Montreal Start Up

We have been very busy over the past weeks trying to help close follow-on financing for some of our companies. All in all they seem to be have pretty successful and hopefully we will be able to make some announcements soon.

We have often had the debate about how much time is needed to raise your first follow-on round. The average time quoted is between 3 and 4 months – we have seen a range of 30 days to 7 months.

30 days was based pretty much on doing an internal round and letting regular co-investors into the deal – this is the only way it’s going to be that quick.

Those raises that have taken 5 months or longer are probably because of one of two reasons:

A) The business had not achieved it’s significant milestones (showed uptake / traction) in the time frame it expected.

B) The market was moving very quickly and the business hadn’t absorbed and reacted to the changes quickly enough.

So how do you pull yourself out of the hole in these situations ?

In the case of A) failing to hit milestones you have two options:

One option requires you to explain the reasoning behind the failure to hit anticipated milestones, explain how you have adjusted things to achieve the milestones and raise a small bridge round to give you the time to hit the (revised) milestone.

The second option requires you to redefine your milestone retrospectively – showing that you had achieved a milestone (but not the original one) with the money you were given and that you are now raising a round to enable you to prove uptake / traction.

My recommendation is to choose the option that is closest to the truth. Sometimes (option 1) your lack of experience / good advice means that you just don’t execute well enough – in this case you need to show investors the extent of learning your experience has provided and hope that they still have faith in you. Sometimes (option 2) the milestone you originally set becomes irrelevant and hitting another milestone is genuinely more important.

In the case of B) not evolving your business quickly enough – this nearly always comes down to either a failure to execute (see above) or more often an unwillingness to listen to the advice of others.

One of the hardest things to do as an entrepreneur is to be able to have your head down focused on execution but at the same time be aware of everything that is happening around you. Really listening to external voices (advisors, mentors, investors) is probably the best way to keep a balanced view of where your offering sits in the overall eco-system. If everyone is telling you that the market is changing, then you need to considering changing too.

In some cases this just means acknowledging the shift in the market as part of your pitch and highlighting how these shifts might affect your business. In other cases it may mean that the product (or product development roadmap) may need to be changed to take account of the market shifts.

In either case you need to show new investors that you have the ability to evolve your business quickly in the future and show to current investors that you are now more open and willing to take input and advice – and hope that they still have faith in you.

Work hard to maintain the faith of your existing investors – because without that, it’s going to be much hard to raise follow-on financing if (when) something (inevitably) doesn’t go to plan.

I’ve seen so many pitches that start with "The (insert a given industry) is broken". I hate pitches that start like that – industries don’t break, they evolve. And the venture capital industry is no different!

One of the reasons that experienced entrepreneurs often make decent VC’s is that they understand the need to evolve their venture capital business in the same way that they evolved their previous businesses.

Mark Skapinker and the Brightspark team have recognised this and decided to evolve into an ideas lab. Selfishly, I think this great because it means we have less competition, but i’m sure that soon enough some other "entrepreneur turned investor" will spot the opportunity that their departure creates – there’s nothing like competition to keep you on your toes.(Hey Mark – if i’m ever given the opportunity to invest in one of your ideas please make sure the pitch deck doesn’t start of "the (industry) is broken" )

Rick Segal and the JLA/Blackberry Fund team have also evolved with the introduction of their Jump Start program. As the industry evolves opportunities also open up for new models such as those of the Y-Combi"Nations". The Boot Up Labs guys in Vancouver and Extreme Ventures in Toronto have been able to position themselves favourably in this evolving world – and to some extent so have we at MSU. But even in the past year we have felt the need to evolve our strategies twice and there is yet another twist in the works as we speak.

Any under-grad marketing student knows that a problem in a market is actually called an opportunity, but it’s a smart entrepreneur that can work out how to make money out of that opportunity.

MSU closed its first seed stage fund a little over a year ago so I thought I’d do a quick wrap up of how our first year went. 

1. The initial fund was $3M and we said we wanted between $5-$10M. As we raised another $2M this fall, I’m calling this one despite being on the low end of our target.
2. We said we were going to co-invest alongside Angels. We’ve got Angels involved in about half our deals, so I’m calling this one as well even though we need to improve upon it.
3. We were aiming to do at least eight deals in 2008. Well, we did eight and another two are due to close shortly, so we’re good here as well. By the way, not all the investments have been announced yet, but some of you may have heard about the latest one.

So we’re three for three in 2008! Of course, investing the money is the easy part, now we need to help those companies grow and raise their next round of funding. While we still have money to invest, the bulk of our time in the next six months will be spent on our existing portfolio companies rather than looking for new investments. 2009 is shaping up to be a lot of fun!

Je suis à Boston cette semaine. Laissez-moi vous dire que, mis à part les trois fans du Canadien que nous étions, ça ne fêtait pas trop dans le bar ce soir. Go Habs Go!

On dirait que quelqu’un chez BusinessWeek lit mes posts

Pour ceux qui l’auraient oublié, mardi prochain aura lieu le prochain Tech Entrepreneurs’ Breakfast, un évènement incontournable pour ceux et celles qui cherchent à démarrer leur entreprise ou qui veulent travailler pour une entreprise en démarrage. C’est très informel et tous sont le bienvenu.

Après une pause en juin, DemoCampMontréal est de retour. Notez que la date a changé. Pour ceux qui ne connaissent pas, c’est un mélange sympa de geeks, d’entrepreneurs et de visionnaires. Certains veulent changer le monde, d’autres faire fortune, mais tous sont passionnés et intéressés à jaser de leurs projets.

Over the past 12 months there has been a marked change in the way Venture Capital in Quebec is being managed. A number of the previously big players such as “the Caisse” and the “FTQ” have chosen to pull out of direct investment in start-up’s and now instead invest in professionally manged VC funds such as ID Capital, Brightspark and Garage Ventures.

The money flowing into these funds requires investing and once invested requires ongoing management by the Partners at these funds. The net result tends to be one where the average size of an investment increases – “au Quebec” in 2006 the average VC investment rose to $3.4M from 2005’s $2.1M. A longer term problem that can occur, particularly if Angel Investor activity is low, is that fewer new ideas and entrepreneurs are given the chance to grow – some evidence of this can be seen from the fact that almost 75% of Quebec investment in 2006 was made as a “follow-on” funding compared to 68% in 2005.

The VC’s are in somewhat or a lose-lose situation – they don’t have the resources to make many smaller investments – but if they don’t get new companies, entrepreneurs and ideas coming through then they are not going to have an opportunity to make many larger investments.

There have been some interesting initiatives in other parts of the world. I particularly like the Early Growth Funds that the UK Government launched and New Zealand’s Seed Co-Investment Fund. Both funds are manged by professional fund mangers and target businesses seeking between £50,000 ($NZ50,000) and £250,000 ($NZ250,000) of equity. Interestingly though, in both cases all investments must be made, on a 1:1 basis, alongside funds provided by Angel Investors.

Given the number of exciting ideas and capable individuals that are coming to the surface as a result of initiatives such as DemoCamp, BarCamp, Tech Breakfast etc. and the resulting demand for seed level funding, MSU is now working with local entrepreneurs, Angels, VC’s and government bodies to see whether this type of fund structure, along with support and advice from experienced Angel entrepreneurs, might be feasible in Montreal.