnslev.com
    617.345.3831

    Charles Godbout
    Vice President, Corporate Finance Inc.
    PricewaterhouseCoopers LLP
    charlesgodbout(at)ca.pwc.com
    514.205.5020

  • Garage Canada in the deadpool?

    Garage Canada has had, to say the least, a poor reputation as of late. Fundings that happened, and then didn’t happen, a lack of activity and general uncertainty about just how serious they were.

    It seems that things may have finally come to pass, and Garage Canada appears to have called it quits.

    Lawyer Suzie Dingwell-Williams notes

    Now, the Garage Canada web site is down, there is no reference to the affiliate on Garage’s US site (although Tom used to be listed as an advisor) and there comes news that some of the former fund staffers are forming a new entity St Lawrence Capital(no website yet). What happened to the portfolio, and the undeployed capital contributed by Quebec LPs like Caisse and Soldiarity Fund QFL?

    I have sent out a few emails to find out what is going on. If you have any insight, comment below.

  • 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.