by Chris Arsenault, iNovia Capital

I had the pleasure of meeting Miriam Varadi, author of Merchants of Enterprise, in 2008 and had the pleasure of participating in her research on the Canadian Private Equity landscape. Since then, the book  has been doing extremely well, and continues to be the basis of on-going discussions on the subject across Canada and the USA.

Most recently, the Goldman Sachs/Facebook deal generated heated discussions and placed private equity front and center again. Miriam feels that this Facebook deal is a victory for private over public markets. Here is what she had to say in a recent BNN interview:

Merchants of Enterprise, Private Equity in Canada: The Color and Controversy is the first Canadian book to take you behind the scenes and expose the inner workings of our private equity industry. This book is all the more authoritative because she gained on-the-record access to many of the biggest dealmakers in the field.

The book’s goal is to demystify private equity by creating more public awareness, to educate and to inform. The lack of transparency in the past has lead to worrisome trends in regulation abroad. The aim here is to create openness in this area, which inspires dialogue and trust.

This easy to understand book will be of interest to professionals, entrepreneurs, investors and their advisors. Since the publication of the book, Ms. Varadi has acted as a spokesperson on private equity topics and given interviews on BNN and CBC. She also moderated a private equity panel discussion at Rotman’s Business School.

You can get a copy of Merchants of Enterprise at Chapters online.

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Last evening, nextMontreal featured a post about an unusual upcoming boxing match that will see an LP and a GP of a Venture Capital Fund go at it, in the ring!

These Knockout Entrepreneurs! are Jacques Bernier of Teralys Capital and François-Charles Sirois of Telesystem. Sounds crazy to hear that two major players in the Canadian Entrepreneurial and investment community are going at it, with gloves? Well at least, it’s for a good cause.  It’s an “Invitation-Only Event” and all proceeds from the event will support both St-Justine and the Centre of Excellence for Cellular Therapy of Hôpital Mainsonneuve-Rosemont.

It should be a memorable match.

Here is an excerpt of the blog post by Chris Arsenault on the nextMontreal web site October 28th, 2010.

Canadian GP & LP put-on the Gloves for a great cause on Nov. 18th

Do you remember the last time you got into a heated argument that culminated with your adversary laying down the proverbial gauntlet by issuing those infamous three words – “I dare you!”? Then, without even a shadow of a doubt and before you can even comprehend the seriousness of the situation, you responded with a testosterone-tinged “Sure, I’ll do it – name the time and place!” More often than not, the consequences of such actions end up being more than you wished for.

Now, to be honest, I’ve given more than my share of cocky replies over the last 20 years in the business. That being said, I can also say none of my “quick replies” ever landed me in a prize-fighting ring versus a trained boxer who also happens to be Canada’s largest VC and PE fund investor!

Yes, ladies and gentleman; Jacques Bernier, Managing Partner at Teralys Capital, has dared the VC community to face him in the ring. He is wants to go at it, one-on-one and show what it what he’s made up of.

Personally, stepping into a ring is already something I consider a little crazy. Furthermore, to go out and face one of my future potential investors in a boxing ring is almost suicidal. It’s definitely a lose-lose proposition…Or is it?

François-Charles Sirois, a dynamic young entrepreneur (and also President of Telesystem – one of Canada’s most active entrepreneurial investor through its numerous funds), heard the calling in October 2009. When Jacques threw out his “I dare you” in a friendly meeting, François-Charles rapidly evaluated the odds of winning or losing, the time he needed to train, the muscle-mass he needed to gain to face Jacques, identified Jacques’ main weaknesses, calculated the difference in age and speed, and rapidly (because all of this happened within a micro-second) answered back: “Sure, I’ll fight you. Give me a year to prepare. Oh, and by the way, I care tremendously for a specific foundation that gives support for kids and want to give 100% of my winnings to the Fondation Sainte-Justine.” “My winnings” – talk about a bold statement! Jacques quickly replied: “Perfect – but to be clear, my winnings will go to the Centre of Excellence for Cellular Therapy of Hôpital Mainsonneuve-Rosemont, which is a cause close to my heart”.

Definitely, François-Charles is walking into this adventure with but one objective in mind – to win! While Jacques already knows he has won!

Please checkout the nextMontreal web site for the full article (clik here)

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Check out the new NAO Summit web site: http://www.angelsummit.ca

Good news for the tech and investment community in Canada!

The National Angel Organization is hard at work planning for their 2010 National Summit that will be held in Montreal this year from October 6th to 8th.

This year’s event includes some of Canada’s best angel investors sharing their experiences and insights. Such as:

Keynote by Charles Sirois, an entrepreneur, angel, venture capitalist and chair of CIBC, is the luncheon keynote speaker on October 8th, and he is just the start of a great procession of distinguished keynote speakers and panellists coming this year.

Other speakers and panellists typically embody decades of hard-won expertise in the global early-stage space, of inestimable value to any individual or group providing seed, early-stage, and expansion capital to early-stage enterprises.

The series of panel on Angel War Stories & Early Exits which review some of the best and worst of the year in Canadian Angel Investing, will this year welcome Andy Nulman and Chris Arsenault:

Andy Nulman is the newly appointed President, Festivals and Television, of Montreal’s renowned Just For Laughs International Comedy Festival, the world’s first and largest comedy event.  This is not Andy’s first go around at JFL. From 1985 until 1999, he literally transformed the event from a two-day show to a month-long cultural happening, attracting over 2 million visitors per year. He is also former President & co-founder of Airborne Technology Ventures, a company celebrated as a pioneer in the industry of mobile media and marketing.  Check him out at www.andynulman.com.

Chris Arsenault is President & CEO of iNovia Capital, one of Canada’s premier managers of seed and early-stage venture capital funds.  Chris is an entrepreneur turned venture capitalist! Having founded, co-founded or launched almost a half a dozen tech companies over the last 17 years all within the software, Internet and Communications space. Chris now has the pleasure of working with an amazing team of investor entrepreneurs in Montreal, Calgary and New York. Chris was an early investor in Airborne Entertainment (which was subsequently sold to Japanese based Cybird for $100M) and thereafter participated in the birth of Airborne Technology Ventures alongside the founding partners. And continues to be on the lookout for the next entrepreneur to back!

Register here

October 6th – 8th, 2010

Montreal, Quebec

The premier event for Angel

networking and education in Canada!

Contact NAO at pconnor@angelinvestor.ca

or 1600-401 Bay Street

Toronto, Ontario M5H 2Y4

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repost by Chris Arsenault, Managing Partner at iNovia Capital

Earlier this month I was invited by Rob Hyndman to post some of my views on the topic of: The Future of Venture Capital in Canada, as part of a series of posts at The Mark – Canada’s daily online forum for news, commentary, and debate. I ended up posting a short view of the “VC Ecosystem”, outlining only but a few key elements critical to having a stronger and most importantly a viable tech industry supported by venture capital in order to compete on a world wide basis. David Crow, added some valuable comments relating to “Creating a Venture Culture” so as did ex-VC and entrepreneur Rick Segal, tech CFO Mark MacLeod and others, participated in the discussion and shared their views on the topic. If you haven’t read the posts, I strongly suggest you give it a read.

I fundamentally believe in the early stage venture capital model that supports promising high growth tech startup entrepreneurs. And through my efforts and those of my colleagues and partners at iNovia Capital, MSBi Valorization, the CVCA, the C100 and numerous other initiatives, we are trying to make the model work by approaching venture capital the same way you one would build any other tech business: with the right people/team at the right time (entrepreneurs vs. operators); by building a strong network of knowledgeable partners with complementary skills sets and long term relationships; and by understanding what startups and entrepreneurs need from their early stage VC’s and deliver results/returns to our Limited Partners while properly managing expectations. Building an Ecosystem takes time, commitment and passion.

Building an Entrepreneurial Ecosystem requires the right culture and mindset! For the last 12 years I’ve dedicated my entrepreneurial life towards helping to build successful tech business via my role as an active early stage investor. Over this same period of time I’ve witness important changes across the Canadian VC landscape which continues to evolve and now seems to be driven by a more entrepreneurial culture, one that includes Venture Capital savvy Entrepreneurs that understands the role of VC funding more than ever before. Hopefully the pieces will continue to fall in place and we will see the next generation of successful Canadian tech entrepreneurs that will change the way we work and live be funded by Canadian VC’s.

Earlier in March I was given the opportunity/challenge to discuss Entrepreneurial Venture Capital by giving a, “fast, 15 seconds per slide, 5 minute 20 slide presentation” at Ignite Montreal. My presentation was specifically on the topic of trying to communicate how to “Make Venture Capital Work”.  I really like the Ignite presentation model, but it’s indeed a challenging concept, too bad I ended up doing the basic mistake of trying to say too much in too little time… thus not saying as much as I could if I would of said less!

So, many entrepreneurs these days are talking about “How the Venture Capital Model is Broken”, which is the wrong way to address the lack of capital Canadian entrepreneurs face! The VC Model isn’t broken because it never really worked in the first place, period!

With the exception of the 1980’ and the few last years of the Internet bubble, the model has never been successful for the masses, but has been only for a handful. And, when it comes down to Canadian numbers, we have to account for an additional level of difficulty: the fact that Canada doesn’t have the “weight” of numbers in its favor. Not only does Canada have a less mature IT and Biotech industry when compared to the US, it also has a small and nascent private equity and venture capital industry, and still only has a handful of privately managed venture capital funds today.

The stories about the highly successful technology entrepreneurs as well as those about the rockstar venture capitalists (note: over 80% of all venture capital returns are generated by less than 25% of the venture capital funds out there) created the impression that the only thing needed to build a high valued successful startups was an entrepreneur with an idea and an investor with cash! This meant that venture capitalists could blame poor returns on unsuccessful entrepreneurs while those entrepreneurs could blame their failures on the lack of capital or restrictions tied to the capital they did raise.

The math is the same for a Canadian venture capital fund as it is for a US venture capital fund. Investors in venture capital funds usually expect a high IRR (internal rate of return) – Top tier venture capital expected returns in the +30% IRR, a rate that is far above banking rates due to the high level of risk involved. A Venture Capital fund will usually has a ten year life and will require a certain level of management fees over that period. Therefore, in order to understand the type of capital that needs to be returned to the investors of the Fund (the Limited Partners) one needs to plan on generating three times (3x) return of capital to be successful and part of the Top tier firms that are able to continuously raise additional capital and funds.

In a nutshell, that means that a $100M size fund must return approximately $300M in order to generate the expected level of returns of a Top tier fund! So, knowing that for an early stage venture capital fund, one can expect it owning on average 20% of any given company in a portfolio of around 15 companies (for a $100M size fund), this would translates into $1.5 billion of aggregate portfolio enterprise value at exit, or $150M in cumulative EBITDA based on a 10x EBITDA exit valuation, needed to generate those type of returns. That’s pretty demanding! Managing expectations also sets the bar as regards the type of actions that will be put forward to achieve those expectations. Maybe it’s time we set an aggressive but achievable bar that would benefit the whole industry, no?
Reality is that entrepreneurs operate in a living “Ecosystem” that feeds itself by growing and building new connection. No party can do it alone! The community feeds itself off its own growth. High growth technology companies need venture capital to succeed and the venture capitalists need to back successful entrepreneurs to generate strong returns. Not only do we need to have better return expectations for venture capital funds, we also need better collaboration within the community to build networks strong enough to support promising technology companies and deliver high shareholder value.

The more successful entrepreneurs are, the more successful venture capital funds will be, leading in turn to more funding for entrepreneurs.
We have to learn how to expect more and know how to get more. Yes, funds and large institutional investors like pension funds and insurance companies should expect better returns from their venture capital investments. The last 10 years of Canadian venture capital returns represent -0.2%, yet expectations were in the unrealistic + 30% range, while solid manageable returns should be more in the 15% level. Large institutional investors can help themselves achieve such realistic returns by selecting fund managers with entrepreneurial backgrounds and experience with building successful companies. Managers who think and act like the entrepreneurs they back are better suited to select the ones who understand how build a successful start-up and have the most chances of succeeding.

Likewise, entrepreneurs should expect more from themselves, their teams and their investors. Entrepreneurs need to understand what is expected from the capital they raise and they can do this by selecting the right potential investors and doing due-diligence on them, by understanding the ecosystem they are operating in and making sure they surround themselves with people who are stronger than themselves, and generate stronger returns by setting themselves up for success.

High but achievable expectations create and define leaders!

Entrepreneurs are natural leaders, because they are able to execute on ideas, they transform opportunities into tangibles such as jobs, products and profits. So by having more entrepreneurs funding other entrepreneurs, we have more chances of building a sustainable ecosystem. It takes time to build a viable company, and by understanding the type of returns that are expected from the different source of funding, entrepreneurs and fund managers alike will be able to create a model that works.

The venture capital model is broken only to those who don’t understand it
those who aren’t willing or interested in investing the energy to adapt it to their reality. Like other industries, the venture capital industry will continue to evolve over time.

I’m looking forward to seeing the level of returns over the next five to 10 years as the Canadian venture capital industry begins this evolution – where entrepreneurs are funding entrepreneurs

Now, some questions for you:
- What do limited partners think of the emerging number of entrepreneurial driven Venture capital Funds?
- What do entrepreneurs think of the new breed of entrepreneurial VC’s?
- Is the Canadian market mature enough to trigger the level of collaboration required to build a strong ecosystem around Canadian technology companies?
- What is expected by the entrepreneur of the early stage VC’s (other than the obvious $)?
- How will you be part of the “make it Happen” generation?

For those interested in participating, take a look at the following few links to recent articles and you’ll get a feel for the energy and around the subject:
The Mark: The Future of Venture Capital in Canada
La Presse: Jacques Bernier, de Tralys: le goût du risque
Tech vibes: Venture Capital Funding Outlook In Canada
Financial Post: Venture capital finally gets a break
TechCrunch: Strength In Numbers: Canadian Entrepreneurs Flock To The C100
CVCA: Canadian Venture Capital Investments in 2009 – Lowest recorded in 13 Years
StartupNorth: What is being a startup really about?
Bootup Labs: Startup Visa Canada

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Interview with Timothy C. Draper, Founder and Managing Director, Draper Fisher Jurvetson

By Chris Arsenault Managing Partner at iNovia Capital

Please note that a full copy in .pdf of the magazine can be downloaded on the CVCA web site.

The outspoken and energetic Silicon Valley investor icon Tim Draper storms the stage at the 2009 CVCA Annual Conference

The theme of this year’s CVCA Annual Conference was “Embrace our Energy.” Well, keynote speaker Tim Draper did just that. He had more energy than any other venture capitalist in the room that evening – his eyes were sparkling and he saw opportunity everywhere.

When asked about the current state of the venture capital industry, Draper, who is Founder and Managing Director at Draper Fisher Jurvetson, focused on two core issues. First: we need to break down the borders and enable free trade, he said, and second, we need a new private stock market. While Draper offered no solutions on achieving free trade, he continues to actively advocate for borderless markets. He regularly takes time out of his busy schedule to speak with government officials, the private equity industry, politicians and industry leaders to convince them the world will be a better place if we dropped our commercial borders.

On the second issue, Draper expects to be able to launch a new private equity exchange market. Oh yeah, and Draper also sings! He not only sings, he wrote the lyrics to the “The Riskmaster” and gave CVCA attendees a taste of his singing skills right there and then. Good thing we had the lyrics on the screen to sing along!

Chris Arsenault: What makes these times so exiting for you?

Tim Draper: Timing is now! The current crisis is creating huge liquidity problems. The venture backed IPO market is inexistent and it’s tough for entrepreneurs, venture capitalists, limited partners and future entrepreneurs. While some people are panicking, or even worse clinging to the past, I think that crisis creates opportunity. And that’s a VC’s job to identify the opportunities.

Arsenault: You said earlier that our time was now, why is that?

Draper: I’m talking about the cycle of high returns for venture capital funds versus private equity funds. It’s a cycle. One goes up while the other goes down. The last cycle was owned by the private equity guys, from 2000 to 2008, and they had an amazing run. Until last year that is. We just now embarked on the venture capital cycle and will be coming out of the recession. That means good business for us. It’s the best time ever to invest venture capital money: we are going through a recession/depression, there are low company valuations, liquidity solutions are near, there’s less competition for VCs and entrepreneurs, and new technologies will be game changers.

Arsenault: How does your experience guide you through these times?

Draper: My father and my grandfather pioneered venture capital in Silicon Valley and I’ve been in the business for over 25 years. Some of the greatest companies in the world have started in recessions or depressions, such as GE, IBM, HP, Adobe, Skype and Johnson & Johnson. And now is the best time to invest in start-ups because existing companies are reeling, smart people are out of a job, new technologies are going to change the way we work and play, and there are fewer start-up competitors.

Entrepreneurs are now more enabled by technology than ever before. Entrepreneurs don’t require as much cash either. So we need to support these entrepreneurs, but we now get a larger stake in the company because of the more reasonable valuations. I do fear that there will be less VCs out there though. I also think that the markets will come back. They are slowly creeping back, but we need a new platform for liquidity.

Arsenault: So tell us more about XChange.

Draper: Awesome. This is the greatest thing to happen in the liquidity markets in a long time. XChange is a new springboard to an IPO. Companies can post their profile, raise money, control access and communicate with shareholders. Investors can peruse, connect with companies, buy and sell shares. The technology behind the platform answers today’s communications needs.

My company Draper Fisher Jurvetson is a substantial investor behind XChange. We need more liquidity. Liquidity is what drives deals. The current markets don’t offer solutions for companies under $250 million. This platform will enable companies to remain private while providing liquidity to investors. It will allow entrepreneurs to raise cash for their ventures while enabling investors to get their money out short of an IPO. Investors will need to be qualified trading institutions. Big names will be backing this new platform. We expect to launch in September.

Arsenault: What do you see in Canada?

Draper: Well first, the XChange platform won’t be available in Canada, at least not at initially, but it would be great to find a partner to do so. The Canadian government should drop the borders and have real free trade with the U.S. Lower friction to do business is needed. Aren’t we are both socialist countries now?

We want to bring our DFJ network to Canada and do more deals here. Canada has a history of great technologies – RIM, Sierra Wireless, OpenText, Sharepoint – great universities, a strong entrepreneurial community and a better perspective from outside Silicon Valley, more creative.

This is our time now!

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