Venture Capital

Keeping the Faith While Raising Venture Capital

I met with an entrepreneur for lunch recently who had just completed raising a modest series A round. Curious, I asked about the most challenging part of the process. His answer was maintaining the faith in your startup’s vision.

It was an interesting answer because you might expect the answer would be the preparations, the creation and constant revisions of presentations, and the meetings with investors that require you to be confident yet respectful.

When I asked for an explanation, he said one of the realities for startups when they raise money is investors are intent on picking everything apart – the vision, the business model, the opportunity, the people, etc. For some people, this can be a difficult exercise because it flies in the face of entrepreneurial enthusiasm and the dyed-in-the-wool belief in what you’re doing.

In some respects, it’s like an abusive relationship in which one party tries its best to please while the other party insists on picking them apart. The reality, however, is investors need to scrutinize, criticize, question, analyze and challenge entrepreneurs so they can make as good as a decision as possible. It doesn’t mean they have to be badly behaved but sometimes things can get testy.

Entrepreneurs can find themselves buffeted about and, in some cases, they may find themselves questioning their vision, which was rock-solid before the investment dance started.

While this could be a natural reaction when you are trying to please, it is also important for startup entrepreneurs to be strong about what they’re doing and where they’re going. While investors can highlight deficiencies and areas for improvement, entrepreneurs need to be careful about not their stripes simply because they come across people who don’t share the vision or the opportunity.

In an ideal world, entrepreneurs end up with investors who can provide insightful and constructive criticism, while providing the right amount of support and encouragement. It may mean, however, dancing with partners who don’t like your moves.

 

Is Canada’s Startup Landscape That Robust?

At a conference earlier this week put on by the Ontario Media Development Corp., I kicked off panel I was moderating by boldly declaring the Canadian startup landscape is as exciting and healthy as it has ever been during the 15 years I’ve spent as a reporter, entrepreneur and startup consultant.

But before I could ask a question, one of the panelists, Real Ventures’ J.S. Cournoyer, stepped into the fray by suggesting the landscape wasn’t as bullish as my description. His key point, which is totally on the mark, is there still isn’t enough capital to properly support and nurture startups. Instead, there are small pockets of activity that are celebrated but are relatively modest in the scheme of things.

It got me thinking about whether my enthusiasm is well-intentioned but a bit misplaced. As I thought it through, it struck me there are three parts to Canada’s startup ecosystem.

On one hand, there are investors, who are slowly but surely becoming more active. Players such as Real Ventures, Extreme Ventures, iNovia, Mantella Ventures, Golden Ventures and OMERS are making some interesting investments. Nevertheless, it’s a relative drop in the bucket to what’s needed for the Canadian startup ecosystem to really thrive.

We’ve also got a growing number of incubators and accelerators – players such as Founder Fuel, Extreme Labs, GrowLab, Next36, MaRS Commons and Incubes. Even so, it’s a modest amount. Note: I’m not totally convinced about the incubator model given the “cost” to play and their marketing pitch that every “graduate” will able to pitch to investors.

Then, there are the entrepreneurs themselves, who the most exciting and active part of the ecosystem. With the barriers to entry to lower than ever and entrepreneurialism becoming hip, startups and here, there and everywhere. In fact, I’m starting to think it’s too frothy given some of the startups I’ve seen recently.

When you look at the three “buckets”, there are different stages and healthiness. So to make a sweeping statement about the startup landscape without breaking things out is a mistake.

It is difficult to tell how startup scene will evolve over the next couple of years. Maybe we’ll see more capital for the startups seeking seed and growth capital. Maybe accelerators and incubators will, in fact, create high-quality opportunities and businesses. And maybe we’ll continue to see a robust entrepreneur landscape, as well as a healthy amount of roadkill given not everyone can be successful.

If I’m guilty of anything, it’s being a glass half-full person. While things aren’t perfect, I do see lots of reasons for encouragement.

What do you think? Are we guilty of being too bullish?

When Does a Startup Stop Being a Startup?

This may be a question of semantics but here’s a question for you: When does a startup stop being a startup? At what point does a startup become a small company or a plain and simple company?

It’s an interesting question because it’s easy – and probably lazy – to describe less established high-tech companies as startups. As well, the word “startup” is lot sexier and appealing than “small business”.

So how should a startup be defined? Does it have to do with the evolution and life-cycle of its product? Is it the number of employees? Is it linked to revenue? Does it have to do with how long a company has been around? Can a startup have 10s of thousands of customers even if none of them actually pay for a service?

For example, is Freshbooks a startup despite the fact it has been around for several years, it has 80 employees and sales of about $10-million give or take a few million dollars? It’s sometimes called a startup but it’s more accurate to call it a small company.

For the sake of argument, here are some possible criteria for startups:

1. Less than 20 employees. Once you get more  than this number of employees, a company starts to have “departments”
2. A product still in development (pre-launch) or in market as a beta for less than six months.
3. No sales or sales of less than $1-million, which means it’s a mini-business as opposed to a small business.
4. It’s less than a year old, although there are companies that do go from zero to sixty in less than 364 days.
5. No customers or only a handful of customers, who may or may not be significant clients dollars-wise.
6. It has raised more than $5-million in venture capital. With this kind of cash, a company can support having a large team.

For more thoughts, check out this Q&A on Quora, as well as a recent blog post on Business Insider.

Will Canadian Tech Be As Hot in 2012?

As many Canadian shoppers head out the door to battle the crowds for Boxing Day deals (a strange and bizarre activity in my opinion!), it is interesting to look at back at how many Canadian high-tech companies were snapped up this year.

According to Techvibes, there were 34 high-tech companies acquired – two each by RIM, Google, Zynga and Salesforce.com. The total dollars that flowed to Canadian entrepreneurs and investors was more than $2-billion, fuelled by mega-deals for Kobo, Radian6, Coradiant, MKS and Algorithmics.

Without a doubt, it was an awesome year for anyone involved in the high-tech, startups, entrepreneur and venture capital sectors. After being an M&A wasteland for many years, Canadian technology finally attracted serious and much-deserved attention, which will hopefully encourage more acquisitions and, as important, provide Canadian entrepreneurs with the cash to do it all over again.

An Anomaly or the New Normal?

A key question is whether 2011 was an anomaly or an indication the Canadian high-tech landscape has evolved. In 2011, there were several established and fast-growing companies purchased such as Rypple and Radian6. There were also many emerging startups snapped up such as Zite, Tungle and Pushlife.

With so many high-tech cash acquired, did it flush out the most attractive M&A target or is there another wave of attractive startups on the horizon?

My take is it’s probably the latter given the number of interesting startups that were funded this year, many of them businesses making revenue as opposed to ideas requiring capital to be nurtured.

Buy vs. Build Alive & Well

At the same time, the buy vs. build landscape is still very much alive and well. In a fast-moving world, companies such as Google, Zynga, Facebook and Twitter don’t have time to develop new ideas and features internally so buying technology and, as important, teams/people has become standard operating procedure.

The key issue for Canadian startups is how much capital they’re able to get before the buyers coming calling. If Canadian startups are well financed, it will give them more time to gain more traction, customers and sales to attract a higher valuation. If they’re not able to attract growth capital, many startups could get snapped up prematurely and, as a result, leave a lot of money on the table.

While there was a flurry of seed financing (less than $2-million) this year, I would argue the Canadian high-tech landscape will not be able to take the next step forward without players who can provide startups with $5-million to $10-million. There are small signs of activity, most notably OMERS’ $180-million fund, but it’s just a drop in the bucket for what’s needed.

As someone who spends a lot of time working with startups, it was an exciting and busy year. To me, it was the year that we really walked the walk as opposed to just talking the talk. For too many years, Canadian entrepreneurs talked about the possibilities and the problems they faced; in 2011, they started to make things happen in a major way.

So, what do you think? Is 2012 going to be as active and exciting for Canadian startups? Who do you think are the most attractive acquisition targets?

For more thoughts on the year that was, Jevon MacDonald has a post on StartupNorth encouraging startups, entrepreneurs and investors to “get to work”.

Good Times Ahead for Canadian VCs and Startups?

Is the Canadian venture capital roaring back to health? Are the waters getting warmer for Canadian startups seeking capital?

If you’re a glass half-full person, there’s reason to be optimistic about venture capital activity in Canada. According to the Canadian Venture Capital & Private Equity Association there was $388 million invested in Q3, a 51% jump from the same period a year go. The number of companies that attracted venture capital climbed 27% to 137. So far this year, $1.1 billion of venture capital has been invested, a 30% jump from 2010.

“It is encouraging to see healthier levels of venture capital investment in Canada at this point”, said CVCA president Gregory Smith. “And it is gratifying that the year-over-year growth in dollars invested has been spread across entrepreneurial firms in key innovative sectors – communications and information technology, life sciences, and clean technology.

So let’s pop the champagne because the good times are back again within the Canadian venture capital community. If you’re a startup, get that business plan ready ’cause the VCs have some money for you.

That would be a panacea but no one should get carried away. Sure, there was a flurry of VC deals in Q3, particularly by high-tech startups such as WattPad, Paymentus, Achievers.com, ScribbleLive, Keek and Wave Account, but there are still major gaps in the VC landscape.

The biggest is the glaring absence of institutional investors and pension funds, which can provide Canadian start-ups with money beyond seed rounds. While OMERS recently launched a $180-million fund, they’re an exception to the rule.

Without multiple sources of post-seed capital, many companies will have to go to the U.S. or not be able to get the capital they need to grow and expand. As much as the start-up financing ecosystem is getting healthier, no one should consider it vibrant and sustainable until the gaps are filled in.

Don’t get me wrong, I think the Q3 numbers are encouraging and positive. It is just important for people not to get carried away.


Has Bootstrapping Become Under-appreciated?

As a growing number of start-ups attract financing, it is difficult not to get the impression it represents a major accomplishment or victory. When a start-up announces that it has completed a deal, it is cause for celebration and congratulations from friends, colleagues and the community.

It’s great to see a more fertile financing landscape for start-ups but all the fuss has, in some respects, overshadowed the importance of entrepreneurs being able to successfully bootstrap a business with little or no venture capital.

In a recent blog post, Brad Feld provided a good reminder about bootstrapping in talking about a friend/entrepreneur who was “much more focused on ramping up his customers than raising money”. Feld, co-founder of TechStars, which provides financing to start-ups, was trying to remind everyone about the value of bootstrapping to grow a business.

I have come across some entrepreneurs who appear to have forgotten this reality because they have pinned their hopes on launching and growing a business on getting financing. The advice I offered to one entrepreneur with financing aspirations was simple: “Get your product launched and start selling”. I was trying impress upon him that having sales and customers who wanted his service was valuable because it would get the business off the ground and, as important, make it easier to raise financing when and if needed.

As much as venture capital is great, valuable and sexy, it is difficult not to be impressed with entrepreneurs who can establish and grow a business without it. Not having financing forces you to be creative, agile and flexible, and forces an entrepreneur to make smart decisions because a strategic or tactical mistake can be lethal. For entrepreneurs who succeed while bootstrapping a business, there is a different sense of accomplishment.

There are, of course, many situations in which bootstrapping can only get a business so far. At some point, a business needs financing to take things to the next level. But I think bootstrapping should get as much as attention and be seen as just as much of an accomplishment as raising venture capital.

 

 

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