CVCA Blog
This is Roger Martin, reporting from Mars
Originally posted on 25 Nov 2008
http://www.wellingtonfund.com/blog/2008/11/25/this-is-roger-martin-reporting-from-mars/
By Mark McQueen
I have little doubt that Roger Martin’s brain is bigger than mine. I’ll bet that his dog, by sheer osmosis, probably has a higher IQ than I do. But when it comes to his findings about venture capital in the Task Force’s Seventh Annual Report on Ontario’s Competitiveness and Prosperity, he has definitely mailed it in from Mars. The planet, not the Parthenon of concrete at University and College in Toronto. He is so wrong that you have to wonder if Dr. Martin was taken hostage a year ago and some anti-Entrepreneur prankster falsely filed the Report under his name.
Here are some choice quotes from his Report:
” …we continue to encourage the provincial government to follow through on its plans for ending special treatment for Labour-Sponsored Venture Funds, as the evidence is clear that such approaches reduce the quality of venture capital - a more important problem than quantity of venture capital.”(p. 17)
“…we continue to conclude that Ontario’s and Canada’s key challenge for venture capital is the quality of investments we are making.”(p.45)
“..to fund broader reductions in taxes on business investment, eliminating the special tax treatment for LSIF’s is a first excellent step.”(p. 45)
“…venture capital policy should be focused on efforts to raise its quality through higher returns, not its quantity.”(p.61).
For the life of me, I’ve yet to meet an entrepreneur who would agree that there is too much venture capital available in Ontario. Ontario’s share of national VC dollars has declined for five consecutive years, on both an absolute and relative basis according to statistics. Quebec received more VC dollars in 2007 than Ontario, for example, despite having a far smaller population.
Let’s be frank, when Dr. Martin criticizes the “quality” of VC investments in this province, he’s really speaking about the quality of our entrepreneurs. VCs might pull the investment trigger and sit on the Board of Directors, but the CEO, CFO, CTO and VP Sales are the folks who run the companies on an hour to hour basis. Perhaps he thinks you all would benefit from an upgrade at the $85k U of T EMBA program.
On the topic of Labour Sponsored funds, I won’t fail point out that they’ve all outperformed the investment performance of CitiBank, Goldman Sachs, RBS, UBS, Merrill Lynch, CIBC, etc for the past several years. I own both Goldman and an LSIF and I know all too well. But that’s too easy a comparitor.
When Dr. Martin speaks about the poor quality of venture capital investments in Ontario, and LSIF’s in particular, consider these facts:
- The 2008 Deal of the Year award for venture capital went to Platespin Ltd. LSIF’s Covington and VentureLink backed the story, along with CastleHill Ventures and Four Quarters. Covington first invested in PlateSpin Ltd. in March 2003 and upon exit in 2008, the investment had generated an internal rate of return (IRR) of 117% and a multiple of 18 times original investment.
- Richard L‟Abbe, former President and CEO of Med-Eng Systems, was the recipient of CVCA’s 15th Annual “Entrepreneur of the Year Award” in May 2008. An investment managed by LSIF GrowthWorks came into Med-Eng in 1997 in the amount of $2 million. Med-Eng’s revenue grew to $261 million by 2006 and the company was acquired in 2007 for $650 million.
- The GrowthWorks Canadian Fund won the 2007 Deal of the Year in the venture capital category for its investment in Galleon Energy Inc. The investment in December 2002 generated an internal rate of return (IRR) of 134% and a multiple of 7.6 times investment. Growthworks was “one of Galleon Energy’s largest and most active investors through multiple rounds”. Galleon is a technically oriented high growth oil and gas company with focused operations in the Peace River area of Alberta. Galleon commenced operations in October 2003 and has had significant success in acquiring undeveloped acreage, drilling and purchasing production.
- Dave Caputo, Co-founder, President and CEO of Sandvine, was the recipient of CVCA’s 14th Annual ‘Entrepreneur of the Year Award’ in 2007. In March 2006, Sandvine was listed on London’s AIM Exchange, raising $37 million and reaching a market cap of over $230 million at first day of closing. Sandvine was listed on the TSX in October 2006, raising a further $13 million. As of May 28, 2007, Sandvine (TSX: SVC) had a market cap of approximately $580 million, the highest market cap of any Canadian VC-backed IT company that has gone public since 2000. Celtic House Venture Partners led Sandvine’s $20 million seed financing in September 2001 and participated in each subsequent funding round. The other venture investors included BDC Venture Capital, LSIF Vengrowth Capital Partners, and Tech Capital Partners in Waterloo.
- The LSIF BC Advantage Funds won the 2006 Deal of the Year award for the venture capital category award for its investment in Aspreva Pharmaceuticals. The investment in September 2003 generated an internal rate of return (IRR) of 272% and a multiple of 23.4 times investment. Jim Heppell, President, of BC Advantage Funds, said at the time: “We consider Aspreva to be the poster child for our model of investing early and maximizing returns by applying the expertise of our Advantage Mentors”. Aspreva’s vision is to change the treatment landscape for people living with less common diseases by increasing the pool of evidence-based medicines available for these patients. In early 2003, Advantage led Aspreva’s seed round of financing at a pre-money valuation of $5 million. In October of that year, Aspreva signed a major partnership agreement with F. Hoffmann-La Roche for the development of CellCept in autoimmune diseases. In just 18 months, Aspreva initiated three Phase III clinical trials in three different autoimmune diseases. In March 2004, it closed a $76 million initial venture financing, one of the largest Series A financings reported in North America. One year later, Aspreva raised $112 million and became a publicly traded company is listed on the Nasdaq National Market and the Toronto Stock Exchange. At the time of the award, Aspreva had over 100 employees, quarterly royalty revenues of over $50 million and a market capitalization of approximately $1 billion.
- The 13th annual Entrepreneur of the Year Award went to Teresa Cascioli, Chair and Chief Executive Officer of Lakeport Brewing Income Fund. Using angel financing to take Lakeport Brewing out of bankruptcy protection, Ms. Cascioli was able to lead the company from a struggling, underutilized operation to the 3rd largest brewer in Ontario. Lakeport’s market share increased from just over 1 per cent in 2000 to approximately 11 per cent to March 31 of this year, and two of the brewery’s brands are on The Beer Store’s Top 10 list. Prior to its acquisition, Lakeport Brewing Income Fund was an Ontario-based brewery focused on producing value-priced quality beer for the Ontario take-home market. LSIF VenGrowth Private Equity Partners backed Lakeport’s management buyout in 2004. With VenGrowth’s support, the formerly insolvent Lakeport went public prior to its highly-valued takeout by Labatts.
I could go on, but it’s time for bed.
Dr. Martin, the facts are these. The past three “Entrepreneurs of the Year” had LSIF venture capital backing. The last three “Deals of the Year” for Canada’s venture capital industry had LSIF backing, with two of the three firms seeing Labour Sponsored Funds lead their financing rounds.
Dr. Martin, you must not have known this when you reported on page 17 that “the evidence is clear that [LSIF] approaches reduce the quality of venture capital - a more important problem than quantity of venture capital”. I respectfully suggest you put out an erratum version of the Report, just as any of your MBA students would be forced to do if their Mid Term Paper was found to be as flawed as the findings in your Report of earlier today.
An “F”‘ grade will have to do in the interim.
MRM
(disclosure - these are my owns views and not necessarily those of the CVCA or its membership)
This is Roger Martin, reporting from Mars
This is Roger Martin, reporting from Mars
This is Roger Martin, reporting from Mars
This is Roger Martin, reporting from Mars
The New Funding Gap for Canadian Entrepreneurs
By Suzanne Dingwall
The newly-renamed National Angel Capital Association has announced its first Co-Investment Summit for November 19 (was there really any confusion about what the National Angel Organization did? I asked my brother the priest, and he said his people were clear on the matter). The event is designed “to bridge even more of the funding gap faced by seed- and early-stage enterprises in Canada.”
Two points here: first, the NCAO is looking for some companies to pitch - go check the site if you are interested. Second - and I’m seguing away from the NCAO to another matter altogether - it’s time we stopped attaching the phrase “funding gap” to early stage ventures.
In a relative world, the funding gap for research and commericalization is a teeny tiny little thing. Like the gap between Madonna’s front teeth, it’s not as charming as her publicists might want you to believe, but it’s not as hideous as the gap you’ll see in any hockey player’s mouth, either.
It seems to me that, of the available government capital, most of it has been allocated to research and commercialization. If we’re going to accurately speak of funding gaps and the need for urgent action, then public discourse in Canada needs to turn to later stage ventures.
We’ve all seen the “Valley of Death” charts that many advocates for government funding used to great effect 4 years ago. Now, however, those charts look much different. The new occupants of the Valley of Death are companies that angels and VCs have funded, that now find themselves with increasingly limited access to anything other than small bridge $$ from their current investors.
What’s the likely size of this gap? According to the CVCA, in Canada 412 companies received VC funding in 2007. If you apply the “angels do 30-40% more deals than VCs” maxim, that means approximately 1200 received angel funding during the same period. Applying the 18-24 month cash runway rule of investing, that means that most of these are now seeking follow-on funding in a cash desert.
I wish Paul Kedrosky was here – he could draw me a nifty graph to illustrate the point.
Here are the questions we need to ask ourselves: Why is there no government policy that focuses on job retention/creation for this sector? What good is an innovation strategy that feeds academic researchers while it starves the current generation of entrepreneurs?
Disclaimer: Let’s not get sidetracked by the debate over whether government support is the right way to foster innovation and entrepreneurship. The reality is that it is, in the near term, the predominant support available. Shouldn’t some of that near-term support be directed to entrepreneurs who have proven they can commercialize a product and build a start-up?
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The New Funding Gap for Canadian Entrepreneurs
The New Funding Gap for Canadian Entrepreneurs
Do or Die: Global Customers, Investors and Acquirers
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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Do or Die: Global Customers, Investors and Acquirers
Government Investment in Venture Capital: Should There Be Rules?
By Suzanne Dingwall
Another election is over, which means the planning for the next federal budget has begun. Entrepreneurs should be taking this opportunity to place themselves at the forefront of the innovation debate, and grabbing some of the money that the government keeps allocating to research and venture capital.
Before we do that, however, we should ask ourselves whether current government initiatives can be shaped or adjusted to provide some near term relief. Take the money provided by government (through “fund of funds” programs) to venture capital funds to disburse to entrepreneurs: should there be some checks and balances on how it’s spent?
This is not an insignificant issue. Provincial “funds of funds” such as Ontario’s Technology Innovation Fund, Alberta’s Enterprise Corporation, and the like have been allocated hundreds of millions of taxpayer dollars in the aggregate to reinvest in venture capital funds. In addition, in February, the federal government also gave the BDC another $75 million in fresh capital to invest directly in high growth companies (those of you who missed that lifeline should be talking to them). Should government-provided venture capital be treated differently than money provided to VCs from private sources?
If the cycles of the last ten years have taught us anything, it’s that economic recession can lead to aggressive pricing and investing terms from venture capital investors. Down round valuations, ratchets and protective mechanisms – all the old standbys. I have even heard that the multiple liquidation preference (where an investor must get 3-4x his investment back before any other shareholder receives proceeds from a company sale) is back in town. Is it fair for those remaining angels and VCs to take advantage of market conditions? Of course. But is it appropriate to allow them to do so when the funds they are investing came from us, the taxpayers? I don’t think so.
How are Canadian entrepreneurs protected from being goudged? There needs to be some kind of oversight mechanism which will allow government to pressure VC recipients to behave in a reasonable fashion, above the market frenzy. To be specific: no multiple liquidation preferences. No usurious interest rates. And while we’re at it: if the purpose underlying these funds is to foster strong homegrown investment funds, why not insist that VCs who receive government funds embark on mandatory education, so that there is a minimum standard of financial, operational and governance competency? Surely the government entities disbursing money can insist on some strings attached to their commitments.
No question, these kinds of strings may impact the IRR of any VC who takes government money. But perhaps the best way for VCs to look at this funding is as a taxpayer bridge loan. We taxpayers don’t need to see a 30% IRR; we’re just trying to bridge VCs to the next phase in the cycle. If we get our money back, that will be perfectly fine. In the near term, however, we’ll also have kept current entrepreneurs who’ve already proven themselves in the game, with a meaningful stake in the businesses they’ve built.
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Government Investment in Venture Capital: Should There Be Rules?
Government Investment in Venture Capital: Should There Be Rules?
Canadian Start-Ups: Where’s Our Bailout?
By Suzanne Dingwall
Originally posted at Venture Law Lines
This week, the Canadian Venture Capital Association issued a call to federal political parties to support technology commercialization programs. I don’t know exactly what “issuing a call” entails, but it seems to me that the entrepreneurial community had better get on board with its own call right away, and that call should be: “We’d like a piece of that action, too, please.”
Although Canadian entrepreneurs have built a grassroots community that other regions can only dream about, we’ve overlooked bringing into the fold those best-equipped to provide relief from the current venture capital drought – federal policy makers. We complain, but we don’t necessarily engage. And this oversight has allowed the venture capital community to co-opt the current funding crisis as exclusively theirs. The result? Government initiatives that, for the most part, propose to stimulate innovation by propping up the venture capital community first, leaving entrepreneurs to rely on trickle down benefits when those funds invest. This needs to change.
To be clear, I agree with the CVCA’s proposals for shoring up venture capital. There is no question that the venture capital industry needs help; we will not succeed as an innovation nation unless we have a strong venture capital class. I agree that the government must create a federal fund of funds to subsidize the venture capital industry. But this alone won’t bail out my clients - high tech companies that have hired, have built product, and are now starved for growth capital.
Trickle-down economics take time to have an effect, and it’s no different here. It will take time for any government money that is earmarked today for a fund of funds investing to churn through the economy to businesses. Before an entrepreneur can see relief, that money has to: (a) churn from the government to a fund of funds that the government forms, then staffs with a team (in Ontario, this took nearly 8 months from announcement to closing); (b) be deployed by the fund of funds to one or more VCs (think another 6-18 months); and (c) be invested by the VC in a company (think another 6-12 months). In other words, any money earmarked for the venture capital community today is perhaps 1.5 to 2 years from making its way into the hands of an entrepreneur.
Entrepreneurs need a near-term bailout now. I can hear the groans from Bay Street at the idea of any initiative that would create a government portfolio of venture-capital like investments, and I don’t disagree with the sentiment. But this seems to me the lesser of all evils, given the opportunity cost of waiting for trickle-down relief. Can we afford to lose another innovation cycle by starving the entrepreneurs out there today?
So, grass-roots community: it’s time to find our government voice. Let’s say something, and say it soon. If there are initiatives afoot, let’s be afoot more loudly. Maybe it’s even time we asked for our own government funding, like the National Angel Association and others have received from the MRI, to create our own policy watchdog network.
But what we cannot do is rely on organizations for other industries to carry the day for us. Drafting only works if: (a) you’re on a bicycle, and (b) the rider in front of you is headed in the same direction.
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