by Chris Arsenault

March 2009 will definitely be the month the Canadian Venture Capital Industry heard its “wake up” call. Fund of fund initiatives, new funds, follow on funds, co-investment fund, business funds. We got swamped with VC related initiatives and announcments and even withnessed some true initial traction. It was refreshing to read about the Québec Government Venture Capital initiative, done in close partnership with la Caisse de dépôt, the Fond de solidarité FTQ and Investissement Québec, with commitments toward the creation of: a $500M business growth fund, $125M for the creation of three seed stage funds as well as the creation of a $825M Fund of Fund. Now, the latest news comes from Ontario, where the Ontario Venture Capital fund announced, earlier today, that it had completed its first commitment to a private fund manager: Georgian Partners. Below an extract of the press release: 

  

Venture Capital Fund Invests In Jobs Of The Future

McGuinty Government Welcomes First Ontario-Based Commitment.

The Ontario Venture Capital Fund is committing up to $15

million inGeorgian Partners “Growth Fund I” to help support

innovative, high-growth businesses, including high-potential

companies in Ontario.

Georgian Partners (http://www.georgianpartners.com/index.html)

is an Ontario-based venture capital firm investing in companies

in the information technology, information aggregation, and

enterprise software sectors.

 

 

Note that the Ontario Government first announced the creation of its Fund of Fund, in close collaboration with its partners (OMERS, RBC Capital Partners, Manulife Financial, BDC & TD Bank Financial Group) back in June 2008 (Link), a $205M Fund, and, at the time of its announcement, it was one of the biggest to-be active Canadian Fund of Fund  (the Ontario Government commitment was in the order of $90 million). We hadn’t heard much since then nor seen any activity until earlier this month when the Ontario government followed up with the announcement of a new $250M VC fund that would co-investing with other eligible fund managers in emerging technologies (Link). This announcement was quickly followed by other rumors about the first two investment commitments towards private funds by the Ontario Venture Fund (the Fund of Fund) which were rumored to be Kodiak Venture Partners and Mayfield (both US funds). I guess it was just rumors, because today they announced their first commitment, and its towards Ontario based venture capital Georgian Partners.

The level of energy and the willingness coming from large Canadian institutions and government to commit important amounts of capital to Venture Capital is well received by the community. The CVCA and many of its members, have been putting allot effort towards gathering support from large institutions as well as from our governments in order to help address the current lack of funding available to bridge the gap between research and development and the commercialization of promising technologies. If you haven’t yet, take a look at the recently released study on the economic impacts of venture capital: Why Venture Capital is Essential to the Canadian Economy (Link).

Even if all of this sounds really good, I still fear that in the current economic climate, as a VC fund manager, attracting funds from the non-government entities, such as: Pension funds, Insurance Companies, Banks, large corporations, endowment funds… will prove to be at the least extremely difficult.

But we will get there.. only by showing our Canadian existing and potential limited partners, that yes, Venture Capital Funds in Canada can provide strong returns (IRR)!

Onwards, upwards!

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by Jacqui Murphy, Partner at Tech Capital Partners (www.techcapital.com)

Last week I attended one of the CVCA‘s professional development events in Toronto (full disclosure I am a member of the CVCA professional development committee). The topic for the session was “Going Global” and quite honestly, despite the line up of high profile folks, I was expecting the event to be similar to other events on this topic, filled with motherhood statements about the benefits of going global with very few suggestions on how to pursue a global strategy. I was wrong. In fact, there were many valuable insights and suggestions. I’ve attempted to filter “some” of the content through the lens of information I’d like to share with our portfolio companies at Tech Capital Partners.

Jennifer Brooy, Vice President of EDC Equity talked about the shift to the “communication age” and our use of the internet to interact and communicate — how markets are now telling us exactly what they want. She suggested that we look and listen to the large and rapidly growing markets like China, India, Brazil, Russia and Southeast Asia. A couple of years ago there were a flurry of “India/China” events… I wonder how many Canadian companies have explored opportunities in either of these countries. Looking at the chart below, at a macro level, the US is still a huge market. Looking at growth of GDP: China, India, Russia, Southeast Asia… all growing at a more rapid pace than the US. And the population bases and export growth — China and India — huge. And import growth — Brazil and Russia.

But what do these types of charts mean to individual Canadian companies? I think the question each company needs to think about is: Where is your market? Where is your biggest and best opportunity? Not necessarily in your own backyard. And not necessarily in the country with the largest GDP. Think about the specific segment of the market you should be addressing and think about it in a global context. Now where is your biggest and best opportunity?

Jennifer spoke about the strengths of our country:

• We have a strong fiscal discipline.
• We have a solid economic base not withstanding what’s going on right now.
• We have a sound banking system — some of the soundest banks in the world.
• We have water and energy resources.
• We have diverse and talented human resources — multi cultured, multi language, multi coloured.
• We have the highest educated population base in the world. We have the highest per capita of post secondary graduates.
• We have proven ourselves as technology leaders and we are innovative and adaptive.

We have some amazing resources we can capitalize on. Jennifer spoke about the reverse brain drain phenomenon where people have come from China, India, Brazil, and Mexico to North America, Britain, and France. These talented people have been educated in our best universities, have worked here, and have learned our culture, our ways of doing business, and our approaches to innovation. She suggested that Silicon Valley might not always lead the pack in terms of innovation due to this reverse brain drain. These educated and experienced people are going back to their roots and exporting this intelligence back home. How do we encourage these people (both Canadians and non-Canadians) to work for our companies? How do we make sure they are aware of the opportunities? How do we incent them to stay once they’re here? We need to make sure we are providing challenging, fulfilling career opportunities and compensating fairly. We need to make sure our companies have the financial resources and market opportunities to thrive. Jennifer expressed concern about our floundering venture capital industry and its impact on our tech industry. And the impact of globalization on our small and medium sized enterprises that make up the lion’s share of our economy.

EDC has developed a number of programs to help Canadian companies address these concerns and take advantage of these opportunities. Some of these programs, like the equity/investment side of EDC, are not well known. EDC invests directly in Canadian companies that are born global or that want to grow and go global. EDC also invests internationally in funds (one more disclosure, EDC is one of Tech Capital’s LPs) and now has several fund investments in China, India, Southeast Asia, Turkey, a pan European investment, a fund in Israel, a couple of funds in the US, a Caribbean fund, a Mexican fund and is starting to roll out into Latin America and next year Africa. They are actively building a network of people and companies in other countries that Canadian companies (venture capital firms included) can reach out to, learn from, and work with. I would suggest that companies look to EDC for assistance in building relationships with companies in other countries. “EDC Equity is your investment partner with global reach. We’re here to help. Going global is not easy but we’re here to demystify, to de-risk, and to get you connected.”

Rajiv Pancholy, Chairman and CEO of TenXC Wireless challenged startup companies to think about going global as a strategic imperative, rather than an afterthought. He broke his presentation down into three segments: (1) reasons for going global, (2) what you need to do to go global, (3) the challenges you will face in going global and who you can turn to for help.

Rajiv made an interesting point that in the technology business, there is now clear evidence that the adoption cycle for new ideas and new technologies is significantly shorter in many other parts of the world vs. the more entrenched conservative thinking that permeates through the big customers in North America and Western Europe. “Customers in Asia and the emerging economies will pull you along faster than you ever thought possible.” In a world where there is less and less capital available for technology companies, a quicker path to market and revenue certainly sounds attractive…

Rajiv made it very clear though that “going global” should not be an afterthought. Most startup companies don’t have the human capital and resources to go after multiple markets at the same time so companies should pick and choose carefully. “Going global requires a lot of effort, focus, and staying power. You must have right resources in place. Going global requires a lot of long journeys, a lot of long stays in foreign countries, and dealing with different cultures. You must have people on your team who are willing to pay the price on a sustained basis.” I certainly remember my time as Director of Marketing at a startup technology company — supporting sales teams in Asia Pacific, Europe and North America. Almost all of our resources were devoted to the North American market… I’m amazed at what our remote teams were able to accomplish on their own.  Certainly not an ideal situation…

You also need to rethink your business model. Rajiv referenced management guru C. K. Prahalad and his big warning to North American businesses. To go global, companies need to completely change their business models to properly address the target market. Work from the market backwards rather than relying on your traditional ways of doing business.

Some additional tidbits from Rajiv’s presentation:

• As a young company, you need to understand that when selling to companies in developing countries it is not just your product they are buying. Yes, they want your product and they understand your value proposition but they see you as representative of your company and they are attempting to build a relationship with you. They are hungry for the knowledge behind the company and want to discuss the thought process that went into the product. Reps and agents typically fail in these early stages although they can be helpful later on.
• Patience is a bad word and breeds a sense of complacency. Do not be “patient” to develop your business in another country. If you put in a sustained effort anywhere in the world you will get to your goal sooner rather than later.
• There are obviously some local complexities and it can be hard to know who and what to trust. There are many rumours, assertions, and stereotypes and you need to learn to navigate them. Doing business in other countries is not necessarily that different at the end of the day. Beware of falsehoods, rumours, and innuendos.
• Getting to meet the decision makers is a big issue. When you are representing a small company you typically struggle to get an appointment. You need people who can open doors for you. You also need to project an image to convince customers to trust you with a significant piece of business. TenXC has used what Rajiv calls “force multipliers”: Canadian Trade Commissioners and EDC to help broker introductions. EDC has helped TenXC by “opening doors, giving introductions, speaking on our behalf, facilitating meetings, to extending to us certain financial tools and capabilities to be able to handle that level of business.” EDC invests in organizations and companies so when they make a phone call, they are not making it on behalf of a supplier, they are making it as an investor to the group CFO. EDC can also introduce you to an ecosystem of people who have been part of major transactions and have been vetted.
• Other groups that can help: the Canadian expatriate community all over the world, networking organizations like The Indus Entrepreneurs (TiE), and the ethnic communities here in Canada.

“Don’t be afraid of going global. Yes you’ll have to pay the price, yes it will be arduous, yes it will be physically draining, but it can also be extremely exhilarating and can make success happen a lot faster than you think.”

There were a number of other interesting speakers who also spoke at the event including:

Scott Aldsworth, Vice President and East Coast Regional Director, High Street Partners, Inc.
Peter Crombie, Partner, Emerald Technology Ventures
Robert Genieser, Managing Partner, Vertex Venture Capital
Ajoy Mallik, Global Head, Venture Capital for the Co-Innovation Ecosystem (COIN), TATA Consultancy Services
Jevon Macdonald, Founder, Firestoker.com, (co-Founder of StartupNorth.ca, WirelessNorth.ca, CommunityNorth.ca and StartupIndex.ca)
Rob Lane, CEO, Co-Founder, Overlay.TV
Maggie Fox, CEO, Social Media Group

Hold the date for the next CVCA PD session on “Deal Trends” taking place on February 26th, 2009.

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Originally posted by Georges van Hoegaerden, Managing Director – The Venture Company.

I just came back from a trip to Europe and let me tell you: Belgian chocolate, raw herring from Holland and ficelle from France – nothing is more authentic and delicious.

But few of these travel well or find a large deserving audience in the United States. Much like technology.

The state of the technology industry and the accompanying investment ecosystem in the US are quite a bit more developed than in Europe, 15 years at least.

In the US, roughly $30B per year is poured into early stage companies by some 300 investors in my backyard in Palo Alto, not including Private Equity deals. In contrast, only a handful European early stage VCs exist and the majority of all european investments are late stage investments done by Private Equity firms.

In Europe, early stage VC valuations hover around $1M, compared to $4-7M in the US. As a result desperate european entrepreneurs often default to Angels that show some flexibility, but those investors are often very inexperienced with the technology sector and early stage investing or the combination. They made their money somewhere else. Because of the young history of technology success in Europe, very few european investors (either VC or Angel) have actually had the personal experience of building an early stage technology company from scratch.

To sum it up, european investors (with a few exceptions) take large early equity stakes, provide limited relevant business insight and push those companies to early profitability (even at 250K euro investment levels). Selling a product or a service too hastily, before it is ready to enter a global marketplace delivers NO validation of the business, good or bad. But it is a sure way to slow down its innovation and differentiation.

So, underdeveloped access to quality early stage money makes life of entrepreneurs in Europe quite difficult.

But, let’s assume you passed the bar on all the above and your company is on its way to the United States. No one can stop you in the pursuit of the great early exit opportunities only Silicon Valley can offer.

So here are some things to be aware of:

1/ A cherry, picked by an investor in Europe is not always a cherry in the US. Be sure you understand – or seek advice about the timing differences between continents that attract follow-on investors in the US. Some of that timing has to do with technology, but market timing is even more crucial.

2/ Plan ahead. Allocate a larger fundraising runway than you would in Europe. To US investors foreign companies are yet another risk they need to mitigate. By default you are less attractive than a US company.

3/ Modify your operating plan. Change it from a plan to profitability to a plan to market dominance (which could include profitability but can also have other primary denominations as drivers, such as owning a majority of eye-balls in the consumer space).

4/ Move your headquarters to the US. Without it you’ll find very few US investors interested.

5/ Assuming you get this far, be open to a recap. US investors understand the equilibrium of shareholdings will provide the best business value, not exorbitant ownership of the initial investor achieved through a low initial valuation. But since the US valuation should increase significantly, the initial investors should not lose too much net value, if at all.

6/ Hire a local management team that understands how to perform in a petri-dish that is quite different from Europe.

My final recommendation is to be prepared before you come over and not put your head in the sand, I can give you a long (and still growing) list of foreign companies that were forced to move back.

For larger US VC firms there is a fantastic opportunity to scout for technologists in Europe and fold them into their US investment model before they’ve taken in too much local money. I see technologists in Europe building innovation that is at least as good as the in the US. Remember the most delicious chocolates from Belgium?

But, the worlds largest chocolate factory is Hershey’s located in the US. The name of the game remains matching sufficient technological capability to a fast growing market, in the same way Hershey’s reaches a much larger audience than Belgian chocolates – with a quality that is good enough for most. Market timing, not technology, is key.

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