Thursday, October 26, 2006
Tuesday, October 17, 2006
Technology Buyout Transactions: Let the Games Begin
Golden Gate is a private equity firm with over $2.6 billion under management. It has been driving consolidation in various parts of the software industry through acquisition platforms like Sierra - Aspect(call center software), inFor. Welcome to Canada.
Boardroom Musings 2: Deer in the Headlights
Ordinarily, when someone starts staring at my breasts, I assume that I've spilled something. After all, the girls are getting on in years. There are plenty of newer models out on the market for the lads to admire. So when I found an older gentlemen reviewing the troops during a board meeting recently, I was both flattered and stymied. What to do?
Ignoring the matter evaporated as an option when the man actually began talking to them. Now, this is where I draw the line. My Macguffies are not microphones. Nor are they sentient beings. But I, the only woman in the room, was the only one who seemed to understand this. Dear lord, the rest of the board fell silent as they waited for my chest to answer his question.
I considered my options. I could: (a) as another lawyer once did, smack my chest and yell "Wake up! He's talking to you!", or (b) direct my reply to the crotch of his pants.
In the end, I chose a different path. I offered to prepare a memo with formal advice on the issue and to distribute it after the meeting. I may even add a premium to my bill. After all, the three of us will be working on it together.
Monday, October 16, 2006
Boardroom musings: Sales Pipeline Haiku
This powerpoint slide shows
that your pipeline
across what I had thought
was barren land.
Can it be that Q4 sales,
like the wind
will be limitless?
Or was this pipeline built
not with qualified sales prospects
but with the fragile paper
of business cards
submitted to you for a draw
at your last trade show?
I am tarred
Like an arctic tern
after the Exxon Valdez ran aground.
Who can clean my ruffled feathers?
Sunday, October 15, 2006
VCs: The Myth of the Value Add
I get it. But while I think the points have merit, they are based on an outdated view of what venture capital in Canada is. Which is, pretty much what it's historically been - an asset class built on making long term, illiquid investments in businesses. To succeed in this asset class in Canada, you have to be a generalist. It is not important to understand Web 2.0, just how a Web 2.0 business fits the venture capital model of investment. If you happen upon a VC that has decided to focus on Web 2.0 and has developed his or her own investment thesis for that space, that's serendipity - it should not be an industry expectation.
The concept of venture capital as "value-add investing" has always struck me as marketing spin coined by VCs in more competitive times. It's a nice way of explaining why VCs expect to control your business for a period, and why it won't be too painful for you for you to let them. But why is control an unreasonable or surprising deal point? As a startup, you want their money, and until you manage to derisk your technology/business model/market opportunity, your VCs have no collateral to secure their investment. Some control over your business plan, spending and direction is appropriate; if your VCs are also helpful, that's just gravy.
As in every relationship, there is blame on both sides, and Canada's venture capital industry bears some responsibility for the disgruntled feelings in the startup community. At the height of the high tech boom, VCs recruited team members from outside the industry to help manage capacity. It is fair to say there was an adjustment period:
1. New VC recruits who were plucked from startups themselves often had a tough time adjusting to the role of investor, preferring instead to act as shadow CEOs and micro-managing an investment instead of providing oversight. This is when "hands-on approach" became a negative term.
2. Other newly-minted VCs, who did not have the connections to shoehorn themselves into deal syndicates, ended up saying yes to deals just to get into the game, leading to some breathtakingly quick flameouts (Take Riptide - in retrospect, an unfortunately on-point corporate name).
3. Finally, the sheer volume of venture capital that was available (and the pacing requirements of some funds) made many VCs look into market segments and businesses that simply did not fit venture capital's model. Because of this frenzied activity, there is still a lingering, misguided perception that venture capital is really startup capital that should be available for all new businesses.
Focusing complaints on what were the growing pains of venture capital is ignoring the broader issue: in future, where is Canada's startup capital going to come from? Venture capital in Canada is at a challenging stage. There are some who wonder aloud (after months of quiet whispering) whether it can succeed as a purely Canadian asset class in its current form. So enough, already. Show VCs a little love. Maybe even a disruptive technology or two.
Wednesday, October 11, 2006
Startup Branding: Why Trademark?
Two caveats here: First,this approach is not appropriate for consumer products businesses, who will need to satisfy potential retail channels up front that their product names are protected. Second, none of my clients has had the foresight to coin terms like podcasting or TechCrunch, which were catchy enought to be worth protecting from the get-go.
I understand the need to name your business (and your products) in a way that is meaningful to you, but you need to weigh this against the potential cost and hassle of doing so. I still occasionally suffer from post-traumatic branding disorder because of the branding whimsies of one CEO during the height of the dot-com boom. Back then, branding was really early stage investor relations. Even though we had no revenue, my company needed an eye-catching logo and a snappy name to create pre-IPO buzz. Because we were going to have an IPO within 18 months, even if our business had no revenue...right?
In a three-month period, I spent hundreds of thousands of dollars on search and registration fees creating an international trademark portfolio that: (a) was based on several names from Arthurian legends (p.s., the good ones were already taken), for no particular reason other than the CEO liked King Arthur, (b) added an umlaut to one name to distinguish it in international markets, (c) removed the umlaut because it made trademark searches and registrations inpossible, (d) added ".com" to our trademarks because our competitors did, (e) changed our logo to include multiple colours (like Google), and (e) removed the ".com" because the market was beginning to soften. All before we booked any revenue.
We sold the business to another Company and the trademarks were never heard of again. In the purchase documents, my company's name was spelled three different ways.
If you do have a trademark you wish to protect, register it (go talk to my buddy Jessica Levy at Preston Gates in Seattle or, for Canada, Chris Hale at Blake, Cassels). But don't stop there; protect that expenditure by making sure you use your mark correctly. This means, at a minimum:
–Have a Corporate Standards manual which set out the marks as registered and impose rules for use. Make it available to employees and licensees.
–Set a trade-mark apart from other words (whether by upper case, italics or distinctive typestyle)
–Use your mark as an adjective and not a noun (e.g. Xerox brand photocopiers and not "can I use your Xerox?") or verb ("I Xeroxed a copy for you")
–Give notice of trade-mark ownership ("TM" or "R" )
–Make sure to use the mark as registered
–Do not pluralize trade-marks
–Take action against infringers
Dick Cheney Shops Here
Gieves and Hawkes (of Savile row) has come up with this bizarre take on a classic shoe, calling it the "buckshot patterned brogue." The New York Times has even singled this out as a must-have for men this fall. I don't recommend this for any of you who are currently raising funds; a shoe that says you like missing the mark is just not good for business.
Animation: Cool is King
For the last decade, Sheridan has been turning out the world's leading animators, attracting recruiters from Disney, Pixar, and Dreamworks. Many of those alumni are now returning home with the dream of building their own studios here. The House of Cool has managed to amass its own repertoire of original content while keeping itself relevant to Hollywood. In addition to great artistic vision, they also have developed a unique digital storyboarding process which can lower the time and cost of production of animated films, as well as mobile content , and can improve game development.
Check out their blog, where you can monitor their progress to becoming the next big thing.
Thursday, October 05, 2006
Evan Solomon: Pathway to My Heart
Evan Solomon is a CBC newscaster and author and was the tall drink of water hosting last night's Gala for Pathways to Education. For giving his time, we salute him. He is witty, relatable and can speak in compound-complex sentences. Which means there likely is very little time left to watch him on CBC before he is snatched up by CNN or ABC to become the next Scud Stud. I'm betting he is aiming for the big job in NYC; ever the forward thinker, he has cleverly given his children great, original names (Maizie and Gideon) that will distinguish them from all the little Dashiells and Allegras running around Manhattan's East Side.
Fly, little snowbird, fly.
The Philanthropic Startup: Pathways to Education
Pathways to Education is the best example I've seen of social entrepreneurism. 6 years ago, the high school drop out rate in the Regent Park area of Toronto was 56%. Regent Park is one of the city's poorest areas, comprised of 80% new immigrants. There is no in-district high school in Regent Park, and many students could not afford the bus fare to reach class. Some girls in the area also faced the additional challenge of coming from cultures that did not traditionally support higher education for women.
Pathways was founded with the belief that, with enough seed capital, a mentor and support program could be built to change all this. 6 years later, the drop out rate is 5%, and there are over 100 -supportedPathways students in 2006 alone that are entering university and college.
Pathways is a low profile charity, backed by government, VCs, and large corporations alike. The fund-raising gala, held last night at Hart House, was a low key affair that more closely resembled a gathering of friends than the usual, watch-out-for-Cathy-Nugent's-hair- she's turning-around kind of event. There were no gift bags or elaborate to-dos. The women were well-dressed, but they wore Prada for a higher purpose.
Pathways will roll out nationally to other cities this year and next - watch for it.
Draft VC Term Sheets: They're Just Not That Into You
I don't understand why some VCs believe that providing a draft term sheet is a useful, relationship-building tactic. There are only two ways a draft term sheet can reasonably be interpreted:
1. The investee's valuation expectations are too high and need to be right-sized. (I have never heard a VC say, "Your business is even better than we first thought! We need to increase the pre-money valuation before we close!" )
2. Some of the VC's partners don't support the deal, but he still wants to hedge his bets that things might work out after all.
Think about how these messages would be received in the dating world (investing is, after all, the pursuit of financial romance). Has having "the talk" with a date to set expectations about the future of your relationship ever worked out for you? (Did you ever feel the need to have "the talk" when everything was progressing fine?) Did your girlfriends ever appreciate it when you explained that you needed more time before you could fully commit?
Some women may overlook this kind of behaviour by rationalizing that it is simply your fear of commitment, poor darling, that makes you do such things. But I don't think you'll get a relationship mulligan from entrepreneurs. They're mostly men.
Wednesday, October 04, 2006
Technology Buyouts: Can they revive Canada's technology sector?
A technology buyout allows a undervalued or thinly traded publicly-traded technology company (often dubbed "fallen angels") to leverage its assets to raise enough capital to buy out existing stakeholders and take the company private. Once out of the public arena, the Company can cut costs (public company reporting requirements and compliance costs are generally estimated to be US $1 million - $3 million a year). With meeting quarterly targets no longer a focus, management then can focus on long-term value creation (new product development, strategic transformation). Management is also awarded a far more significant stake in the private company - 20% is an oft-cited number - than it would have enjoyed in the public markets.
A private software company with significant financial sponsorship also can drive much-needed consolidation for fragmented market segments by acquiring smaller players. SSA, Infor and Concerto are great examples of how private equity firms can use buyouts to drive consolidation.
How would technology buyouts play out in Canada? The major US players - Silver Lake, Sumit Partners, General Atlantic, for example - likely would find the opportunities here too small. Until this spring, I had been watching Cybermation, a Toronto-based provider of IT Workload Automation software, as a possible candidate for a consolidation play. A private company in an exploding space that is populated with small, venture backed players, I figured some public company would roll it into a larger strategy. I was only half right; in late spring CA bought the whole thing.
Next month, Insight is hosting a conference here in Toronto about private equity in general and buyouts in particular. Unless somethign changes, I'm thinking it's more of a breakfast get-together than a two-day event.
What Makes a Good VC Investment
I've developed my own shorthand list for what won't make the grade with a VC. I look forward to your comments:
You are NOT a good candidate for VC investment if:
- Adding the adjective "artisanal" to your product description would increase margin.
- Success is dependent on securing large channel partners. Channel partners are like nightclub bouncers. They aren't going to let you in unless you deal with them in a generous fashion. This strategy (if successful) most often leads to a licensing deal or outright acquisition by a channel partner early on, before venture-capital level returns are likely.
- Your patents can be characterized as defensive. Having a patent, or a provisional patent, is no longer enough. The quality of your patents , and your patent strategy, are becoming table stakes in even the earliest of technology deals.
- Your CEO waxes his eyebrows. Waxing= trend follower. Plus, it's just weird. Unibrow=power. Ask Leonid Brezhnev.
Tuesday, October 03, 2006
My favourite part of fall has arrived: candy corn is back on the market. I always say a little prayer of thanks to the gods of free trade for making candy corn available here in Canada. Its blend of marshmallow, sugar and corn syrup makes candy corn both irrestistible and revolting at the same time. I crave it, even though I know it will make me nauseous. Candy corn is the hot dog of autumn.
Welcome, my waxen friend!
Monday, October 02, 2006
The Startup Board of Directors
For a variety of reasons, many companies find their independent directors using the "some guy" approach - they choose some guy their investor knows without much consideration. This is not necessarily a bad thing, but my goal on this blog is to provide tools for you. Here is a subset of best practices that the Society of Corporate Secretaries and Governance Professionals recommends to public companies:
- Identifying the Right Candidate: Start by inventorying the skill set of your current slate of directors, including their areas of expertise (financial, technology marketing). Decide what skills and experience are required to complement the current board’s skills. While “access point to customers” is not a skill, many early stage boards select independent directors who can assist with this business milestone.
- Agree on general attributes any candidate should have. Typical ones are: Experience, expertise, and willingness to devote the necessary time, commitment to the company’s vision and purpose.
- Practical issues : Is the candidate available for regularly scheduled board meetings? One of my clients recruited a very high profile director who had terrific insights into the business and the market it addressed. Unfortunately, he attended the majority of meetings telephonically, and the company's ability to tap into his expertise became limited.
- Is the candidate serving on the board of a competitor? While Canadian law does not prohibit director “interlocks” between competing companies, it nonetheless raises appearance of conflict, impropriety, and should be avoided. This is an ongoing issue that boards must monitor; in markets that are fragmented, it is more likely that some players will become competitors as they morph their business models to survive consolidation and shakeout.
Orientation. Once the new director is on board, the company must ensure that he/she given orientation. At a minimum, this should include briefing materials on company’s governance structure, D&O insurance, and financial statements. Even "some guy" can't do the job if he/she does not understand the rights your investors have negotiated.
Startup Grooming: Take a Page from IBM's book
The rules for nose hair are inflexible and fixed: when it is protruding from your nostrils, it has to be cut. Period. There is no "fashionable length" for nose hair; you cannot develop your own signature nose hair style. A man who cannot manage his nose hairs is telling the world he cannot deliver venture capital-sized returns.
The same is true of the software you develop. You can't just let it hang out there without some definition and structure. From day 1, you must track and monitor all third party software that is being incorporated into product. Nothing kills your credibility with investors faster than being unable to demonstrate that you have chain of title to all of your product.
It's not so great from a customer perspective, either, when you have to delay launch because you are still negotiating a resale license from the supplier of that piece of trialware that your engineers threw in to the product.
To spot-audit your development work, take a page from IBM's book: have someone run a search for the letter “C” through your source code. Any copyright notices for third party software that turn up can then be traced and dealt with – either by scrubbing the third party materials from the code or ensuring you have the correct license for use in product.