By Chris Arsenault Managing Partner & COO, iNovia Capital

http://twitter.com/chrisarsenault

New yet familiar faces are marching into the Canadian VC landscape with different approaches towards supporting tech entrepreneurs in their endeavour to change the world. At last’s year CVCA annual conference, the theme was utmost appropriate: The Face(s) of Change! Only one year has gone by, yet so much has already changed, new and familiar faces are showing leadership and paving the way for an industry revival.

Today’s BDC announcement of a $75M commitment towards the newly created Tandem Expansion Fund (link to press release), is yet another example of how the Canadian venture capital landscape is being reshaped from an entrepreneurial angle. The managers behind this $300M later stage fund are experienced operators, with investment backgrounds and core entrepreneurial values. Interesting enough are the powerhouses that will provide global networks behind this new fund: Charles Sirois (Telesystem Ltd) and Brent Belzberg (Torquest). I know Charles Sirois and the Telesystem Ltd group pretty well, having worked for Charles for a few years in the past and for having co-invested with his other VC funds (note: Telesystem is a small investor in iNovia Capital’s second fund). I have much respect for Charles, not only because he founded and managed companies, some he built from scratch and lead them to several hundreds of millions and even billions in value, but rather because Charles has been a fervent and active supporter of entrepreneurship, understanding what drives entrepreneurs and accepting that they have the right to try, to fail, adjust, and succeed.

What does Tandem means to me?

It means that many great Canadian companies and strong tech entrepreneurs having built their businesses up to the point where a substantial amount of capital is needed to either help them consolidate a market segment, or to simply support their growth, won’t be obliged to only look south for a strong financial partner. For iNovia Capital, it means that in some cases we will have a later stage co-investor able to lead those few $10-20M rounds required to further fuel the growth of our most successful companies.

The Tandem Expansion announcement comes on the tail of Quebec based Cycle Capital – who has recently launched its cleantech investment activities with the addition of new partner/recurring VC fund managerBernhardt Zeisig; Western Canada’s warming up to the recent formation of an interactive entertainment venture capital fund called Vanedge – the team are all gaming industry veterans from Electronic Arts and Dreamworks Interactive – Paul Lee, Glenn Entis, Owen G. Mahoney and Jason Chein; Celtic House’spreparation for their new fund IV fund raising activities with the addition of entrepreneur and VC experience Pierre-André Meunier; and Steven Hnatiuk and his team out in British Columbia at Yaletown Venture Partnerswho announced not too long ago the first closing of a second early stage cleantech & IT fund.

Interesting enough, many new VC faces are in fact venture capital knowledgeable operators and entrepreneurs. Others, like Bud Kirchner of Kirchner and Company are not only showing leadership, they are taking ownership! The Kirchner and Company team havebeen extremely active and involved on both sides of the equation: as a VC, by partnering up with existing fund managers to raise funds and actively oversee direct investments such as with Avrio Ventures where Bud joined as a Partner; then, by being one of the most active investment bankers doing M&A and divestitures in Canada, sometimes representing the buy-side and other times assisting the sell-side; and finally, as a key partner to secondary fund managers, acquiring and managing the exit process for a broad range of portfolio companies (rumour is that they recently came to an agreement with Coller Capital for the management of the old portfolio of Innovatech Montreal which was sold to to Coller in a secondary transaction a few years ago).

The following chart outlines what Kirchner & Company say makes them different. Funny thing is that it doesn’t sound any different, right? Wrong. Its different because Kirchner and Company, like many new entrants in the VC ecosystem, are building their business on new paradigms, where the people in the team are less alike, more complementary and more driven by entrepreneurial fuel. Just take a look at Kirchner’s recent additions to the team: Barry Gekiere (ex-Ventures West), Les Lyall (ex-Growthworks), Claude Vachet (ex-Multiple Capital), Andy Agrawal (entrepreneur), Chris Butlin (entrepreneur), Mike Cooke (entrepreneur)… and I can keep going. Doesn’t this start to sound way more like a next generation VC fund than the typical investment banking firm?   

It will be interesting to see how these new and returning faces in the venture capital landscape will affect the type of VC transactions we were once used to seeing.  

My recent post about our industry being at a turning point is more and more appropriate. With the recent announcement of Teralys Capital, a $700M + Fund of fund, managed by Jacques Bernier, an entrepreneur turned VC who then turned Fund of Funds Manager for the largest Quebec based labour sponsored fund (Fond de solidarité FTQ), and who now manages Canada’s largest Fund of funds, it seems like we are witnessing change within change.  

For Tandem Expansion as well as for Teralys Capital, our governments (both federal and provincial) are playing key roles of being “enablers”. By participating as pure investors, by expecting full return of capital in addition to reasonable returns, at the same rate and on the same terms as their private co-investors, our governments are setting a new tone: where they aren’t providing any bailout, any grants, any loans; they aren’t selecting or politically influencing the type of companies these funds should invest in; they aren’t trying to save any specific industry by giving tax credits for job creation; they are enabling sophisticated fund managers to attract important amount of capital into their funds (as we all know size does matter) as well as providing the level of commitment necessary to attract foreign co-investors into investing in promising Canadian tech companies. Anyway we look at it, having the means to invest and to support our entrepreneurs, directly creates high paying jobs, clusters of expertise and put Canada on the map (just think of what would of happened to these industries without venture capital: Quebec’s gaming and media production industries; British Columbia’s Biotech industries; Ontario’s semiconductor and telecom industries; Toronto’s software industries, Montreal’s aerospace industry, and I can go on and on). Our governments are doings the right things, now it’s up to our fund managers to do things right!

What is next?

Our governments and our large Canadian institutions alike, need to further value the impact that the venture capital and private equity industry has on the competitiveness of Canada on the world markets. One day, soon enough, I hope to see our Canadian government, as well as other provincial governments, follow in the footsteps of the Teralys Capital model and allocate substantial amounts of capital ($300-500M each) towards enabling private fund managers in their endeavour to attract local and foreign institutional capital, in order to better support our tech industry and our entrepreneurs, and by the same means, generate important returns on capital over the next ten to 15 years, while, as a result directly impacting the success level of Canadian innovation commercialization and job creation.  

As the Canadian Venture capital industry matures, we will witness higher returns, recurring entrepreneurs and an increase in local success stories. More high growth companies will not be obliged to be acquired by a foreign entity in order to provide exit opportunities to its stakeholders and with the recognition that this class of investment (venture capital), although considered high Risk, will prove to generate High Rewards. That should be enough to attract more Canadian pension funds, banks, insurance companies and private institutions,  with allocations of a fraction of their capital towards Canadian venture capital funds.

With this year’s CVCA annual conference, themed “Embrace our Energy”, being once again sold out, I take it that allot of the above will be subject of discussion in Calgary.  

Thoughts and comments welcomed.

P.S. for the latest and greatest industry headlines, follow the CVCA on Twitter at: http://twitter.com/CVCACanada

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Re-post from StartupCFO Mark MacLeod Is the worst over?

Healy Jones, a friend who has spent his whole career in banking / VC wrote a frank and open post yesterday about why today is his last day as a VC. It’s worth reading. Some of his reasons are personal. And of course, its perfectly natural for an associate to leave a fund. Still, other reasons are structural. He has a pretty bleak assessment of the current state of the industry right now:

“VC is less fun these days. I went into technology banking @ H&Q because I loved the idea of working with young technology companies. And I still love the rush of hearing about a new technology and working with an entrepreneur building a dream. These days, there is a ton of effort is being spent re-sizing existing portfolio companies and doing downrounds. Sure, some new investments are still getting done (and Atlas is in a very solid state to make new investments, with a new fund and committed partnership). But all the Excel cap-table anti-dilution modeling and nasty negotiations with co-investors over companies that aren’t meeting expectations just isn’t enjoyable, and it isn’t really why I got into venture in the first place. I’d love to spend more time growing companies, but given the pressures that any VC with an existing portfolio must be having right now the best place to help grow a business, for me, is going to be within an actual startup.” This got we wondering: Is the worst over? Is Healy seeing the bottom or are we in for a rough ride? 

One of the reasons why entrepreneurs and investors are having a tough time is the beating that public markets have taken since the credit crisis. Anyone who’s invested in the public markets feel this on a personal level too. When the valuation of the biggest acquirers of startups dropped, valuations throughout the food chain dropped too.

I checked this morning on the 6 month stock charts for some of the most active acquirers: Cisco, Google, Microsoft, Oracle and Verisign. All of them are trading well above their 52 week lows and all are trending up.
stock chart -

This is good news. Exits don’t happen when companies feel poor. They feel poor when their stock is down. I have no doubt that the downrounds and resizings that Healy talks about are happening across everyone’s portfolio. Still, I believe there are positive things happening.

Of course, we don’t see press releases for the bad stuff. So, when we look in the media, all we see is the good stuff. On that front, deals are still getting done (both fundings and sales). Some new funds have formed (Healy’s fund Atlas recently raised a new fund).

Here in Canada of course, the Ontario and Quebec governments have made big recent commitments to private equity and funding innovation. That money won’t come online for several months, but when it does it will have a positive impact as well.

It has never been easy to raise money. Expecations are up and valuations are down. So, it just got a little harder.

On the M & A side, I hope we will start to see exit volume picking up as well. On the lower end of things (the deals that don’t get the headlines), deal volume is up. Corum Group who serves the mid and lower markets reported that Q1 was its busiest quarter ever.

So, while I’m under no illusions about the difficulty of funding companies and generating good exits, I am hopeful that the worst is over. What do you think?

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Re-Post from Brightspark Blog by Mark Skapinker

Last month, I was lucky enough to join about 250 other attendees at Kinnernet 2009, a “Foo-type” Internet geek camp/ un-conference held on the shores of the Sea of Galilee in Israel. Kinnernet is a by-invitation networking event hosted by Yossi Vardi. If you have never heard of Yossi, he was the founding investor of ICQ (when I met him in 1997). Yossi has invested in well over 80 tech companies – mainly young Internet companies, and has often been called the Godfather of the Israeli web industry.

Yossi has an approach to the market that I think the Canadian startup industry can learn a lot from:

·         Startups need cash, and the biggest help you can give them is cash. It is said that Vardi invests a few hundred thousand dollars in his startups, that he takes common stock with simple terms and no negotiations.

·         If someone has failed before he’s even more likely to invest – “It makes them want to win even more,” he is quoted as saying.

·         He generally invests in young entrepreneurs.

·         Yossi usually hardly looks at business plans at all, and mainly invests in the individual. My favourite Yossi quote is: “Business plans are like sausages, if you knew what went into them you wouldn’t eat them.” Another unauthenticated quote: “Judge the individual over the business plan”.

From what I saw at Kinnernet, Vardi has played a major part in stimulating Israeli startups. At every turn, I met another young entrepreneur eager to tell me about their startup. Full of positive energy and drive, it was extremely energizing to meet these entrepreneurs.

In addition to financing, Vardi orchestrates events like Kinnernet where all his startups can interact with each other along with many experienced and connected people from all over the world. And he relentlessly works on business development and finding opportunities for his startups.

It would be amazing if we had a similar process in Canada. If we could find a way of kickstarting 50 (or more!) tech startups with a few hundred thousand dollars each; if we could find a way to orchestrate ways for them to work with each other; if we could help them meet people ready to advise them on lessons learned. 

We have all the ingredients – great universities, superb talent, high enthusiastic young people with ideas. Now we need a way to get the right money to the right people and we may be able to create an industry…..

Posted by Mark Skapinker on May 01, 2009 | Permalink

COMMENTS

Who would be the Godfather of the Canadian web industry?

Who in Canada will invest in 80+ startups (for a few hundred thousand each)?

Posted by: Ben Yoskovitz | May 01, 2009 at 02:51 PM

if only there were an guy in town who had a big exit and wanted to spend time and money with young founders…

Posted by: David Crow | May 01, 2009 at 02:53 PM

There seems to be more and more government monies available, provincial and federal. 50 X $250k = $12.5m. Seems to me it would be monies really well spent to kickstart more startups.

Posted by: Mark Skapinker | May 01, 2009 at 03:00 PM

Mark, very well said. I totally subscribe to yours and Yossi Vardi’s comments. Early stage companies are the engine for innovation, job creation, and economic growth. Let’s face it, even in the best of times, startups are typically run by entrepreneurs that wake up each morning, knowing that they must kill what they are going to eat, else their families and employees will go hungry. In the worst of times (such as we are living through right now), who else to bet on, but those that have the ability to survive and quite possibly thrive, through nuclear winter?

Posted by: Yung Wu | May 01, 2009 at 03:03 PM

One other thought, there is a real need to have re-invested entrepreneurial experience to go with that early stage cash infusion. It would be nice to see more entrepreneurs who have had successful exits (such as Yossi) invest not only capital, but their experience, energy and contacts into the next crop of high potential entrepreneurs. Instead of putting “passive” money to work, and seeing the investee companies once every 3 months for 1/2 day Board meetings, I believe more in a model where experienced successful business builders invest time on a weekly basis, to provide coaching, support, contacts, strategic guidance, and access to resources — not just capital. This, I think, would start a virtuous cycle of success breeding further success.

Posted by: Yung Wu | May 01, 2009 at 03:10 PM

I would argue that weekly meetings with investors isn’t a model that necessarily works – and Yossi subscribes to that too. I think it is much more important to provide tools, and a health peer network that provides help to entrepreneurs. 
-MS

Posted by: Mark Skapinker | May 01, 2009 at 03:58 PM

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