StartupNorth

Tag: funding

  • Risk Tolerance

    If there is one thing in Canadian startup land I have heard repeatedly since moving back from California it is in regards to the lack of ‘risk tolerance’ of VCs here. When I was on the operational side of things I didn’t know many Canadian VCs so I couldn’t really comment, but I heard the stories. In fact, I will be completely honest that the idea of joining a Canadian VC fund was the furthest thing from my mind.

    risk and rewardBefore I share my thoughts on risk tolerance let me start with a few points. First, I think that we can all agree the landscape is improving. There is a new generation of  entrepreneurs, investors and community leaders emerging. I am blown away at how different things are now compared to five years ago.

    Second, we need to once again state that Canada is NOT the Silicon Valley. It is a silly comparison even from a geographical perspective as comparing a small region with critical mass to one of the largest countries in the world is insane. Vancouver, Toronto and Montréal are not the Silicon Valley in the same way that Boston, Austin, New York and Des Moines are not either. Anyone who sees Canada as its own insulated eco-system is completely out-of-tune with reality. Capital and technology knows no borders. Mark nailed this earlier this week.

    Lastly, there is a level of talent, experience and excellence in the Silicon Valley that can’t be found anywhere else. There is a reason Facebook moved to Palo Alto in its early days. There were entrepreneurs and investors who had been exploring the potential of a social web for almost a decade beforehand. No where else in North America could you find this. Pinterest moved from Kansas City to San Francisco for the same reason. One of iNovia’s portfolio companies, AppDirect, started in the Silicon Valley as the founders (Canadian btw!) knew that the talent they needed to build a large-scale enterprise platform was there.

    So what can Canada, or anywhere outside of the Silicon Valley for that matter, do well. I can both observe and predict to answer this question. In recent years it has become apparent that B2B SaaS companies can be built anywhere. Look at the thriving companies across Canada – HootSuite, Shopify, Freshbooks, Lightspeed, etc. All SaaS companies. This is not unique to Canada either. ExactTarget was built in Indianapolis. MailChimp in Atlanta. eCommerce companies have similar characteristics. Amazon is in Seattle. Wayfair is in Boston. Groupon is in Chicago. Beyond the Rack is in Montréal. However, it is hard to name large consumer Internet, enterprise platform, networking or hardware companies outside of the Silicon Valley. Of course, there are a few outliers – Tumblr in NYC for example.

    The other thing that Canada, or any region, can do well is build critical mass in a brand new and emerging market. RIM (BlackBerry) did this in the Waterloo region by leading the emergence of smartphones. Calgary has been the hub of most stock photography and graphics companies over the last 20 years. Route 128 in Boston dominated the minicomputer industry back in the 70s and 80s.

    All of this results in the eco-system we find ourselves in and behaviour of investors. It is less likely that a consumer application with no traction will get funded in Canada because there are not funds big enough to make a long bet on it and there isn’t the talent that improves the chance of success.  We also lack senior management talent, especially in sales and marketing, as it generally resides were the majority of customers – in the US. This is why many Canadian startups build its sales and marketing teams in the States. We often proactively syndicate larger Canadian investments with US funds as they bring complimentary resources to the table and can significantly mitigate future financing risk as they have deeper pockets. All of these factors results in the eco-system we find ourselves in. Blame the system, not the players as David Crow would say.

    One last factor in determining risk tolerance is rarely discussed and it is simple numbers. Investing very early in a company with no traction does require incredible intelligence, it requires incredible conviction. Savvy entrepreneurs know that to find the investor that has that conviction is going to be tough so the best approach is as a pure numbers game. This means they talk to a ton of funds. Tim Westergren, founder of Pandora, said that he had over 300 VC pitch meetings before getting funding. 300! In Canada there are not a lot of VCs, lets say 10. There are very high odds that you can talk to every fund in Canada and not find the conviction you are looking for in any of them. It is simple math – if you are looking for a needle in a haystack do you have better odds looking in 10 places or 300? Unfortunately, this is then chalked up to an issue with ‘risk tolerance.’ I can’t speak for every VC across the country, but I can report that approximately half of our initial investments are made before there is a dollar of revenue in the company.

    My advice to entrepreneurs would be to start local as you may find the investor that has the same convictions you hold. They may be able to connect you to US investors to put a strong syndicate together as well. What you shouldn’t do is talk to the local VCs and then complain about risk tolerance – even if there is truth to it. The successful entrepreneurs get on their horse and find ways to get in front of investors from the Valley, New York and even overseas. Ryan found his first investors in the US. Yona found his first angel investor in Europe! Jack and Rian found their first investor in Germany!

    We have seen a ton of US-led investments in Canada recently and this is great news. Often this is perceived as a problem in Canada. I disagree – it is great. In many of those cases local VCs passed or perhaps they lost out as the deal became competitive. That is completely fine as well. In the past Canadian investors were forced to be generalists, but I hope this recent trend drives more domain focus within Canadian VCs. As much as we need world-class entrepreneurs and startups we also need, to a lesser extent, world-class funds and investors. This is why I went against my initial instincts and joined a VC fund in Canada – the team was focused on becoming a leading North American fund and was actively investing in the US. I believed that this was the right approach and the only way we are going to be able to compete in the long run as capital becomes even more fluent across borders. Canada is a small player on the global tech stage and as a friend of mine used to always say “What’s so great about being the best hockey player in Kuwait?”

    Lets all aim higher.

    [Ed. note: This originally appeared on Kevin Swan’s Once A Beekeeper on August 12, 2013, it is republished with permission.]

  • A Public Service Announcement

    I keep seeing entrepreneurs that complain to me after the fact that they took an investment with bum terms. It comes in many different ways, usually something like, “here’s my cap table what do you think?” or “I have this term sheet what do you think of the terms?”. The terms are usually appalling. But the entrepreneurs asking don’t know this until it is too late, they signed the documents, they spent the money, and now they want advice raising the next round.

    https://twitter.com/rhh/status/344232460533518337

    It looks like I’m not alone. If you can’t figure out this is war. This is information warfare. I forget that I work with a lot of great investors. They look for deals that work for them, their portfolio, for their investments and the potential investments. But I long ago realized that my interests and the interests of existing investors or potential investors were not always in my interest, particularly when things start to go bad. I wish all investors were as honest as Brad Feld with their desired investment rights. But there are bad investors out there. They look to use an information asymmetry to gain greater advantage over uninformed entrepreneurs. It allows them to buy large ownership percentages at reduced rates with additional rights that are not always in the favor of entrepreneurs. They tell entrepreneurs that it is ok, their capital brings additional non-dilutive government capital and the entrepreneur will have the cash to grow. They are trying to maximize their returns by exploiting the information asymmetry.

    And I don’t like seeing people being exploited.

    Clark Stanley's Snake Oil Linments

    It is not the first time that someone has used both simple and sophisticated tactics to take advantage of people. Part of the creation of the Securities Exchange Commission to allow, in this case, the US government to bring civil actions ” against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law.” Before the enactment of the commission, consumers were protected by “blue sky” laws, but Investment Bankers Association told its members as early as 1915 that they could “ignore” blue sky laws by making securities offerings across state lines through the mail. Many investors are money grubbing capitalists and that’s the way I like it. But as an entrepreneur the only person looking out for you is you. So rather than  leave yourself ignorant and uninformed it is your responsibility to reduce the information asymmetry. After all, it is your company and…

    Knowing is half the battle

    The person that is responsible for your success and the success of your company is YOU!

    So stop blaming bad investors. Stop blaming lawyers. Stop blaming others. You need to take proactive steps to reduce the information asymmetry

    1. Get educated
    2. Due diligence on your investors
    3. Participate and share

    1. Get educated

    Fifteen years ago, this information was very difficult to access. The first book that I read about venture capital was High-tech Ventures: The Guide For Entrepreneurial Success that was written in 1991. Part way in to my second venture (I was employee number 6 for the record) John Nesheim released High Tech Start Up, Revised And Updated: The Complete Handbook For Creating Successful New High Tech Companies in 2000. This was my early education about venture capital, high potential growth companies. But most of the lessons came from the school of hard knocks. But things have changed. There are a tonne of resources available to entrepreneurs.  Here is a short list:

    This is your business. You are taking outside funding. You need to understand what is happening in the process and why.

    2. Due diligence on investors

    The investor is doing diligence on you and your company. They are going to talk to your previous investors, your employees, your customers and maybe your prospects. They will take to people in their circle of trust to learn about the market, expected performance metrics, and your reputation. It is incredibly important theyunderstand the risks and accretive milestones before presenting you to their investment committee.

    “I will not let my investors screw me” – Scott Edward Walker

    You must do your own due diligence on the investor before taking any money. This is going to be a partner in your company. It has often been described as a work marriage. You should need/want to understand more about this person, the firm they work for, and how they treat their existing companies and CEOs. Go for dinner, have a glass of wine, talk about your company, and figure out if you can work with this person for the next few years. Talk to other CEOs that they’ve invested at a similar stage as your company. Talk to the ones that succeeded, to the ones that failed. Talk to the people that the investor sends to you to do diligence. There are so many tools to expose social relationships that didn’t exist: LinkedIn will allow you to send InMails to past CEOs; Clarity allows you to connect with a lot of entrepreneurs and mentors that have a connection with the investor; AngelList is a great tool for discovery but it is also becoming a great way to see investments and help you in your diligence.

    “the diligence factor was that I knew them, but had never taken money from them. It’s hard to know how people are going to react when they are at risk of losing money because of something you are directly responsible for until you are actually at that point.” – Brandon Watson

    3. Participate and share

    The above resources are amazing. However, I often learn best from the examples of others. I learned a lot from Mark Organ at Influitive. Mark shared stories about the good and the bad decisions he made in the early days at Eloqua. You learn a lot when you share a hotel room on the road as grown ups.

    There are formal meetups like Founders & Funders. But seriously in order to have the trust, you need to get out of the office and the formalities of these events. The conversations come over a poker game. But you’ve got to put yourself out there, be vulnerable, and find people that can teach you something.

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    I believe so much in this that I’m renovating my house. I want a big kitchen for family dinner. All of my startups will be getting an invitation to Sunday night dinner. Why? Because I’m betting my family’s future on them, and I want them to be a part of the family.  This includes the ones that I’ve invested in already and any of the companies that I’m looking at investing. I want them to hang out. I want them to help each other. Share metrics and tactics. I want them to tell you that I’m slow to invest. I’m slow even after I’ve said yes (but I hope they understand that it is because sometimes I have to do some consulting work to have investment dollars). (Now I just need the renovations to finish).

    Feeling screwed?

    I’m starting to think about publishing shitty term sheets, depending on the risks our lawyer identifies, with investor names. I’m not sure public shaming is right model, and my lawyer might tell me it is not. But I think that we need to elevate the conversation we as entrepreneurs are having with each other and our investors.

    I’ll be publishing prospective term sheets in the next few days.

    Reach out if you want to share.

     

  • Aim for your next valuation

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    “Ain’t no need to watch where I’m goin’; just need to know where I’ve been.” Mater in Pixar’s Cars

    This is wrong. But it is the behaviour that a lot of founders execute on after raising money.

    I’ve been thinking a lot about Venture Math, Valuation and Accretive Milestones and whiners. I was struck at how many entrepreneurs seem to be working towards the post-money valuation of their last round of financing. I think this is wrong. You should aim high. Higher than the post-money of your last round. You should be acting like the pre-money for your next round. That is the only way you will drive the necessary milestones for the next raise.

    Skip Level

    Let’s make a few assumptions.

    You are raising $1MM on a $4MM pre-money valuation. This gives you a post-money valuation of $5MM. If you subscribe to 2x valuation as the floor for the next round. This means that you need to start behaving like your company is worth at a minimum $10mm. That’s right, a minimum of 2x your post valuation. You should be targeting >2.5x, so in our example you need to start acting like a company that is valued at $12.5MM.

    Your behaviour and decisions need to reflect milestones necessary to raise your next round of capital. Not the round you just closed.

    “The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones.” – David Crow

    This is incredibly difficult. Because the balance is crucial to the long term success of the company, getting it wrong and you’ve raised too much money you will be diluted, but you might have enough money to change direction and try again. If you aren’t behaving like the end point has changed, the company will be executing on goals that are too small to raise the next round.

    Don’t aim for the Net Present Value milestones. You’ve already raised money to achieve those. Start setting milestones for your future value. And start delivering against those.

  • Round13 Capital puts founders first

    Scott Pelton, Bruce Croxon and John Eckert - Round13 Capital

    Round 13 CapitalWhat’s interesting about the Round13 Capital announcement today isn’t the size of the fund – they are targeting $100MM. It isn’t the people who are involved – they are amazing. It isn’t the LPs – they are different. The team, Bruce Croxon, John Eckert and Scott Pelton, are bringing together a group of entrepreneurs to serve as mentors. This is not uncommon in the US with a number of funds like SoftTech VC, Felicis Ventures, Founders Fund and similar to Founder Collective (if you are interested read the Kauffman Foundation’s Do Entrepreneurs Make Good VCs? [PDF]).

    “Venture capital firms with a greater fraction of entrepreneur VCs have better firm performance. The positive relation between entrepreneur VCs and performance is stronger for venture capital firms specializing in high-tech industries and in early-stage investment.”
    — Do Entrepreneurs Make Good VCs – Entrepreneurial Finance and Innovation Conference – The Kauffman Foundation

    The Round13 Capital team has done an amazing job of bring together founders with exits as both LPs in the fund, and more importantly as mentors for their portfolio companies. This is a critical differentiator for Canadian entrepreneurs. Hopefully the Round13 fund will close and they can start funding Canadian entrepreneurs soon.

    Round13 Investors/Founders

    This is great new for Canadian entrepreneurs!

  • Go big and stay home

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    Wattpad announced today a $17.3MM raise from Khosla Ventures, Golden Venture Partners, Union Square Ventures and Jerry Yang. This is huge.

    “It has been recognized as highly significant due to having two top-tier US funds investing at this level in a Canadian-based consumer internet company.”

    We are seeing Canadian entrepreneurs build companies and demonstrate global traction. The changes to foreign investment related to Section 116 changes in the Tax Act, have allowed Canadian companies to go big and stay home.  The changes to Section 116, coupled with the desire of Canadian entrepreneurs to go big and stay home. Evidenced by Wattpad’s big raise, Wave Accounting’s $12MM series B from Social+Capital, Hootsuite’s $20MM round from OMERS (sure they’re not foreign capital but its a big round), Shopify’s $22MM ($7M series A + $15M series B from Bessemer), Beyond The Rack’s $36MM raise, Fixmo’s $23.4MM Series C from KPCB, Achievers’ $24.5MM Series C from Sequoia, and others. There are startups and there is capital. It’s possible to build a growth company in Canada and raise foreign capital. The game has changed for Canadian VCs, geography limitations can help these funds identify early but it potentially will relegate many to second tier status if they can not enable their startups beyond their geographies.

    The great thing in talking with many of these entrepreneurs is that they want to build successful companies in Canada. Allen Lau, CEO of Wattpad, mentioned that his desire was to grow a large successful company in Toronto. He is not looking to move the company. The same is true of my conversations with Kirk Simpson at Wave Accounting, Tobi at Shopify, Mike at Freshbooks, etc. There are a lot of reasons to want to be way from the tensions and pulls the exist in the Bay Area. Canadian startups have access to great talent. While there is some pull between the different startups, many of these companies aren’t competing with each other for employees or mindshare. Just check out Shopify’s recruiting video and tell me why you wouldn’t choose to work for Harley and Tobi instead of a financial institution or a government organization.

    It’s a great time to be an entrepreneur in Canada. It’s a great time to work for a startup. You should check out the opportunities on the StartupNorth job board.

  • Early stage companies don’t need money, they need customers

    Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

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    The popular belief in Canada is that the tech startup world has been fairly light on investment dollars relative to other industries in Canada. Because there is such a disparity in seed or angel round investment size in Canada vs the US people tend to point to that as a reason people go south. The perceived result of the funding problem (and likely the weather) is that there are 350 000 Canadians in the Valley. No one can argue the talent to build global calibre tech companies exists in Canada (or at least has Canadian passports) but you can certainly argue Canada lacks that certain something to keep them here.

    Five years ago Paul Graham observed that the total cost to get a tech startup started had dropped dramatically and will continue to do so.

    So my first prediction about the future of web startups is pretty straightforward: there will be a lot of them. When starting a startup was expensive, you had to get the permission of investors to do it. Now the only threshold is courage. – Paul Graham, 2007

    There is a lot of attention around getting young people money but does that help them? Does that keep them in Canada? I would argue that the ones that do need and can use capital don’t pull up stakes and leave town for the investment. They leave town (or the country) because they are missing something more valuable than money — customers, mentorship that helps them get customers, and a network of peers.

    Know thy stage

    The problem with comparing funding deal levels in Canada and the US is that it ignores the stage the company is in relative to the stage of US startups raising money for the first time. The Startup Genome report 01 and the Startup Genome Compass offers startups an excellent way to measure themselves against a benchmark of over 3 000 startups. In the report there is a table (shown below) that gives you some overall averages for all startups.


    From the Startup Genome Report 01.

    In last seven years of being involved in the Canadian startup community (mostly in Waterloo) and in the last three years leading what is arguably the best student focused incubator in Canada while founding my own startup. I saw dozens of companies peek into the Discovery phase, a few move on through to the Validation phase.

    What I have seen happen before the discovery phase:

    • Talk of raising money is used to pull in a large group of talent.
    • Focus is not on customers, it is on technology or raising money.
    • There is little help by way of mentorship that takes the time to understand the dynamic of the group.
    • Mentors focus on finding a way to get them money so they can work full time.

    What founders fail to do:

    • Define the problem.
    • Find out what people are looking for.
    • What else do they need in a system?
    • Determine what they might pay for it by getting them to pay for it and talking to our customers.
    • Measure, iterate, repeat.

    Startups need to focus more on customer acquisition and growth in Canada, enough talk about raising money

    There are so many business plan and pitch competitions one could make a career out of attending them. This gives a false sense of success because the ‘winner’ is determined on a lot of factors except their ability to actually get customers. The game becomes about (and has been it feels like) how to put together a report on an idea (business plan) and present in a way that makes you look confident.

    The game is really about getting lots of people to give you their money because you provide value to them. What makes you better than others is that you are chasing a much bigger problem that will provide value to a full percentage of the world’s population. Bonus points if you change the world.

    Note: This is cross posted from WhoYouCallingAJesse.com by Jesse Rodgers, who is a cofounder of TribeHR. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

  • Founders and Funders Toronto – February 16th, 2012

    The last Founders and Funders dinner in Toronto was almost exactly two years ago. A lot has happened in that time and we thought it was time to sit down and break bread together again.

    The Founders and Funders dinners are a series of invitation-only dinners that are held across Canada several times a year. They are a sort of summit on the state of each community and we do our best to make sure that the best startups possible have a chance to meet the most respected and active investors who are doing deals in those cities. There is always a mix of locals and people who come in for the event as a way to get connected.

    We believe that if you cannot sit down and have dinner with someone, then you probably shouldn’t invest in or take investment from them. This is a great chance to apply a social filter to the dealflow in any one place.

    What is it?: An invitation-only 3 course dinner. Cocktails before, cocktails after….

    Who is coming?: The top investment-ready startups and active investors in Canada.

    Where is it?: Downtown Toronto

    When?: February 16th, 2012 at 6:30pm

    How much is it?: Tickets range from $125 (startups) to $500 (service providers)

    We are now accepting requests for invitations and the first round of invitations will go out this week.

    To apply please use this form >>

    We have also decided to include a brief fireside chat with Daniel Debow at this dinner. We rarely do this sort of thing at a Founders and Funders but 2011 was such a great year we thought it would be fun to look back on the ups and downs of Rypple through the years and how they got to their eventual exit, some of which was written about in Forbes this week.

    Daniel and Rypple have also been a big part of the Canadian startup community and he has also been an active angel investor recently.

    We are excited to hear what he has to say about how we can help build more great Canadian companies and how to build awareness in Silicon Valley when your HQ is back here in Canada.

    We hope you will join us as we kick off another great year for the Toronto and Canadian startup community.

    We will be announcing Founders and Funders dinners in other cities soon as well.

     

  • When a Massive Opportunity Knocks!

    Editors Note: This is a guest post by Chris Arsenault (LinkedIn, @chrisarsenault) a tech entrepreneur turned venture capitalist. Chris is the Co-Chair of the Canadian Innovation Exchange (CIX), a board member at the Canadian Venture Capital Association (CVCA), a Supporter of the C100, among other things. Follow Chris at chrisarsenault.wordpress.com or on Twitter @chrisarsenault.

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    The last few weeks have certainly proven to be extremely promising for Canadian Tech Entrepreneurs. Almost $80M of equity financing has recently been secured from some of the top investors in the world to help build our next generation of massive tech companies. It’s even more exciting when you realize that these funds are going to three especially young, dynamic and opportunistic companies, all of which are in our backyard!

    Beyond the Rack

    Beyond the RackYona Shtern, Robert Gold and the team over at Montreal-based Beyond the Rack (“BTR”) lead the way with a whooping $37M financing round that should propel the company to new heights yet unseen on the Canadian eCommerce front. BTR has quickly established itself as an eCommerce leader by showing the market that Canadian companies really do know what a “hockey stick” revenue growth chart looks like. The teams’ ability to build such a big company in such a short time frame has earned them our utmost respect. We initially met the team and reviewed their business plan in late 2008; by 2011, they were already ranked as one of the fastest-growing online retailers in the entire world. Yona was also wise in choosing his investors, be it industry specific angels or great VCs such as Panorama Capital, iNovia Capital, Rho Canada, Tandem Expansion, BDC Venture Capital, Highland Capital Partners, EDC and Montreal Start Up. If you aren’t a Beyond the Rack member, don’t wait – register now, and you’ll be impressed!

    Shopify

    Shopify - LogoJust down the road from Montreal is another world class eCommerce team. Ottawa-based Shopify recently closed a $15M second round of financing. Tobias Lutke, Cody Fauser, Daniel Weinand & Harley Finkelstein have developed an industry leading eCommerce platform that is already being used by thousands of leading online retailers around the world. The team, their vision and commitment to execution all combine to make Shopify one of Canada’s tech leaders in an extremely high growth global market. Unfortunately, we missed the boat on the opportunity to work with them, but our friends over at Bessemer Ventures, Firstmark Capital, Felicis Ventures and Georgian Partners were more than happy to come aboard. I’m expecting to see Shopify rise above the tide over the coming years and establish itself as a global leader in its space.

    Fixmo

    FixmoThe most recent team to announce a substantial equity-financing round is Toronto-based Fixmo. Led by its founders Rick Segal, Shyam Sheth and Joyce Janczyn, Fixmo just announced a $23M round. This investment round included both existing investors (iNovia Capital, Panorama Capital, Rho Canada and Extreme Venture Partners) and an impressive syndicate of new lead investors: Silicon Valley-based Kleiner Perkins Caufield & Byers, Washington-based Paladin Capital Group and Hong Kong-based Horizons Ventures. While the company’s core vision has not changed over the last two years, the product development road map has evolved at a rapid pace. Within an extremely short time frame, Fixmo launched a series of Government and Enterprise products, acquired two companies (Conceivium Business Solutions and Chocolate Chunk Apps), established a series of key partnerships and practically jumped ahead of every other Mobile Risk Management solution provider in the market. Obviously, the founders didn’t do it alone, but the sheer fact that Rick was successful in attracting some of the best talent out there (Bruce Gilley, Jonas Gyllensvaan, Tyler Lessard, Lee Cocking, John Yuen and others) speaks to the long term execution ability and potential of Fixmo.

    Ambition coupled with Execution

    The average tech financing round in Canada is under $4M. Therefore, the aforementioned three companies basically raised as much cash as 20 average Canadian tech startups combined. Obviously, I get nervous when I see a company (portfolio or not) raise such a large chunk of cash. Why? It’s not because I like the small size of the average Canadian financing rounds. Rather, it’s because I think that too much money for a young business can be as bad as or worse than not having enough. $15M-$40M rounds for Canadian tech companies are amongst the largest we have seen this side of the border in over 10 years. That being said, I do also think that Canadian Tech Entrepreneurs are now entering a phase of Ambition coupled with Execution. We have lived through too many years of “lack of ambition”, quickly followed by “lack of execution”, not to mention the much lamented “lack of capital”. However, we are now seeing deals done where massive amounts of ambition and execution converge, and capital is becoming available to build large tech companies right here in our own backyard. With more companies able to raise the amount of funding they truly need to generate hundreds of millions of dollars of revenue, not only we will stop selling our companies short, they won’t need to move down south. Hopefully other investors will note the phenomenon, and future startups won’t have as much trouble raising the capital both from Canada and into Canada. And that’s good for all of us.

    At iNovia, when a massive opportunity knocks, we answer! I’m expecting to be sharing a lot more stories about successful Canadian entrepreneurs, and how they’ve built hugely successful companies here as they compete globally for resources, capital and market share. There isn’t much stopping the entrepreneurs driving Canada’s next generation of large tech companies, and for the likes of Beyond the Rack, Shopify, Fixmo and many others, this is just the beginning.

    Congratulations to all the teams mentioned in taking important steps on their paths to success!

    Below some article worth reading with regards the above companies:

    Editors Note: This is a guest post by Chris Arsenault (LinkedIn, @chrisarsenault) a tech entrepreneur turned venture capitalist. Chris is the Co-Chair of the Canadian Innovation Exchange (CIX), a board member at the Canadian Venture Capital Association (CVCA), a Supporter of the C100, among other things. Follow Chris at chrisarsenault.wordpress.com or on Twitter @chrisarsenault.

  • Trying to understand incubator math

    Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

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    Incubators are not a new addition to the financing and support for startups and entrepreneurs. On the surface, incubators and accelerators seem like a low cost way for VCs and government support organizations to cluster entrepreneurs and determine the top-notch talent out the accepted cohort. The opportunity to investing in real estate and services that enable companies where the winners are chosen by the merits of the businesses being built. It feels like a straight-forward, relatively safe bet to ensure a crop of companies that are set to require additional growth capital where part of the products and personalities have been derisked through process.

    However, its not as simple as putting small amounts of investment into a high potential company. An incubator is a business and it’s sole purpose should be to make money.

    What are the basics of an incubator?

    The basic variables in setting up an incubator business are:

    • Cost of the expertise, facilities, services and other overhead
    • Amount of $ to be invested/deployed
    • Number of startups
    • Equity being given in exchange for cash
    • Return on the total investment

    There are cost of operations: real estate, connectivity, marketing, programs and services for the entrepreneurs, and the salaries of the individuals to find the startups, provide the services and build successes. These costs are often covered by governments, in exchange for the impact in job creation and taxation base. We’ve seen a rise in incubators that are funded on an investment thesis, where an individual or a set of “limited partners” provide the initial investment in exchange for an investment in the companies being incubated.

    How much do incubators cost?

    The goal is to efficiently deploy capital to produce successful investments. I’m going to explore how incubators make money by making a few assumptions based on the incubator/accelerator models we’ve seen in Toronto, Montreal, Palo Alto and New York.

    Basic assumptions:

    • Capital Investments: 10 startups x 20k = 200k invested with an assumed ‘post-money valuation’ of $2.2MM
      • This means you now own 9.1% in 10 startups each with a post-money valuation of $220k
    • Support Costs: 10 startups x $10k = $100k
      • This is the cost of real estate, furniture, telecommunications, internet connectivity, etc.

    Alright, we’re planning to deploy $200k and it need to provide approximately $100k in services just to provide the basics for the startups. We’ve spent $300k for the first cohort and and that is before you pay any salaries, host an event, etc.

    Additional costs:

    • People:
      • $100k per year salary for one person to rule them all. Call them executive director or dean or something.
      • Assuming you’re not doing this to deploy your own capital, the person or people in charge probably need to collect a salary to pay their mortgages, food, etc.
    • Events – Following the model set forth by YCombinator or TechStars we have 2 main types of events. Mentoring events where the cohort is exposed to the mentors and other industry luminaries to help them make connections and learn from the experience of others. The other event is a Demo Day, designed to bring outside investors and press together to drive investment and attention in the current cohort, plus attract the next cohort of startups.
      • Mentoring event: $1k for food costs with 25 founders
      • Demo Day: approximately $5k
      • Assumption: 10 mentoring events plus a demo day per cohort adds $40k.

    The estimated costs are approximately $340,000/cohort. Assuming 2 cohorts/year plus the staffing salary costs, an incubator is looking at $780,000 that includes 40 investments and a total of $4.4MM post-money valuation. If we assume that I’m a little off on the total capital outlay, and we build in a 30% margin of error this brings the annual budget to appromimately $1MM/year to operate.

    How do incubators make money?

    Incubators make money when the startups they take an equity stake in get big and successful. The best exits for an incubator come when one of their startups is acquired. Why acquired? Because the path to getting acquired path is shorter than the path to going public which would also allow the incubator to divest of their investment.

    Let’s do the math. If your running an incubator hoping to get respectable returns on the $1,000,000 you’ve laid out above, let’s say it’s not the mythical 10 bagger but a more conservative 3x, the incubator needs one of the companies to exit at near $30,000,000. It can be one at $30MM or any combination smaller than that totalling $30MM. This needs to happen before any dilution and follow-on funding for your cadre of companies. You have to assuming that they can make it to acquisition on the $10,000 and services you’ve provided. For more on incubator math, check out there’s an incubator bubble and it will pop.

    The bad news is that it isn’t as simple as that. Startups are not just something that exist in a vacum. There are a lot of unknown variables that can make or break an incubator.

    • percentage of startups that fail (or turn into zombies) in the first two years after investment
    • time frame return is expected
    • how many startups currently produce that kind of return annually
    • total number of startups that receive investment in any given year
    • total number of acquisitions in any given year
    • avg. number of years a startup takes to get to acquisition (because they aren’t going public)
    • avg. price a startup sells for (I bet those talent acquisitions drag the average way down)
    • what do VC’s currently spend on their deal pipeline?

    It is the unknowns that are where the gamble exists. You can tweak the numbers all you would like but assume startups have a no better fail rate then any small business. The common thinking on that is 25% of businesses fail in the first year, 70% in the  first five years? If just more than half of those companies are alive in one year you are doing well. If one out of those 20 is acquired in 5 years and you get 3x return do you succeed? Do you have to run the incubator for the 5 years at $1MM/year to be able to play the odds?

    Maybe this is why so many incubators focus on office space, it’s easy to show LPs what they are getting for their $5MM for 5 year investment, plus an impressive number of “new” startups that have been touched by the program (often without an exit, you know the way incubators make money).

    What am I missing?

    Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

  • Show me the money

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    I love when entrepreneurs tell me that raising capital in Canada is hard (it is). I love it even more when they tell me that they think “they should move to Silicon Valley” because raising money will be easier (it isn’t). It helps me determine which entrepreneurs are too egotistical, too delusional, too uninformed to really be effective raising money.

    There is a venture capital scene in Canada. It’s different than the scene in Silicon Valley or New York City. But there are people making investments in entrepreneurs. According to the CVCA in 2010, there was $484MM invested in IT in Canada (2010 Q4 VC Data Deck from CVCA [PDF]) with $271MM going to software & internet companies. There are issues like US Funds making larger investments than Canadian funds (looks like $2.5MM vs $1.1MM average deal size) or that US companies raise more ($8.2MM vs $3.6MM). But these are just the nature of the game. There are structural issues. It could be better. But to say it is nonexistent, that’s just wrong or lazy. And both are bad qualities in early stage entrepreneurs.

    I was asked by an entrepreneur about who where the funders in Canada. Here is my short list of companies that are writing cheques or are in the process of doing diligence on companies, i.e., prepared to write a cheque. There are a lot of companies like OMERS that are stage agnostic, but I’ve put them in the growth side given their deal history (in the case of OMERS it’s $1.5MM in WaveAccounting).

    So if you think it’s easier raising money in NYC, Boston or California. My advice is get your ass on a plane and try. Because it isn’t as easy as you might think.

    But don’t say that there is no Canadian VCs or venture capital money. Because that just makes you look like a moron.

    Suck it up, it’s hard raising money. Maybe you should talk to the Canadian investors and figure out why they don’t want to write you a cheque!

    Seed ($25k – $500k)

    Growth ($500k – $5MM)

    Expansion

    Who else is actively placing money with Canadian startups? No grant money, we’ll do that in a separate post, but who else is actively doing convertible debt or equity placements? How to define active? Either >3 deals in diligence or has deployed more than $50,000 ($25,000/placement * 2 placements). That seems fair.

    Who did I miss?

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