StartupNorth

  • Startup funding sources – National Angel Capital Organization

    My previous article on start-up funding sources covered the Investment Accelerator Fund. For the next article in this series, I will cover the National Angel Capital Organization (NACO). I recently met with Dan Mothersill, President and Bryan Watson, Executive Director from the National Angel Capital Organization.

    Craig: Thanks for taking the time today to speak with the StartupNorth readership. To start, can you give the ’30 second elevator pitch’ on the National Angel Capital Organization?

    Dan: Sure, the National Angel Capital Organization is the umbrella organization that represents angel groups in Canada. Its members are the 32 organized angel groups across Canada. NACO has various programs to help support and encourage angel investment in Canada such as:

    • Support for angel groups to get setup and be sustainable
    • Publishing best practices on angel investing and running angel groups
    • Advocating to government for policy initiatives to support angel investing (i.e. grant money to support angel groups, tax breaks for angel investment dollars)
    • Fostering co-investment across angels groups in Canada and other regions of the world

    Craig: To clarify, NACO does not make investments in companies like your member organizations?

    Bryan: Correct, individual angel investment occurs via our constituent groups and their respective members. If companies approach NACO looking for funding, I refer them to one of our member groups that is the best match in terms of location / industry.

    Craig: For angels in Ontario, there has been an exciting program, the Angel Network Program, that has made a big change in the ecosystem around angel investing. Can you talk about this?

    Dan: Angel investors play a critical role in helping fund early stage companies and helping them commercialize and advance to the next level. However, from an entrepreneur standpoint, without organized angel groups, it can be hard to find and approach ‘lone wolf’ angels that invest individually. Prior to the Angel Network Program, there were only a couple of organized angel groups in Ontario. Now there are a dozen that cover a range of geographic areas, industry sectors, and university affiliations. Having organized angel groups makes it easier for entrepreneurs to get matched with angel investors as the groups are setup to promote themselves, intake deal-flow, and present to members. The Angel Network Program is funded by the government of Ontario and provides grants to angel groups in Ontario to give funding to groups to setup and support themselves.

    Craig: This is a great program, I know the board at Maple Leaf Angels really values the work NACO did to get the program established and it is a key factor in the successful operation of our group. Having established angel groups is clearly beneficial to entrepreneurs. Can you speak about the advantages to angel investors?

    Dan: Research has shown that that angel investors that invest via an organized group get better deals and higher return on investments. Since the angel group is actively marketing itself, they generally see more deals and higher quality deals. Most angel groups have a selection committee that helps narrow down the deals into the best few that are presented to members. Since this selection committee is comprised of several members with a wide variety of professional expertise, they can better assess the quality of deals across a variety of industries. Similarly, when it comes time to do due diligence on a candidate company for investment, there is a greater chance that somebody in the angel group has direct industry expertise or contacts that can do a detailed assessment of the company. Compared to an individual angel that may only do deals in the industry they are comfortable with, by investing through an organized angel group, they can assess deals in a wider range of industries which will help them build up a more diversified portfolio.

    Craig: What are some of the companies that have been funded by angel groups established by the Angel Network Program?

    Bryan: Some examples include: Speech Bobble, Cubeit, Spartan Biosciences , and a StartupNorth favourite, Well.ca. In total, an estimated $13 million in investment has been made as a result of this program.

    Craig: That’s great. In addition to the capital investment, have there been other advantages?

    Dan: Yes, definitely. From the entrepreneur standpoint, the ability to get several angels invested in their company is extremely beneficial from a mentoring/networking point of view. Many angels are themselves cashed out entrepreneurs and are willing to lend their expertise and connections to help their investee companies. From the government standpoint, the success of the Angel Network Program has helped to showcase angel investment as a class and show the importance that angels play in the commercialization lifecycle. Angel investment in Canada totals over $2.2b annually.

    Craig: Moving on, NACO has been spending a lot of time of late to foster co-investment across angel groups. Can you talk about why this is important?

    Dan: With the challenges in the VC system, it has become harder for companies to get follow-on financing. This is bad from the company standpoint as well as the angel investor standpoint. Co-investment aims to encourage deal exchange between angel groups. Namely, if one angel group invests in a company and sees them make good progress, we want to enable deal flow to other angel groups for follow-on company financing. This is a win-win situation as other angel groups will see high quality deals since their peer angel groups already have a working relationship with the company and the original angels will ensure there is a follow-on source of funding for their portfolio companies.

    Craig: What events has NACO held around co-investment?

    Bryan: NACO held the first Canadian co-investment summit in November 2008. 25 companies presented at this summit and at last count over $2m of investment has closed as a result. NACO recently held a second Canadian co-investment summit in May 2009 where 15 companies presented. We will aim to hold 1-2 co-investment summits in Canada each year. To date our events have been in Toronto but we are looking to hold them in other cities next year.

    Craig: How does a company get selected to attend a co-investment summit?

    Bryan: We have two qualifying criteria. First the company must be nominated by an angel investor. This angel will appear at the summit alongside the company to give their perspective on the company and why they feel the company is a strong investment. Secondly, the company must have at least $250k of outside money (i.e. in addition to friends/family/founders). For our last co-investment summit we received 60 applications. A selection committee composed of managers of several angel groups reviewed the submissions and narrowed it down to the 15 that presented.

    Craig: What future co-investment initiatives are planned?

    Dan: In the fall, we will be expanding our co-investment initiatives to the US and Europe with co-investment events planned in Boston and London. In the future we are looking to expend this to other regions such as China and India.

    Craig: Most companies in Canada probably look to the US as their key market outside of Canada. Can you talk about how the European co-investment initiative will be able to help companies?

    Dan: As you mentioned, the US is an important market for an early stage Canadian company to target. This is relatively easy to do given the language, culture, geographic proximity. However, when expanding sales and marketing channels, to Europe, this gets harder. Our goal is to find established early stage companies that are looking to penetrate the European market. By matching with angels in Europe we can help enable this expansion through capital and more importantly knowledge/contacts that European angels can bring to support the company in launching into Europe.

    Craig: We’ll look forward to seeing this grow and develop over time as it will be good to develop broader relationships across angel groups across the world. Lastly, NACO is holding their annual summit in October. Although more geared towards investors vs. entrepreneurs, can you give a preview of what is planned at this event?

    Bryan: Our summit is run for angel investors with various speakers, panels, and educational topics to help angels understand the investment process and keys to being successful. Two confirmed keynote speakers include Basil Peters, who will talk on how to build (angel funded) companies for early exits based on his recent book , and by Alan Barrell, renowned UK Angel investor, who will talk on cross-border investment. We will also have a small co-investment track where 5 companies nominated by our member angel groups will be able to make an investment presentation.

    Craig: Dan and Bryan, thanks again for speaking about the National Angel Capital Organization today. NACO has done a lot of great work to promote and develop angel investing in Canada and all of us in the community look forward to continued development of the various programs you have on the go.

    craig at mapleleafangels.com

  • Because Startups Need Each Other

    “Because startup entrepreneurs need each other.”

    The Philly Startup Leaders have published a manifesto for startups. The manifesto embraces the call for community. It reminds me of the passionate call that Jevon led with "How Startups will save Venture Capital in Canada” and “I love my city, and so should you”. It is about enabling entrepreneurs! And more importantly, it is about the realization that we are a community, we need to support each other.

    Starting a company can be a long and lonely journey.

    Each milestone is a small miracle—from idea to prototype, from first employee to first customer, from first revenues to first profits and eventually to a thriving, successful business.  Most startups fail along the way.

    To survive this journey, startup entrepreneurs need many things. They need access to funding and talent.  They need support from their government and their community.  They need opportunities to educate themselves and their team.

    But more than anything else, startup entrepreneurs need each other.

    Toronto, Waterloo, Montreal, Vancouver, Ottawa, Calgary, Halifax. We’re all very lucky. We have growing, thriving communities of entrepreneurs. We’re connected to each other. It is our responsibility to help each other. To make the connections. To build the fabric. To call bullshit. To build the next great thing.

    This is beyond just casual connections. We have a lot of disparate resources and individuals. I’m not suggesting that we need “one ring to rule them all” but that we need to do a better job helping entrepreneurs connect with each other. And this will requires a personal commitment to an open, creative community and conversation. We need to build something like the PSL Values.

    Philly Startup Leaders Values

    1. We know our niche: startup entrepreneurs.
      Our focus is our advantage.
    2. We are a community.
      Starting a company alone is painful.  Along the way, our greatest need is the company and support of entrepreneurs like ourselves.
    3. Our community depends on deep, open and frequent communication.
      This kind of communication is essential for our members to get to know and trust each other.  As an organization, we earn the trust and loyalty of our members by communicating with them in the same way.
    4. We believe in lean and flexible leadership.
      Bureaucracy and hierarchy tend to stifle entrepreneurs.
    5. We don’t replicate other organizations and events in our ecosystem.
      Instead, we support other organizations by partnering.  We produce only unique and complementary content.
    6. We encourage entrepreneurship within our organization.
      Any member can champion a cause they believe in.  When they do, they have access to the same resources the leaders do.
    7. We believe that entrepreneurs of all experience levels should mentor one another.
      We have all had great teachers, and it’s our responsibility to give back to our community.  This includes our fellow entrepreneurs and those who ought to be.
    8. We love our city and our region.
      We walk the same streets as Benjamin Franklin, an entrepreneur whose inventions and institutions have survived for generations.  We are inspired by our history and proud to be writing its next chapter.

    What can I do?

    1. Participate.
      This is the very first step. Blog. Tweet. Comment on posts. Share links. Attend events. There are lot of events designed to help entrepreneurs connect with other entrepreneurs and others in the community. In Toronto, check out the YouSayYeah Community Calendar. In Vancouver, check out the Bootup Labs Events page. In Montreal, check out TechEntreprise. Use social media to connect with others. The reason we started StartupNorth was to make it easier to find out about Canadian startups.
    2. Patronage.
      It might sound a little like protectionism, but it’s about supporting your community. What was the last product or service you purchased from a startup? From a local startup? If you work for an established company, you should be looking for tools, people, companies, products that give you a competitive edge. Look for vitamins or painkillers, remember this is not a charity activity (though it often feels like it). We are all looking for competitive advantages, and there are lots of startups with new solutions to problem. Look at StartupIndex to find new startups. If you’re a startup, and you want some additional coverage, drop us a note (but check out previous stories iLoveRewards, GigPark, make it easy for us to write a story about why people care). 
    3. Provide feedback.
      When you find a startup, an entrepreneur or a product that only sort of fits what you are looking for, share the information back with the company. Help them build a better product by giving them customer or potential customer feedback. What were the key features that were missing? What was wrong with the pricing model? Why won’t it work in your corporate IT infrastructure? This is valuable information that a lot of young startups need to gather to iterate and improve their offering.
    4. Celebrate failure.
      Did you take a job working for an established company because your startup failed? Share your stories about what worked, what you did wrong, what you’d do differently if you could do it again. How? See # 1. Hire a failed entrepreneur (I know I appreciate the opportunity provided by Microsoft Canada to be startup guy in Canada running BizSpark). We’re all in this together, it feels like I’ve been working with and for startups since the beginning of time. And if I’m lucky, I’ll be doing this for many years in the future. And I know I’ll have a few great stories about what I did wrong.

    It’s up to all of us to celebrate the startup successes and failures in Canada. Personally, if you’re a startup I’d love to hear what you think StartupNorth should do to help you.  Please comments with your suggestions for stories formats, events, site improvements, etc.

  • One small step for startup kind

    “I believe this Nation should commitment itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to earth. No single space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or expensive to accomplish." – John F. Kennedy

    Yesterday was the 40th Anniversary of the lunar landing. The Apollo program is an interesting concept for early-stage startups. It was a self-imposed race to beat the Soviets. A lot of startups need to feel the pressure to succeed, and having timelines, constraints and competition often helps amp up the sense of impending doom.

    For the Apollo program there was competition. There were extreme timelines. There were budget constraints. All of these were much bigger and longer than the plans for startups. But there was a clear goal (“landing a man on the moon and returning him safely”), and constraints (“before this decade is out”). And most importantly the money wasn’t the end, it was a necessary means to accomplish the larger goal.

    Clear Goals

    Beating the Soviets. Recovering national pride after the failed Bay of Pigs invasion. It was an effect of the Cold War. But there was competition. The historical analysis of the program looked at a variety of success factors including Big Hairy Audacious Goals that included:

    • “a chance of beating the Soviets by putting a laboratory in space”
    • “a sporting chance of sending a 3-man crew around the moon ahead of the Soviets”
    • “an excellent chance of beating the Soviets to the first landing of a crew on the moon (including return capability, of course)”

    The definition of goals included both the engineering constraints but also a prediction of the potential of the competition. Startups need to set big goals. The goal should specify the desired outcome, not the path/method for achievement. 

    Competition

    The goals need to be in context of their operating environment including that of their competitors. I really hate when an entrepreneur tells me they have no competitors. The number of times that this is true is rare. Most companies and products have competition. Stop being afraid to talk about your competition. Understanding where you fit in the competitive landscape can help you figure out your product offering, your time to market, potential marketing events. It makes it a lot easier to know who is the bad guy? Trust me, you should be diligent and honest about who you are competing against. Having a clear competition makes it easier to see where you should spend marketing dollars, what conferences to attend or avoid, and build strategies that either embrace or ignore the competition.

    Constraints

    Money is one of the easiest constraints to understand. Unfortunately, when you’re working part-time out of your basement/garage/spare room, you don’t have the impending sense of doom that money is a constraint. The runway for side projects is a long. I think this leads to thinking that raising money is the end goal.  “We’ve raised a million dollars”. This is meant to be the beginning of the journey. The money is for a purpose, it’s meant to help you grow, build, market, acquire, etc. Raising money enables you to do the real work. It allows you to either increase the rate of acceleration or lengthen the runway. But it’s just the beginning. Equally said, SR&ED is a great benefit to companies, however, when you decide to focus on SR&ED credits to keep the company afloat instead of finding new customers you’re doing the wrong thing.

    Money in the bank/Monthly expenses = How long until we are dead – Phil Morle

    The change over the past 20 years is that the monthly expenses have decreased. It no longer costs hundreds of thousands of dollars for hardware, development environments, net access, etc. The price of servers continues to fall, and with the advent of cloud computing and dynamic loads it is becoming variable with the load on your site or application. Development environments are free. Usually the single biggest cost for a startup is talent. Oh wait, you’re not paying yourself and you don’t have any employees. This has 2 side effects, it reduces the monthly expenses thus lengthening the runway, but it can also have adverse side effects like not forcing entrepreneurs to be self critical of their ideas and their progress. 

    Figure 1: The Startup Runway 
    Figure 1: The Startup Runway from Phil Morle on Pollenizer

    I like Phil Morle’s method for using the runway:

    Pick a date in the future (this is point D on Figure 1). Let’s say 18 months from now because that’s roughly what John Doerr of Kleiner says is good runway. And then begin working backwards, determine the point where you will need raise more money or find a paying customer (this is point C). This point needs to be a few months before the end of the runway to allow you a margin of error and the time necessary to close financing or the deal. Continuing backwards in time, you need to be at feature complete (point B on Figure 1). Yes, there is a long time between points B & C but this is to allow you to drive adoption, build press and momentum and refine your existing product and pricing. It brings us to right now, what is the minimum feature set that you can plan, design, build, test and deploy between now and 6-12 months from now.

    Lessons for Startups

    “Startups fail from a lack of customers, not product development failure” – Steve Blank

    You’re goal is to prove your business before time runs out!

    1. Define the end of the runway
    2. Set clear goals and metrics that will prove your business
    3. Identify the constraints – financial, talent, technological, etc.
    4. Focus on customers and markets from day one

    Additional Reading

  • Startup funding sources – Investment Accelerator Fund

    My previous article on start-up funding sources covered the Maple Leaf Angels. For the next article in this series, I will cover the Investment Accelerator Fund (IAF).

    What is the IAF?
    The IAF is a fund that was established by the Ontario government Ministry of Research and Innovation and is managed by the Ontario Centers of Excellence. It was put in place to help early stage companies that may be too risky for traditional funding sources to get funding and allow them to make progress to the next level where they can tap into angel/VC funding sources. In addition to providing capital to investee companies, the IAF also helps companies via its extensive connections and networks to help companies in areas such as opening sales doors, developing alliances, finding management talent, and recruiting board members.

    The fund was founded in 2007 and has done 20 deals since inception. The fund is on track to do an additional 9-10 deals this year. Some companies the fund has invested in include: Regen Energy, Echologics, Nulogy, Bering Media, and Skymeter

    How does this fit into Ontario’s commercialization strategy?
    The IAF is one of 3 programs the Ontario government has in place to support innovation and commercialization in Ontario. The first program is the business mentorship and entrepreneurship program (BMEP) led by MaRS. This helps companies get started and provides guidance for entrepreneurs to launch their companies through mentorship and access to market research. The IAF would be the second leg in helping provide funding for early stage companies. The third leg is the angel network program administered by the National Angel Capital Organization. This helps establish angel groups in Ontario that will fund early stage companies and provides a network for access to follow-on capital.

    What companies are eligible and how much investment can a company get?
    To be eligible for the IAF, companies must reside in Ontario. Investment can be up to $500k and is usually done in tranches.

    What are the deal terms?
    Investment is made via convertible debt with a nominal equity kicker. A board observer seat will be granted to the IAF as part of the deal. The IAF is open to syndicating a deal with other investors.

    How should a company go about applying?
    Initial contact should be made through Trish Barrow. Once the application is received Trish will have an initial conference call with the company to review the application.

    What happens after an application is submitted?
    The company executive summary is reviewed internally and/or externally to assess the opportunity. Companies then submit a full business plan which undergoes detailed due diligence into the market, market strategy, intellectual property, technology, and management. Based on this, a recommendation is made by the IAF management team on investment.

    Companies must then do an investment pitch to the IAF investment committee. This committee is made up of IAF management, VCs, and angels. The committee guides the IAF management committee on the investment and any conditions for investment. This process also provides the investment committee with a window into quality deal flow for potentially follow-on funding.

    How long does the process take?
    The process takes between 3 to 6 months until the company receives a cheque. Timeframes will be dependent on what stage the company is at, if they have materials readily on hand required for the due diligence process, etc.

    What criteria are used to select which companies receive investment?
    As the IAF was established by the Ontario Ministry of Innovation, it is not purely ROI and profit driven like a VC fund would be. Companies successful in receiving funding typically:

    • Have a viable addressable market of at least $20m that the company can add unique value
    • Have strong, defensible intellectual property
    • Are in a position where investment by IAF can be meaningful in terms of helping the company progress and get to a stage where they will be attractive to next round angel/VC funding
    • Have high risk, disruptive technologies that will advance innovation in Ontario
    • Will create jobs in Ontario

    The focus of the fund is on innovation and commercialization so companies with potentially disruptive technology that have strong intellectual property are the best candidates. The fund is looking to help companies develop their technology to the next level (i.e. could be a beta product, could be a pilot project) so the technology is further proven and subsequent angel/VC investors can look to continue funding the company. In other words, the fund is looking to bridge the gap between early R&D and angel/VC fundable companies.

    Although the fund is not purely ROI driven, just like any fund it as limited resources and the fund’s management needs to ensure the companies they invest in will be the ones that succeed and become successful companies. As such, companies must be able to show a clear plan of progression with concrete milestones as to the progress they will make after investment in advancing the company to the next stage.

    craig at mapleleafangels.com

  • Weekend Reading

  • SR&ED Tax Credits – From now on, Less is More

    This is a guest post by Stan Singh [stan.singh [at] ca.pwc.com] and Peter Allen, Senior Managers in PriceWaterhouseCoopers SR&ED practice. Stan and Peter work with software companies to ensure they are making the most of their investments in new technology and will be contributing posts to StartupNorth with advice on how to do the same. Welcome aboard guys!

    Bailout-shmailout! SR&ED tax credits have been available since the 1980s. For those of you out there who are not claiming these credits, perhaps you should be. And for those of you that already are, then you should note that for tax years ending after December 31st 2008, the claim application process got a facelift: you will have to use a revised claim form (the “Revised T661”), and you should be prepared for this new approach to claiming these credits.

    What’s the difference? Well, the biggest change is that you will have to write your project descriptions with word limits of 350 words for the Technological Advancements and the Technological Obstacles (aka Technological Uncertainties or Technology Base Level) sections respectively; and you will be limited to 700 words for the description of the Work Performed. Up till now, there have been no such limitations.

    A quick survey of a set of SR&ED project descriptions for start-ups showed an average of 900 words for the Work Performed section. The Technological Advancements and the Technological Obstacles sections both came in under 250 words. But now, the Technological Objectives have to be included with the Technological Advancements. And there is no place to provide any background information. So, for all but the smallest projects, we have a new challenge – we have to be very concise.

    I recognize that entrepreneurs are all proud of the way they push the boundaries of technology to amaze customers, and the desire to describe in great detail the impressive advancements made resulting in a viable business with amazing potential – but basically, Canada Revenue Agency is saying “we don’t have time to read all that – just give us the facts!” And they are right – the purpose of these narratives on the Revised T661 is simply to prove that Experimental Development actually took place. The quicker that can be described clearly, the sooner you can get back to your technology development, and the sooner CRA can give you your tax credit.

    So in the Work Performed section, focus on no more than three or four of the major technological challenges you tackled during the project, relate those efforts very clearly to the Technological Advancements and the Technological Obstacles, and don’t bother with any background material.

    The Revised T661 brings other important changes to how you make your SR&ED claims, some of which we’ll cover in future posts. In the mean time, consider SR&ED credits to be your “stimulus package.”

  • Startup funding sources: Maple Leaf Angels

    As a follow on to the start-up funding survey, and to help start-ups have a better understanding of sources of funding, I’m going to write a series of articles on the various sources of funding available to start-ups. To begin I’ll start with Maple Leaf Angels and a discussion I had with Rob Koturbash, Managing Director of the group and fellow board member.

    Craig: Thanks for taking the time to speak with the StartupNorth readership. To start, can you give the ’30 second elevator pitch’ on Maple Leaf Angels.

    Rob: Sure, Maple Leaf Angels was founded in 2007 and is based on Toronto. We are an angel group that has approximately 40 accredited investors as members. We hold 10 investment events each year where 3 companies present to our members at each event. Those members that are interested in a company will engage the company in due diligence and if they like the deal will close an investment.

    Craig: One question I frequently get asked is if Maple Leaf Angels invests as a group/fund or individually. Can you clarify this.

    Rob: At this point, Maple Leaf Angels is a deal facilitation organization. We screen deals and present the best ones to our members. If our members are interested, they ultimately write individual cheques into an investment. Not all members of the group will invest in a given deal.

    Craig: What types of deals has the group done?
    Rob: Since inception, we have done 17 deals for approx $5.5m. Examples include: Regen, Signalink, Homestars, Well.ca, LiveHive, Multiplied Media, Spartan Biosciences.

    Craig: What types of deals do we do and how much can a company expect to raise?
    Rob: We are industry sector agnostic so don’t have any given sector preferences. However, we tend to see a lot of technology oriented deals. Our sweet spot in terms of deal size is $200k-$400k and our members like to see deals where this type of capital investment in a company can help make meaningful progress. As such, we tend not to fund capital intensive companies (i.e. a company needing to build an industrial processing or manufacturing facility) or companies with long time windows to commercialization (i.e. pharmaceutical or medical devices).

    Craig: Can you comment on the geographic angle?
    Rob: Most angels like to invest in companies that are local to where they are located. This is because they like to get to know management during due diligence, have access to the company and be able to help the company with their business network post investment. Since our members are largely based in the greater Toronto area we tend to do a lot of deals in this area and to some extent Waterloo. That being said, with recent co-investment initiatives between other angel groups, we have done deals with companies in the US and other regions of Canada.

    Craig: What stage do companies need to be at to get funding?
    Rob: Of late given the economic/credit market issues, we have been seeing a lot more deals and a lot stronger deals in terms of where a company is at. Realistically a company needs to have a beta product and be looking for funding to help advance the product and drive sales.

    Craig: So what about the person with an idea & a business plan?
    Rob: At this point, it is not likely that our members would fund such a company, there are just too many other deals out there that are at a more advanced stage.

    Craig: How should companies apply for funding via Maple Leaf Angels?
    Rob: We have a link on our website where an entrepreneur can submit their business plan. Note that we are currently in our summer break (we don’t hold investment events in July/August) and our website will be under-going a refresh. Also note that given the volume of deals we are seeing of late, its best to try get a referral.

    Craig: What happens ‘behind the scenes’?
    Rob: I do a first vetting of companies that apply. For companies that look to be good matches to our criteria, I usually call them up to discuss further. We have a selection committee of 4-6 members that meets each month prior to an investment event. I narrow down to 6-8 companies for the selection committee to evaluate. During the selection committee meeting, companies are asked to do an abbreviated 15min pitch to the committee (either in person or via phone). Based on these presentations, the selection committee selects the 3 companies that will present to our members at the next investment event.

    Craig: So how many companies do you see each month before you narrow down to the 6-8 that will present to the selection committee?
    Rob: It varies by month and has been quite high this season. On average, I would get 30-40 applications each month.

    Craig: Any suggestions for companies for how they should approach Maple Leaf?
    Rob: My 3 suggestions would be relationships, persistence, and external referrals. In terms of relationships, I get a lot of deals that our members refer to me. All of our members have strong business networks and generally know of a lot of start-up companies. If they have gotten to know the management & seen their progress, this carries a lot of weight vs somebody out of the blue showing up and asking for funding. In terms of persistence, rightly or wrongly, there is an in-balance between the demand of people looking for funding and the supply of sources of funding. With just the sheer numbers of companies out there looking for funding, companies need to be persistent in getting noticed and getting their message heard. Lastly, in terms of external referrals, Maple Leaf Angels has relationships with a variety of professional service firms (i.e. Cassels Brock, PWC), government funding agencies (i.e. IAF, IRAP), and mentor organizations (i.e. MaRS, ISCM). Often time a company will have a past working relationship with one of these organizations. So if somebody from one of these organizations calls me up and says they have been working with a company and feel they are a good opportunity, that obviously carries a lot of weight.

    Craig: What are the common pitfalls people have when applying for funding?
    Rob: The main pitfall is being able to properly pitch. People not being able to clearly explain what their company does or what the business model is. Or people focusing too much on explaining the technology and not what the investment opportunity is. A lot of people think they know how to pitch, but a surprising number of people do not do a good job at pitching (either to the selection committee or to our members).

    Craig: Can you comment on how long it generally takes for a company to ‘get the cheque in the bank’?
    Rob: From the time they present to our members at an investment event, if this is the first outside investment, it generally takes 3-4 months to close the deal. This includes the time for our members to complete the due diligence, term sheets, legal. If a company has had prior outside investment and there is an existing investment round in play, the timeframe can be shortened to 1-2 months as you would save time on the term sheet and companies will have a lot of the legal aspects already in place (i.e. shareholders agreement).

    Craig: Lastly, why should companies consider Maple Leaf Angels for their funding needs?
    Rob: Our group brings 2 aspects to a company. One obviously is the capital. But another and often stronger benefit is the operational expertise and networks of our members. A lot of times when our members invest in a company they are willing to get quite involved with the company to help them out. This can be in the form of being on the board, being an advisor, or using their professional network to open some doors. Having experienced business people to give advice and help give sales/alliance connections is extremely beneficial to an early stage company.

    Craig: Well thanks again Rob for discussing Maple Leaf Angels today. I know there is a lot of work that will happen over our summer break and we look forward to having another great season starting in September.

    craig at mapleleafangels.com

  • Friday Night Fights

    Whether you think of the UFC and mixed martial arts (MMA) as bloodsport or entertainment, there’s no denying that it is big business. Sure it’s still a bunch of individuals pounding the hell out of each other, but it’s an interesting brand building exercise capturing the attention and wallets of  18-34 year old men.

    Dana White along with Frank and Lorenzo Fertitta, as Zuffa LLC,  purchased a near bankrupt UFC for $2 million in 2001. By 2006, the UFC grossed more annual pay-per-view revenue than any other ‘”combat sport” promotion, think boxing, mixed martial arts, etc. The 2008 estimated revenue was close to $250 million through a mix of pay-per-view, live event tickets, television deals, advertising, video game promotion deals, and other varied revenue streams. It had become a huge business. Big enough that Mark Cuban has creating HDNet Fights as a promotion and leveraging the HD television outlet to highlight other combat sport promotions.

    Love it or hate it this is big business. It’s no longer “human cockfighting” as it was referred to by Sen. John McCain (R-Az).

    So how do organizations like Zuffa LLC and Oscar De La Hoya’s Golden Boy Promotions make money. And what can software startups learn from these marketing organizations. MMAFrenzy provides “A Look Behind the Curtain: Zuffa’s Finances Come Into Focus” that provides a breakdown of the financial side of a private company. And Portfolio.com provides insight into the wheeling and dealing that is Golden Boy Promotions

    Television Licensing & Promotion

    Television promotion is about “the people who create something worth watching and the audience”. Both Golden Boy and Zuffa have crafted television deals to help them reach fans beyond their strong base. Golden Boy Promotions has a deal with HBO and Zuffa has a deal with SpikeTV to broadcast their shows to cable audiences. For both promotions this allows them to focus on building brand awareness, create superstars and sell their live pay-per-view events. In the case of Zuffa, this has resulted in the creation of new content specifically for their television broadcast partner with the reality television show, The Ultimate Fighter (orignially created for $10M), and a host of other shows out of the archive materials from live events. The networks either sell premium cable subscriptions (HBO) or advertising (SpikeTV) based on their audience reach and demographics. Better content equals more diverse people watching, which allows for a shift in advertising demographics (details on Traditional Television Business Model and Video on Demand). The Ultimate Fighter has become the “most-watched original series on SpikeTV” with over 1.8 million viewers.

    Pay-per-view Revenues

    UFC has 5.1 million pay-per-view (PPV) buys in 2007. The PPV are split with the PPV distributor. The PPV buys number is reported for most major sporting events, Yahoo!Sports has a summary of the 2008 business which the UFC was reporting $237.9 million on 5,315,000 buys (average price of $44.75/purchase). Assuming a 60/40 split between Zuffa and the PPV distributor that generated approximately $142,740,000 in revenue.

    Live Event Ticket Sales

    Average ticket price in 2007 was $250/ticket. For example, UFC 99 attracted 12,800 fans and had a live gate of $1.3 million for an average seat price of $101.56. Different venues and fighter cards have different results, UFC 90 drew 15,359 fans and had a live gate of $2.85 million for an average seat price of  $185.92/ticket. (As a side note, these figures include the seats/tickets that the UFC gives away as part of the promotion. If you assume that 30% of the seats are given away to promotion companies and others the price per seat changes to $145.09 and $265.61 for each event respectively). The interesting part is that these numbers do not include any of the costs associated with running a live event: arena, security, medical staff, athletic commissions, promotion, etc.

    Other Revenue Streams

    The great thing once you have an audience, content and a recognized brand you can look for an infinite number of ways to monetize it. You start to ask questions like how do you find new audiences? How do you increase the average revenue per user (ARPU) of your existing users? What are new channels for reaching the audience? What other partnership and revenue generating opportunities exist?

    Video game rights licensing. Subscription internet video. Wait it seems that was tried and failed. No it looks like another opportunity presented itself with Heavy.com. Apparel deals with TapouT. Once you’ve built an attractive global brand, the world is your oyster. Zuffa has negotiated broadcast distribution rights in Australia.

    What can startups learn?

    1. Build a product that people want to pay you for
      I know this sounds cliché. And is not always as straightforward. Just look at the broadcast licensing and pay-per-view revenues for sports promotion. There are complex relationships between the people that produce the content and the people that watch the content. It involves cable companies, advertisers, intermediaries. But it starts with creating a product that people will use, in this case a product that people will watch/use and pay you for.
    2. Engage and support your loyal fan base
      The goal of the adoption funnel is to move from awareness to loyalty. You need to nurture and support the audience that is passionate about your product/service. Go read Kathy Sierra or Saul Colt to learn about how to inspire your customers to become evangelists. It’s about figuring out how they help their customers “kick butt better than their competitors”. Who are your super stars? What are you doing to help them kick butt?
    3. Don’t be afraid to self promote and create superstars
      You’ve got to love Golden Boy Promotions, the UFC and Saul Colt. They are masters of self promotion. Dana White, who owns 10% of Zuffa, has become an instant celebrity from his appearance on SpikeTV’s The Ultimate Fighter. The non-stop promotion of UFC Pay-Per-View events through the SpikeTV audience (2.8 viewers million for TUF9) help reinforce known revenue streams while building characters and superstars. Do all of the commercials feel like their cross promoting other UFC events? Well there is a reason for that, 75% of the UFC revenue comes from PPV sales. Startusp need to find ways to promote the features and solutions that help solve problems, inspire users and make superheroes. Rinse, lather, repeat. By refining their messaging and telling a better story, startups make it easier for customers to tell their story. Saul Colt (who is a big deal) does a great job promoting his companies (Zoocasa, FreshBooks) the power of community and sharing and asking the audience to promote using the channels that are important to users.
    4. Diversify your revenue streams
      There are many different ways to diversify revenue streams. Look at consulting companies that run training events (educating others about great design). Music television channels that are game companies (isn’t it all about music distribution regardless of channel). Go read Peter Frisella’s 2 awesome posts for a review of the different types of business model (part 1, part 2) to figure out your business model. Have a look at Alex Osterwalder’s Business Model Generation and look at his presentations on SlideShare to learn his Business Model Canvas.

    Building a successful startup is hard work! But after watching combat sports, building a startup sure beats the hell out of getting punch in the head for a living.

  • Weekend Reading

  • StartupDrinks – July 29, 2009

    startup-drinks

    DemoCamp Toronto 21 is sold out! But that is no reason that startups in Toronto shouldn’t get together.

    Raymond Luk from Flow Ventures will be in town for DemoCamp and suggested that we host an informal StartupDrinks event the night that immediately after. July 29, 2009 coincides with the next Montreal StartupDrinks and for Ray it maximizes his time in Toronto to meet entrepreneurs and hear about the great things going on in this city.

    What is StartupDrinks?

    A simple concept: startup culture in cities around the world gathers around a bar to have a pint and discuss what they are working on, what they need help with and what they can do for each other.

    Basically, the idea is that if you are involved in a startup or looking to get into a tech startup, come have a drink, meet new people and discuss startups. No rules, no keynotes, no schedules, no sponsors, nothing fancy, just some plain good old drinks, great people, hopefully good weather, hopefully awesome startups to talk about 🙂

    Where is StartupDrinks Toronto?

    The location is still up in the air. It’s looking like it will be at Pogue Mahones at 777 Bay St starting at 7pm.

    Where do I register?

    Really simple. Sign up for the Canadian Startups! Facebook Group and then RSVP on the event page.