Tuesday, March 31, 2009

The Return Of Heavyweight Entrepreneurs, Part II

Vince Kadar has earned his start-up stripes through just about every stage of the high tech boom, starting with Ottawa's Crosskeys in the late 1990s, then on to Saraide/Infospace and Taral Networks (now Airwide Solutions). These days he can be found at the helm of Ottawa's Telepin Software, a thriving mobile financial platform. In January, Telepin was named one of Red Herring's Top 100 Global companies, and has continued to build momentum off the VC buzz grid.

Another example of the growing group of those entrepreneurs who, after one or two highly successful rounds, have re-entered the start-up scene in Canada.

Wednesday, March 25, 2009

Ont. Gov't As A VC: In with a Whimper, Not a Bang

As budget day approaches, the usual flurry of press releases is trickling out, including one in which the Ontario's Fund of Funds (the OVCF) at long last announces an investment in a investment fund. You can read Mark McQueen's take on it over here.

The principals behind Georgian Capital are the former operators of DWL, a Toronto software firm that was backed by local VCs and New York's Insight Venture Partners. Mark speculates that Georgian Capital may also be receiving backing from Insight in the future, (welcome news; Insight has been a long time shopper here in Canada - in Eftia, Airborne, Platespin among others), in which case OVCF's commitment to invest "up to $15 million" may be one that never closes, unless Insight or some other LPs also invests in Georgian. No reason to get too excited, although the fact that Georgian Capital has now leased out space in a Rosedale office building (Patachou croissant, anyone?) likely means it is here to stay, regardless.

The issue I have with all of this is about the press releases which OVCF has not issued. As Mark points out, those of us in the industry are well aware of the rumoured deals being considered by OVCF. (Ordinarily, the fund of funds world is a private one whose managers operate outside of the public disclosure light. Which funds they support, and the terms of their investments, are rarely announced.)

Many private FOFs are sitting out the current market, and in one sense, it's hard to fault OVCF's managers for taking the same prudent approach as they appear to be doing. But this is not a private fund of funds, and the Ontario government did not form it for the sole purpose of generating capital gains. The OVCF exists to support the Ontario venture capital industry and to create Ontario jobs. Don't listen to me - check out John Wikinson's 2007 press release if you're uncertain.

Given the mandate of the OVCF, is waiting out the market appropriate? And when our tax dollars are being managed, should there not be greater transparency?

Why should we care? In the current market, with few options for limited partners, the OVCF in effect holds a monopoly over the venture capital industry in Ontario and, in turn, over the future of Ontario's venture-backed companies. The decisions OVCF's managers make in the near term will determine whether any local venture capital funds survive, and who will receive the lion's share of the profits resulting from any Ontario innovation.

If the majority of OVCF funds go to foreign VCs, then investing in Ontario's future becomes a one-cycle event. The amount of capital gains that recycles into our economy from successful start-ups will be significantly diminished. If that is a decision that is being made by OVCF, we are entitled to understand why it's the right tradeoff for Ontario.(Me, I think it's a question of proportion - equal parts local and foreign, in case you're asking.)

Of course, announcing investments in US funds just before delivering a budget would not be the most popular public relations move by a government. But was this press release an improvement? It underscores the fact that, more than a year after our tax dollars were handed over to OVCF's managers, the chance of any Ontario company receiving funds is likely still months away. (Investment funds still need to be deployed to VCS before they can trickle down to investees.) Which is perhaps why John Wilkinson has created the recently announced investment matching program for "qualified" investors.

There needs to be some kind of oversight or audit of this kind of government investing activity - call it an ombudsmen function if you want to make it catchy, I don't care. But there is clearly a misalignment between public policy and private sector implementation of that policy and the two need to be reconciled. I am one of those who believes that in the current economy, careful government support of the venture ecosystem is absolutely necessary. How that support is provided needs to be monitored and adjusted.

Monday, March 23, 2009

Has Greenmail Come to Bridgewater Systems?

Since last fall, Ottawa's Bridgewater Systems(or, at the least, some of its stakeholders) has been resisting the advances of New York hedge fund Crescendo Partners. In the current impaired market, where some companies are trading below book value, who wouldn't?

Still, with stakeholders that include strategic investors (Alcatel-Lucent) and VCs, there are bound to be some investors whose own business agenda would favour near term liquidity, even if it comes at an artificially low price. How does a company best keep these investors from siding with the proposed hostile acquirors?

By buying back their shares (and their votes) before an acquiror can, which is what Bridgewater intends to do through the normal course issuer bid it has launched to purchase up to 5% of the company's current float. While the buyback offer has been extended to all shareholders, this move is often made to clear out those who may cause problems at any shareholders meeting, such as the one requisitioned by Crescendo for later this spring.

Do lingering VCs and strategic investors, who do not liquidate all of their holdings when a company goes public, maintain a disproportionately large say over the business post-IPO, and/or increase the need for share buybacks? It does seem to be one of the challenges inherent in becoming a publicly-traded microcap or small cap while still in early growth mode.

In California, the term "greenmail" has been revived by pundits to describe efforts in the current market by founders and VCS to force a company (or allied company or individual) to buy back their stakes. There's nothing illegal about greenmail in general, or VC/founder greenmail in particular. But it is an important dynamic for boards to factor into their own strategy for dealing with a predatory market, where hedge funds are looking to buy into solid, undervalued opportunities.

Sunday, March 22, 2009

The Return of Canada's Heavyweight Entrepreneurs

One of the key characteristics of a true innovation economy is the rise of the serial entrepreneur. Which is why it's good news to learn that the founders of two of Canada's most successful start-ups in recent years have quietly re-entered the high tech world. Jim Hjartarson, ex founder of Cadence Design and Catena Networks (sold to Ciena in 2004 for $480 M in stock, or 2.5x the $192 million invested by VCs), has worked his magic and transformed OneChip Photonics into a business that last week announced a raise of US $19.2 million from BDC, Growthworks and Californa's Morgenthaler Ventures.

In Toronto, Workbrain's David Ossip has rolled out his latest venture,Dayforce, a workforce performance management platform. Stay tuned.

Thursday, March 19, 2009

Ontario Government Announces New "Emerging Technologies Fund"

I am writing this at the edge of the Grand Canyon, which is as good a place as any for discussing this morning's press release from the Ontario Ministry of Research and Innovation. The Ministry has thrown a lifeline to many of my clients,but it looks like in so doing it may have pushed local venture capital off the abyss.

The Ministry, which has proved itself a tremendous friend of the researcher (just take a look at the millions that have been pledged in support of innovation and university research), today turned its seductive charms to entrepreneurs, announcing that, starting this July, it will match dollar-for-dollar any investment made by "qualified" VCs or private sector investors in a green tech/digital media/IT business wth a significant business base in Ontario. John Wilkinson has never looked so handsome to me and my clients.

What the Ministry clearly has also done is taken a step away from any support for local venture capital. As Mark McQueen notes, there was no consultation by the Ministry with local VCs. Some speculate that this is because there is a rising belief at the Ministry that Venture Capital as an asset class in Canada cannot success, and therefore the best option is to use a matching program to attract foreign investment. I hope that's not the case; if so, I'd like access to the secret list of foreign investors who have indicated that they woud invest here (or anywhere) in the current economic clime.

The details (which I'm betting have not been yet hammered out) have to navigate a minefield of issues. For example, who is a "qualified" VC? Are angels eligible for matching money, and if so, what attributes must an angel have? Some of the most successful angel deals I have been involved in were led by angels who do not participate in the NAO , or local angel groups - would they be excluded from matching money? How does this initiative line up with the thinking of the Ontario Securities Commission on exempt trades by accredited investors and friends and family?

Whether this is a stopgap measure by John Wilkinson, or a first step into a new kind of government investing, these details are critical. An inclusive matching program could mean great things in the near term. A limited one could effectively create yet another cartel of local investors. Watch carefully.

Monday, March 09, 2009

Government Funding: SDTC delivers $53 million to companies, including start-ups

The primary source of growth capital from the federal government these days (other than the BDC's loan programs)remains Sustainable Technology Development Canada,which last week announced $53 million in funding for 16 different projects. Among the grant recipients is our client Vive Nano, who successfully worked with customers and development partners to put together a project proposal.

Take a look at the grant proposal package when you have a moment and ask yourself whether there is a client/partner initiative that could qualify.

Thursday, March 05, 2009

The Perils of Being a Start-Up Hilton

Recently I spent time on the receiving end of a telephone rant by a U.S. investor. The reason? Yet another mention in Valleywag of the late-night escapades of one of his investees. The entrepreneur in question has been spending noticeable amounts of time at industry conferences and camps, and the attendant after-parties. As the investor said, “I invested in a technology and a business, not in the building of [x’s] personal brand.”

Since the dot-com boom, the line between business promotion and self-promotion has been growing more and more blurry, thanks to the emergence of the business of being a celebrity. Tech Geek Celebrities were a particular subspecies, consisting of dot-com founders who had cashed out to extraordinary returns. Minus their companies, they sought to remain relevant to the start-up community by becoming tech pundits and/or tech partiers.

Now it seems that Tech Geek Celebrity is no longer a term, it’s a career aspiration. More and more founders seem to be spending significant amounts of time at community and industry events, on twitter, on blogs and podcasts. For investors, this raises the question, how much is too much?

There are valid reasons for raising visibility. If your company is consumer-focussed, or if it is truly disruptive, the old saw is that spending time at conferences is the way to generate buzz and get early influencers on board. But some investors believe much of this “marketing” has little to do with advancing the business. “Either it’s viral or it’s not. 5 Trips to the Valley won’t make it so.”

What it will do, some investors gripe, is add to a founder's personal rolodex and assist him in his search for his next opportunity. This kind of comment underscores the need for founders to manage investors expectations about extracurricular activities very closely. The rise of a founder's personal brand can be seen as a lack of commitment to the business. In this market, investor relations can be paramount.

Monday, March 02, 2009

VC Rehab, Part Two: Les Lyall

Ex-Growthworks COO Les Lyall announced today that he has moved from VC investor to fund advisor, joining Kirchner Investment Management Group. A lesser known group part of Bud Kirchner's advisory business (ex-Ventures West guru Barry Gekiere is part of the workout/turnaround group) KIMG provides corporate general partner services to funds - currently Avrio Ventures and Foragen Technology Management.