StartupNorth

  • See you tomorrow night – StartupCamp Montreal

    Wow, we are just coming off a great night last night at Founders and Funders and tomorrow we are hopping on the train and making our way to Montreal for StartupCamp Montreal.

    The final lineup for the pitches are

    1. Cozimo
    2. Tungle
    3. Streametrics
    4. iGotcha Media
    5. YourTeleDoctor

    I am still trying to get over how much interest there has been in Montreal for StartupCamp. Kudos to Philippe for putting things together so quickly and so well. I will cover the night live on the StartupNorth Twitter page. Tune in!

    Now, lets see how well the iPartee widget works:

  • Canada Needs to Realize The Technology Business is a Race

    Canada’s pace in the technology industry is too slow. Commercializing innovation and business are a tough race. Only the swift and the lucky survive. I’m starting to believe the heart of the problem lies in our attitude. We plod along and make excuses as others pass us.

    When you meet technology people from Silicon Valley, you’ll notice that they are in a race. They’re in a race to get to work, to get food and get back to work, and to do whatever they need to do to be productive as much as possible. They’re in a race to raise more money than their competitors, grab talent from anywhere they can, sign deals and build big companies. They’re in a race to thrive.

    When you meet technology people from Africa, you’ll notice that they are in a different kind of race. They’re in a race to adopt mobile technology, to communicate easily where in recent memory it was quite difficult. They’re in a race to stop infectious disease, ease the burden of massive migrations of refugees, and stop the famine and drought that threaten so many. They’re in a race to survive.

    When you meet technology people from Canada, we’re not in a race. We’re watching the race from the sideline. We act like technology entrepreneurship is closer to farming than shark hunting, as if risky business isn’t necessary to make the next Google or Microsoft. We putter around as if slow and steady actually wins races to innovate and grow technology businesses. We fail to light a fire under young entrepreneurs, like the ones that started every major tech company you can think of, and our best venture capitalists are putting their ships on “coast”. In a world of accelerating change, those are very dangerous habits. We need to lose our current attitude quickly.

    If you have any illusions that our major media and technology conglomerates are going to take care of this job for us, please give up your fantasy now. Dinosaurs don’t know how to innovate. Our mobile data rates are worse than third world countries and they’re spending money to slow down your internet connection. That isn’t innovation, that’s strangling the golden goose before it can lay eggs. Startups are starving while they get fat on high prices for mediocre services.

    My friends in the Canadian tech community are doing a lot to try and help technology startups. David Crow, Boris Mann, and Jevon MacDonald are all collaborating with multiple parties to improve the situation. I wholeheartedly support them in their efforts. But I think we have an entrenched culture of mediocrity that needs to be surgically removed.

    The biggest change has to be in our attitude. We need to become bold, we need to embrace risk, we need to aim for the stars. We need to take big chances, learn the lessons from failures, and have some great successes. The only thing holding us back is the size of our own dreams, and our determination to see them fulfilled.

    Will Pate is a street smart web geek, Community Evangelist at ConceptShare and co-host of commandN. This is his first post on StartupNorth.

  • Founders and Funders Toronto Kick Off Questions

    The Founders and Funders dinner takes place tonight in Toronto. We really wish we could have invited everyone who asked for a ticket, but we have been sold out for a while now.

    I really don’t want to miss out on hearing from all of you, even if you can’t make it to Toronto for the dinner tonight, so I thought I would post the questions we will post tonight at the dinner. Please comment below with your thoughts on the state of funding in Canada. Answering these questions isn’t a requirement at the dinner, but we wanted to set the tone of the discussion to focus as much as possible about what we can do to change things in Canada.

    • Do Angel Investors and Venture Capitalists get enough recognition for the deals they do in Canada?
    • Do Canadian universities inspire and support entrepreneurship? Could a “Startup Co-Op” program help?
    • What is the minimum amount of funding a startup should be able to deliver a product with?
    • Is the Dragon’s Den the most visible face of Canadian Entrepreneurship right now? What is wrong with that?

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    Some of these questions may change by tonight depending on the answers we get. As you can see, the Dragon’s Den question tends to invite some good responses!

  • BrightSpark: Venture Capital is not what it used to be, we are changing

    A lot of us like to speculate on the state of Venture Capital in Canada; we all have a vested interest in the existence of a healthy and competitive market. For BrightSpark, the truth has been much more obvious.

    brightsparkl.gifBrightSpark, with over $100 million under management, raised its first fund in 1999 and its second fund in 2004. Co-Founded by Tony Davis and Mark Skapinker, the fund positioned itself as a “seed and early-stage software venture fund” for the Canadian market with offices in Montreal and Toronto. They have been active even recently with great deals like NowPublic, b5Media and MobiVox, 9 recent investments, and a few more to make in their second fund.

    The BrightSpark team, a bunch of experienced entrepreneurs, was (and is) perfectly suited for the job we have been asking VCs to take on here in Canada: early stage financing with heavy duty support capabilities. It should have been a perfect combination, and one would hope that they could have done quite well in the last few years with the resurgent tech bubble.

    I wanted to know what was next for BrightSpark, as I had heard a lot of divergent rumors recently: some said BrightSpark was raising a new fund, others said they were going to close up shop. Earlier this week I had a chance to speak with Mark Skapinker about Brightspark, the Canadian Venture Capital market, and what he might do to fix it all if he could.

    Mark came right out and said that the Canadian Venture Capital market is changing and that BrightSpark has been watching this change closely for some time. He believes that a lot of funds are going to face some troubled waters ahead and that BrightSpark is one of the few well positioned funds to survive in this new environment. It was clear from our conversation that BrightSpark believes Venture Capital in Canada absolutely has to change, and soon.

    Mark and the team at BrightSpark feel that there, quite simply, just isn?t enough early stage deal flow right now to sustain large funds. They also have the sense that there just aren?t enough repeat entrepreneurs in Canada right now who have the experience to create great startups.

    I asked Mark what he would do to improve the financing environment in Canada which led us to a discussion about BrightSpark 3.0, Inc.

    BrightSpark 3.0 is a company (not a fund) that will exist to Create, Build and Operate internet businesses. The company will be focused on creating new Internet and cash generative Web-2.0 style startups and is fundraising now.

    So what does this mean? For the time being, BrightSpark will focus on supporting the growth of companies already in the portfolio. Over the next year, BrightSpark will make a decision about raising a third fund, which would be in the $50 – $75 million range.

    From our vantage point this story is both a bit sad and a bit hopeful. Some of the the top entrepreneurs in the country went out in 1999 and raised a Venture Capital fund so they could change the industry; here we are, almost 10 years later with a market still in dire need of change. The BrightSpark team now has a chance to go back to their roots and build their own startups; hopefully we will see funds stepping up to fill the funding gap left behind.

    If we needed a reason to get the discussion about how Venture Capital needs to change in Canada kick-started, this is it. We have a top fund feeling the model is so broken, that they need to fundamentally change the way they operate. What does this mean for other VCs in Canada? What does it mean for the budding and growing startup community?

  • AnnesDiary.com – Anne of Green Gables gets Fingerprinted

    AnneAnnesDiary.com, run by Toronto based LogicaHoldings, is taking a Webkinz style approach to the children’s online entertainment market. Their twist? A fingerprint scanner!

    To sign up a child for Anne’s Diary a parent must fill out an application and provide contact information for a sponsor who can attest to the child’s gender (female) and age (6-14). A sponsor must meet several requirements, the most curious being that he or she must be a recognized professional from a list of 46 including: Funeral Director, Christian Science Practitioner, and Member of Parliament.

    Fingerprint2-3 weeks later two packages will arrive: a welcome kit (which includes a fingerprint scanner and a copy of the book Anne of Green Gables) at the parents home and a password card at the sponsors home. The sponsor then must call the parents to reveal the password. And that is just the sponsorship piece.

    You’ll also have to install the fingerprint scanner and scan a few of your child’s fingerprints (in case the child looses or injures one finger)! All this adds up to a few things not the least of which is a barrier to adoption.

    BillyA subscription to Anne’s Diary costs $119.99 a year. For comparisons sake, Club Penguin costs $60 a year and Webkinz $15. The games on Club Penguin are actually pretty fun and you get to play with other penguins! With Webkinz, you get a physical stuffed animal even before you register!

    With Anne’s Diary, you get an online journal (more fun than MS Word) and every Christmas a print out of all the journal entries (sweater alert). There are some more features: a few solo games, a birthday calendar, an amazon affiliate site, and a basic instant messenger.

    DeniedSo what does being “the first biometrically-secured social networking site for children in the world” mean in terms of security? We’re not exactly sure… The issue is content not authentication. What’s to stop Uncle Lester from using a logged in but unattended computer?

    Monitoring the chat, blocking certain words, and regularly booting bullies should be enough, which is by the way what they do on Club Penguin (now a Walt Disney Company). Anne’s Diary claims to block out dirty words, but using their demo account I was able to draft my own version of The Aristocrats.

    Club Penguin and others have proven that there is a huge market in this demographic and that parents absolutely will pay for security and a solid product. The Anne of Green Gables brand license is certainly valuable, time will tell if Logica Holdings is in this for the long haul. Losing the sponsor process and fingerprint scanner would be a good start.

    “Marilla, isn’t it nice to think that tomorrow is a new day with no mistakes in it yet?” – Anne Shirley

  • Overlay.TV lands a $4,600,000 Series A

    Overlay TV LogoCeltic House Venture Partners, EdgeStone Capital Partners and Tech Capital Partners announced today a Series A investment of $4,600,000 in Overlay.TV.

    The company, based in Ottawa, is building out an internet video-advertising platform that allows viewers to interact with online video, and enables content owners and distributors to monetize videos. Videos stream from their original location (e.g. youtube) and viewers are able to opt-in to receive overlays with contextual information and links (e.g. affiliate shops).

    Stay tuned for a full review following the official launch February 14, 2008.

  • Founders and Funders is a sellout, then on to Montreal

    fftag.gifFounders and Funders Toronto is just about sold out and we have a waiting list of 60+ people. It is shaping up to be a great evening. I can’t believe it came together so quickly. It was just a few weeks ago that David and I were talking about it. I also want to thank David for his hard work on this, we have both been pretty busy with other things and David has definitely been the leader on getting F&F together.

    People are coming in from all over the country for the dinner it seems, and there is a great core of Toronto funders and entrepreneurs who will be there. Keep an eye on the Founders and Funders website for more announcements. Also, a big thank you to our sponsors: Microsoft Mix and JLA Ventures.

    Then, we hop in the car, plane or train and head to Montreal:

    StartupCamp Montreal – January 23rd

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    StartupCampMontréal is scheduled next Wednesday 23rd at la SAT, from 6pm to 10pm. This is really coming together. I can’t get over how many great startups have applied to present. Montreal is absolutely buzzing these days. The event is totally sold out except for a few service provider tickets.

    I am looking forward to meeting as many people as possible while I am in town.

    5 startups were selected from the votes of 27 gurus:

    • Tungle: Easy appointment scheduling for groups
    • Cozimo: Real Time collaboration for designers
    • Streametrics: Provides metrics on the use of video on the web for publishers
    • yourteledoctor: Virtual visits with a doctor via the internet.

  • The Do's and Don'ts of Raising Capital

    The Wellington Financial Blog is probably one of the most underrated in Canada. Not only are these guys the real-deal, but they have some serious guts and don’t pull punches for anyone.

    Yesterday they published a great but simple list: The Do’s and Don’ts of Raising Capital. The blog is not startup focused specifically, you can think of it as a Bay Street version of StartupNorth, but the topics are worth reading about when you have time. They also have the occasional scoop on Bay Street gossip, like today’s (or should I say, yesterday’s, or last month’s) CIBC news.

    Do?s:

    1. When you ask to meet with an prospective investor, have a defined amount or money in mind, or at least a range, and know what the use of proceeds will be.

    2. Prepare an overview, and there?s nothing wrong with PowerPoint. The pitch can be 15-25 slides long. No one needs a 50 page deck for the first meeting; there?s no way you?ll get through it all during the first session in any event (see below).

    3. Ask for 60 minutes, and no more. That should be all that you need for the 1st meeting.

    4. Show up on time.

    5. If you are bringing your own laptop, make sure you know what you plan to do with it during the meeting: run the show on a wall, link in to an overhead projector, etc.

    6. If you feel you need a non-disclosure agreement executed prior to the meeting, don?t be surprised that the prospective investor might want you to sign their own – rather than yours. If you see 100 or more companies a year, you can imagine how hard it would be for the investor to execute 100 different NDAs.

    7. Review the website of the investor prior to the meeting. If you don?t know what type of firm it is (equity vs. debt vs. LSIF vs. agent vs. principal), you might be wasting your time – and theirs.

    8. If you are going to engage an agent, make sure you know what role you want them to play. Some deals benefit from an outside advisor, and some may not. As much as VCs don?t like to think that entrepreneurs feel the need to spend part of the raise on fees, one wouldn?t do a deal with lawyers or accountants. But if you get an agent involved (and sometimes that agent/advisor can also be a lawyer or an accountant if they have the specific expertise), use them for the hard stuff, like telling you what is practical on the key negotiating items, what?s ?market?, and so forth.

    9. If you get a term sheet and are trying to compare one investor?s proposal to another, make sure you ask about prior deal references. The price/terms of a deal are only part of the decision-making process, or at least they shouldn?t be the sole criteria. Ask to speak to a couple of prior investee companies, and ask how many deals have closed in the past year or two. Do at least some due diligence on the group you are talking to, as not all teams/funds are the same – by a long shot.

    Don?ts:

    1. Don?t send a 10 page NDA to a firm. This is the deal: we investors promise to not steal your idea or tell a competitor about it. We promise to keep your private data private. We promise not to poach staff we meet during the process. That shouldn?t take 10 pages to document.

    2. Don?t ask for a meeting, pitch your story, and show a forecast that ?isn?t board approved?. If you aren?t yet ready to raise capital, why ask for the meeting?

    3. Don?t go into a pitch without knowing ?where your existing investors live?. That?s code for: know whether or not the current investors will play on the upcoming round or not.

    4. Don?t send a PDF of your financial model. It?ll only make the investor wonder why you don?t want to share the working excel version.

    5. If you are raising anything post an Angel round, don?t ask for a meeting if you don?t have a financial model ready. Having a pitch meeting and then sending a model a couple of weeks later ensures that 1) the iron may now no longer be hot, 2) the VC might have come to an uneducated, yet quick, no, or 3) you?ll seem disorganized, which may be normal for early stage companies but not a confidence-builder.

    6. Don?t compare yourself to Google, as in: ?What we?re doing is more robust than Google?, ?What we?re doing is harder than Google?, or ?We are going to be the next Google?.

    7. Don?t bring five or six company people to the first meeting. There are rarely enough chairs anyway, and don?t some of these people have jobs that don?t involve raising capital?

    8. Don?t say you?ll send follow-up material ?in a couple of days?, and then go silent for several weeks. If you ask for a meeting to raise capital, and the prospective investor is interested, be conscious that they see 500 or more ideas a year and can?t possibly waste five minutes let alone a couple of hours.

    9. When you do send forecasts, don?t send a budget that shows revenue going from, say, $1 million this year to $100 million in three years? time. People will think – fair or not – that you?ve lost your mind.

    10. When talking future valuation, don?t use numbers that involve ?billions?. As in, ?We?ll be worth north of a billion by 2012?. People will think – fair or not – that you?re on crack.

    11. Don?t be offended if the investor turns you down, as long as they are polite about it.

  • TIEQuest Business Plan Competition – Deadline January 31st

    tietorontologojpeg.jpgIn case you weren’t already aware, TIE Toronto (an entrepreneur support group in Toronto) is holding TIEQuest.

    TIEQuest is a business plan competition which promises that “the winners will receive an ?Expression of Interest? for up to $1 million of investment from sponsoring firms and various cash prizes and incentives exceeding $150,000 in value.” The overall winner gets an immediate $50,000 prize along with the $1,000,000 prize.

    If any of you are going to participate in this, let us know, we’d love to keep an eye on it.

  • Angel financing – Valuation (part 1)

    In the next series of articles, I will talk about valuation. When you do a financing deal based on equity, you will need to come to a landing on a valuation for your company. This can be hard because there is no exact science to valuing early stage companies. In this article, I will illustrate how investors look at valuation and why it is important in realizing their investment objectives.

    First off, most angels aim for a 10x return on their investment. This means if they were to put $100,000 into a company, they would want to exit with $1,000,000. This target is based on a portfolio basis of investing. What this means is that investors aim to mitigate the high risk of early stage companies failing by investing in a portfolio of companies.

    If an angel had $1,000,000 to invest and they put it all in one company, they may loose it all or barely get their initial investment back if the company does not take off. Rather than put all eggs in one basket, the portfolio approach would split the $1,000,000 into 10 investments of $100,000 across 10 companies. There are different rules of thumb you can apply but basically the gist is that only a few companies in the portfolio will be very successful that generate multiples of return and these have to subsidize the other companies in the portfolio that provide no return or result in a loss. For example, in a hypothetical portfolio of 10 companies:

    3 fail and result in a loss of money
    3 break even that may give a small return on initial investment
    2 return a 2x return on investment
    1 returns a 5x return on investment
    1 returns a 10x return on investment

    The angel naturally aspires for all company investments to generate a 10x return. However, the reality is that only one will be a home run and it will subsidize investment losses on companies that fail.

    In order to see how an investor would realize a 10x return on an investment in a company, lets walk through a very simplified funding example.

    Lets say a company has developed a POC and is looking for their first angel around of financing to fund a market launch. The company has 1 million shares outstanding and is priced at $2 per share for a company valuation of $2 million. An angel puts in $200,000 so now the company has 1,100,000 shares outstanding with a post-investment valuation of $2.2 million. The angel owns 100,000 shares.

    The company uses this money to launch, gets good traction and now is looking for another round of financing to rapidly expand into new markets. For this round, the valuation is increased by 50% to $3 per share to account for the increase in value of the company given its early market traction. A VC puts in $1,500,000 so now the company has 1,600,000 shares outstanding with a post investment valuation of $4,800,000.

    The company makes good progress and gets sales to $10 million. At this point one of their competitors buys the company based on a 3x revenue multiple for a valuation of $32,000,000 or $20.00 per share.

    The angel’s exit is 100,000 shares * $20.00= $2,000,000. So the angel basically gets their home run investment or 10x return they are seeking.

    Now lets run the same scenario with a different valuation. For the first angel financing, the same company gets priced at $6 per share for a company valuation of $6 million. The angel’s $200,000 investment provides the angel with 33,333 shares. The second round of financing is priced at $9 per share for a valuation of $9,300,000. After the VCs $1,500,000 investment there are 1,200,000 shares outstanding. The company gets to the same revenue of $10 million and is purchased for the same 3x revenue multiple / $32,000,000 valuation. The price per share works out to $26.67 giving the angel an exit of 33,333 shares * $26.67= $888,991. In this example, nothing changed with the company except the initial valuation. However, the angel only realized a 4x return.

    This is an overly simplistic example so don’t read too much into the revenue or acquisition pricing numbers. The main point I’m trying to illustrate is that having a high valuation at the start of a company’s financing rounds can limit the investors upside potential. In the second scenario, the acquisition price would have to be more than double to keep the same 10x return as in the first example. So when an investor is confronted with an investment choice between 2 companies, one with a high valuation and one with a more reasonable valuation, the investor will be asking themselves if the more highly valued company is more likely to grow revenues/profits faster and/or be acquired for a larger amount to justify the high valuation. Also keep in mind that large acquisition deals are not as common as smaller acquisition deals. So if an investor is pegging their exit to an acquisition, they also need to factor in the lessened probability due the smaller universe of potential acquirers. These are reasons why investors may turn down investment in a company if the valuation is way off. Even though the company may be very promising and have a lot of strengths, the valuation may not align to the investor’s investment return expectations.

    In my next article, I will cover ways to calculate value of a company. To view an organized index of all angel financing articles as well as see a roadmap of future articles, click here. If you have any comments or suggestions for future articles feel free to contact me: craig at mapleleafangels.com