Venture Law Lines

When University Commercialization Offices Turn Troll

2010-11-17T07:13:00.003-05:00

Bloomberg reports that the patent licensing office at the University of New Mexico has launched a lawsuit against Intel alleging infringement of a UNM patent for a process of making circuit boards.

The lawsuit comes on the heels of rumoured successful negotiations by UNM with Samsung and Taiwan Seminconductor in respect of the same patent.

This seems to me to be an imminently sensible (and potentially far more profitable) route for university commercialization offices. Are there any hero patent lurking in the bowels of Canadian tech transfer offices?

What to do When Blackberry KIKs You to the Curb

2010-11-16T12:43:00.003-05:00

This morning the blogosphere was abuzz with news that Blackberry had removed KIK from the Blackberry APP World store, without apparently providing any reason for doing so. It's not clear whether this is actually the case, but let's assume for the moment that it is. Can distributors like RIM lock out app vendors with impunity?

Anyone who has sold through AppWorld and read its vendor terms can tell you that (like most distribution channels) RIM has reserved for itself the right to remove products from its storefront when it sees fit. However, actually exercising that right and removing apps like KIK can raise anti-competitive issues. If I were KIK, I'd be asking my lawyers, does RIM's leveraging of its rights as a distributor to remove a possible competitive threat to Rim's own Blackberry messaging constitute an unfair trade practice?

This kind of issue has already become the subject of a wave of litigation in the US -take a look, for example, at Skyhook Wireless' September lawsuit against Google (more later on this one). Stay tuned.

Founder CEOs and Severance Agreements: Drafting tips from Mark Hurd

2010-09-23T12:46:00.002-04:00

The value of a severance agreements for departing CEOs lies not only in how much they promise to pay, but in what protection it preserves. Mark Hurd's agreement with HP sets out some of the subtleties that you should ensure your own arrangement addresses:

1. Continuation of Indemnity. Most severance agreements will stipulate that, once a has made a lump sum payment to the departing employee, the company's obligations to make any further payments cease. Make sure that any indemnity the Company provided youa s an officer/director survive your departure, so that you are adequately protected in any future litigation brought against you or the company.

2. Non disparagement/cooperation: Companies often require that departing employees agree not to disparage the business in any manner after they leave. Of course, this becomes awkward if you are approached by future investors or, say, asked to speak to a Congressional hearing. It's important to specify whether cooperation with respect to due diligence or other matters is agreed to.

You can view the full agreement at various sites on line.

Not Now. I'm Having a Bad Day.

2010-09-22T09:26:00.005-04:00

Look, I'll talk to all of you tomorrow. Right now, I'm going back to bed. It's barely morning and already there are all kinds of signs that the day is not going to go well.

First, a blow to women executives everywhere. Hillary Clinton sends the message that, even if you break through the highest of glass ceilings and become Secretary of State, no one will help you with your hair:

All across Canada, board search committees are looking at this photo and thinking, maybe we don't need to address gender diversity on our board of directors right now.

Then, I read that some mandarin within the federal government has been picking on a veteran, causing me to wonder whether veterans are as poorly served by the legal profession as they seem to be.

According to this morning's Globe & Mail, some chuckleheads within Canada's Veteran Affairs ministry decided that it was perfectly fine to use personal medical information about veteran Sean Bruyea in a briefing to the Minister in charge. At the time (2005), Mr. Bruyea was a vocal critic of Ministry's draft Veterans Charter and presumably, ministry officials were looking for a way to silence him.

To be clear, this is not a matter of a few overzealous bureaucrats digging for dirt. The Globe reports that 614 people in Veterans Affairs accessed personal data, which included Mr. Bruyea's psychiatrist's notes. 150 of them shared emails about his medical treatment and Veteran's pension, and a further 243 liberal and conservative party staffers appear to have received briefing notes containing the same materials. It's a systemic disregard for privacy rights.

How is this possible? Somewhere, somehow, someone decided it was acceptable to have Veterans sign away broad rights to their data if they wished to get Veterans benefits. And somehow, we've led an entire ministry to think this is acceptable. Don't even get me started on how this kind of widespread abuse impacts Canada's reputation as a leader in other emerging areas such as telemedicine, where control of medical records and data is important. Thank you very much indeed, Veterans Affairs.

As lawyers seek out new practice niches, may I suggest some of you take a look at how specializing in veterans matters? Yikes.

The BDC: A Board Level View

2010-09-21T12:40:00.004-04:00

This morning Mark McQueen eloquently pointed out that, despite its expanded mandate to invest in entrepreneurs, the BDC has resolutely remained....a bank. Even though it was allocated nearly $500 million for venture capital investing, Mark reports, the BDC has deployed a mere $58 million and change in venture capital investments, at a time when the need for investors (and for VCs, investing partners) has never been greater.

Just between us girls, this is no great surprise. In 2009 the BDC was saddled with the gargantuan task in of overseeing and implementing credit stimulus programs to preserve cash flow for SMEs; it's fair to say their hands have been full. But BDC's sidelining of venture capital support is not simply an oversight. BDC's CEO has always made clear that he prefers to focus is on companies with strong balance sheets and assets. And when I look at the board of directors of BDC, I question not only whether this is likely to change, but whether there is even anyone likely to ask if it should.

BDC's board is first-rate. As a group, they tick all the boxes any board recruitment committee would want, save one: there is no representation from the start-up or venture capital community. Entrepreneurs and VCs, who form the cornerstone of Canada's innovation agenda are for all intents and purposes locked out of the board room.

Oversight of the BDC should be conducted by a group that includes those who can evaluate BDC's performance from the high risk capital side of the table. I'll nominate Mark on your behalf; he already has the shirts for it.

The Challenge of Adding a Corporate Investor

2010-09-20T11:47:00.008-04:00

The corporate VC is the unicorn of high risk investing: while many sing of them, few have ever really seen one up close. This is why I recommend to start-ups who find themselves dealing with corporate investor that they should assume they are engaged in a business development exercise and frame their disclosures and their deal terms accordingly. Here's why:

With the exception of a notable few (Dell, AT&T), few corporations establish separate corporate venture funds. More often, companies establish venture "programs" for which specific funds are notionally budgeted, but not reserved. Investments are tightly linked to corporate strategy, and often made to test out new lines of business and/or as a first step in an acquisition.

This loose structure makes most corporate venturing models inherently unpredictable. In some cases, taking investment from a large corporate investor can ultimately cost you market share. Just ask Craiglist, which has for the last few years been locked in a litigation battle with its shareholder, eBay.

On Sept. 9, the Delaware Chancery Court issued the latest ruling in the ongoing dispute between Craigslist, its founders, and eBay, which had invested $32 million in Craigslist in 2004 in exchange for a 28.4% stake in the business.

eBay's investment had a typical structure: it received a board seat and special approval rights over certain corporate decisions. The stockholders agreement even provided that if eBay opened a business that competed with Craiglist, eBay would lose forfeit its approval rights, leaving the founders free to remove eBay's board seat and to run the business.

The problem with these terms is that they did not incent the investor to grow Craigslist. There do not appear to be restrictions in the stockholders agreement on who eBay's could place on the Craigslist board, nor on who at eBay could access confidential information about Craigslist, its technology or its business model. The absence of any controls in some ways incented eBay to create its own alternative to Craigslist.

When a corporation places one of its employees on an investee board, a clash of cultures often results. I've seen this happen time and again: nominees from mature companies often equate the looser startup atmosphere with incompetency. This often leads to the inevitable "we could do it better ourselves" way of thinking. The board books distributed to directors each month enable this further, by providing nominee directors with the kind of information that, coincidentally enough, is the same information an employee would want to collect in order to draft the business case for an internal new product proposal at his business.

eBay's investment in Craigslist seems to have taken this course. According to Business Net, eBay even admited that it used the confidential information it obtained as a board member and investor about Craigslist to help Kijiiji, eBay's competitive classified service. The lawsuits continue.

For me, Craigslist is a cautionary tale on the problems that come if you assume that a corporate investor should be treated in the same fashion as any other institutional investor. Corporate investor 101:

1. Do your homework and understand what kind of investor you are dealing with.

2. Unless you are dealing with the fabled unicorn, you need to assume that there is a risk your shareholder will become a competitor.

3. Insist on a Chinese wall between those who are managing the investment in your business, and those in your investor's operations who might compete with that business. The two worlds should never co-mingle.

4. Avoid corporate investors who could easily displace your company if their corporate strategy shifted. The bigger the partner, the bigger the risk to you if they set up their own competitive business. It may not be enough to reduce their shareholder role in the business if your investor has cannibalized your position in the marketplace.

Mobile and Med Tech Start-Ups: the Next Great Wave in Ontario?

2010-09-14T09:32:00.005-04:00

Last week Barry Gekiere, the tall drink of water who is the new chief of Ontario's Investment Accelerator Fund, coyly announced that he has a fresh $7 million available for life sciences and med tech startups. This leads me to ask application developers, what are you waiting for?

Ontario has one of the largest telemedicine networks in the world. The province is poised to be one giant early adopter of enabling services and technologies that would leverage this network. We also have one of the most highly skilled populations of application developers, and a track record for building profitable services plays(if there's one thing Canada has always done well, it's build service providers - look at the sale this June of Stream the World to Triton Digital Media).

Teledialysis, remote monitoring of medication regimes, wireless monitoring of cardiac performance - start-ups trying to deliver solutions that streamline healthcare services delivery have found ample venture (and strategic backing) south of the border. Ontario has significant drivers of growth in this space - stay tuned.

Mediazoic streams cash

2010-07-23T07:09:00.002-04:00

Congratulations to our client Greg Nisbet at Mediazoic, who yesterday announced an investment from Slaight Communications Inc. in Mediazoic's personal broadcasting software business.

I checked the calendar and it's been 8 years since I started representing start-ups in online music and entertainment, beginning with the launch of Puretracks, Canada's first music download store. It's practically a mature industry. You can read about Mediazoic, and Greg's unique take on the future of the music industry, at the company site.

Ontario's Investment Accelerator Fund: Phase 2 Begins

2010-07-20T07:56:00.002-04:00

For the last four years, Ontario's Investment Accelerator Fund has been a lifeline for many high- growth, early stage companies, providing convertible debenture financing of up to $500k per business. With the movement of the fund's management over to MARs, and the appointment of a new Managing Director (Barry Gekiere), it appears that the IAF may be laying the groundwork for an expanded mandate.

The IAF was formed in 2006, when the Ontario Government annonunced a "Market Readiness Program" to provide early-stage tech companies with "financial support and management expertise". The premise was that this combination would allow promising companies to accelerate growth and attract investment from VCs.

Despite receiving only $29 million to invest(a surprisingly large $17 million was allocated to a "Mentorship and Entrepreneurship Program"), the IAF produced. They get full credit in my books for adjusting to the market realities and assessing investments not only on the basis of whether the business would meet venture capital requirements for later investment.

Now, however, the fund finds itself in a unique position. With sources of follow-on capital low, what approach should it take to its current investments? Should it risk destabilizing businesses by forcing repayment of debentures? Or should it convert its stake and become a shareholder, and (if so) what kind of role should it take as an investor?

And what about future investments? Here, the IAF has always had a tricky path to walk. In an era where many companies build business plans on the assumption that there will be no venture capital, should the IAF assess investment-worthiness based on venture capital metrics, or should it focus more on the ability of a potential investee to create a sustainable, innovative business , i.e., one that may never be sold for millions of dollars and generate a capital gain? (A business that creates innovation economy jobs and is simply profitable is a policy maker's dream, but a VC's nightmare.) Does IAF's investment committee have the right blend of advisors to ensure that decisions reflect both equations, or is it too heavily populated with VCs?

Stay tuned.

Is Canada the Worst Consumer of its Own Innovation?

2010-07-19T11:48:00.004-04:00

According to Techcrunch, a whopping $69 billion was spent on tech mergers and acquisitions in 2009. For me, the most interesting part of this data is the almost complete absence of Canadian acquirers.

If there is one common element in recent press about successful start-up exits, it’s this: the acquirer's residence is almost always anywhere but Canada. Large Canadian companies don't share the same appetite for Canada's start-ups as their foreign counterparts. Bumptop's patents? You can visit them at Google. 6N Silicon's silicon purification technology? Send your royalty payments to California. For all the tax dollars we allocate to fostering new discoveries and patents, it would seem that we rarely retain any ability to reap long-term rewards. This doesn’t make a lot of sense to me: when I pay for a facial, for example, I don’t expect to see the blackheads disappear from my neighbour’s face. Which leads me to ask, is Canada the worst consumer of its own innovation?

A long-standing complaint of many in the venture capital sector is that the corporate culture at Canada’s leading tech companies is too conservative to successfully implement a growth strategy based on M&A. Their engineering departments remain dominated by developers who swear by the “not invented here” school of thinking. The result? Often, it’s a deal focussed on acquiring patent rights, together with some transitional services from the inventors. Not surprisingly, this kind of deal: (a) is lower-priced, and (b) tends to drive deal flow away from the acquirer into the arms of a competitor with a more entrepreneurial corporate culture – usually, someone outside of Canada.

This mindset is also often reflected in corporate structure: because some Canadian tech stars do not view M&A as a cornerstone of their growth strategy, they have no real infrastructure to get deals done, or to properly integrate acquired staff into their businesses. In an environment where Google, Cisco and other competitors have entire departments focussed on mergers and acquisitions, this kind of ad hoc approach is a competitive disadvantage. And it shows: a US VC (and client) recently told me that he strongly discourages any of his portfolio companies from speaking about acquisitions with one Canadian tech giant, because it is a well-known “price bottom-feeder” who cannot complete a deal.

Conservatism is hardly a flaw, but is it an approach that Canada’s tech leaders can afford in the current climate, where tech M&A is at an all-time high? As any VC knows, future growth and profit is all about the quality of investment opportunities, or deal flow, that one can generate. I worry that poor access to great acquisition targets will be the long term price to be paid for the current approach to M&A that many Canadian tech companies take.

Beyond that, I worry about the return on my investment as a taxpayer. When we sell a start-up that turns out to have the next billion dollar discovery to a US acquiror, we lose the tax we could have collected from that business. Tax that could have paid for funding for more discoveries.

A common question in the world of Canadian innovation is: when? When will we see the next Nortel? With all the money being deployed (and tax credits awarded) for research and innovation over the last 12 years, why aren't there more emerging tech/biotech/clean tech giants? If we do not focus on improving the more mature parts of the value chain, then Canada’s innovation economy may well become an export industry. This would be wrong. Innovation is not like oil; there isn’t an infinite supply which can be extracted and shipped offshore for profit. How can we incent more Canadian acquisitions of Canadian tech? And beyond this, how do we create tech acquisition leaders?

Facebook Law: Beyond Privacy

2010-07-06T11:02:00.006-04:00

There is a thin line between keeping a trade secret, well, secret and public disclosure, and that line is most narrowly drawn in the world of social networks. All of you who use your Facebook page and other networks as your own personal start-up sites, take heed:

Can postings, messages and/or emails that you send through social networking sites be used against you in contractual disputes? According to last month's ruling by the US District Court (Central California), the answer is maybe, probably, yes - perhaps. Would the same conclusion be reached in Canada? That also isn't clear.

Before the court was a request to subpoena all private messages, wall postings and comments posted by a litigant on his Facebook and MySpace pages. These items, it was argued, would support a defense in connection with a breach of contract/copyright infringement suit.

The court based its ruling on the antiquated Stored Communications Act, enacted by Congress in 1986 to protect emails and other private communications that individuals placed "in electronic storage" with "electronic communications service providers". The court went through a heavily-footnoted, elaborate analysis to conclude that yes indeed, direct messages sent via Facebook should be treated like emails sent via an ISP, and therefore protected from disclosure.

The court's findings did not extend to wall postings or comments, although the court hinted strongly that it would, if the facts indicated that the user had set his privacy settings to limited disclosure only.

Would the same reasoning apply here in Canada? It is difficult to see the line being so firmly drawn in many cases. Privacy settings allow for selective social networking, which is not the same thing as private, confidential or privileged communication. I can think of a number of situations where extending privacy to a user who has selected "friend only" access to his postings would be absurd.
What if the user granted all friend requests? What if the friends who could see the postings were, in fact, people with no relationship to the user? (One of my Facebook friends is, in fact, someone I've never met. He likes Farmville. A lot, according to my news feed.)

Until Facebook comes out with some kind of focussed business networks offering that manages these issues, you need to proceed with caution. Not a day goes by without a lawyer somewhere thanking the billing gods for the delivery of Facebook. For lo, unto us lawyers has been born an entirely new niche of legal practice: social networking, or "Facebook" law. Now that the body of Facebook law is expanding to deal with trade secret and copyrght disputes, and other commercial matters, the fun begins.

SRED Reform: Warning Signs Ahead

2010-07-05T08:34:00.004-04:00

I've often worried that Canada does not have a organization that advocates exclusively for the start-up. After all, who has the time? Instead, we rely on organizations such as CATA and the CVCA to address issues on our behalf.

For the most part, this makes sense. But what happens when the interests of the start-up community diverge from those of other members of these associations?

SRED reform is one such area. The federal government currently is undertaking a review of the SRED program, and is soliciting active input from the private sector. CATA, ITAC and all these folk have opened their coffers and paid for handsome white papers, industry studies, advocacy programs and the like. But what they are advocating is not necessarily in the best interests of start-ups.

The SRED program, albeit full of warts, has been a valuable source of additional cash to Canadian start-ups. Under SRED, the federal government will refund up to 35%of the first $2 million spent on research and development each year to Canadian controlled private companies(CCPCs). For companies which do not meet the CCPC criteria (foreign-owned subsidiaries, publicly traded companies, start-ups backed by foreign venture capital), the cash refund is not available; instead, tax credits are awarded.

CATA and ITAC have quite rightly pointed out the many flaws inherent in the system. The process for claiming SRED refunds and credits is certainly no picnic, and has given birth to a lucrative cottage industry of specialists who will prepare the paperwork for you for the price of a small hybrid car. Audits of SRED claims are on the rise as well, making the time to refund, and the amount of any refund, uncertain in some instances.

But for many lobbying groups, addressing these flaws has taken a back seat to a different priority: getting cash refunds into the hands of later stage companies. Public companies, foreign-owned subsidiaries, profitable private companies - all of these folks should also, lobbyists argue, be eligible for SRED cash back.

Now, I know what you're thinking: if Canada provides direct cash government assistance to mature companies, will this turn SRED into an illegal trade subsidy that will cause all kinds of problems for Canadian companies in international trade? (Okay, I know you're not thinking that - it is Monday after the long weekend - but really, could someone explain to me how this would NOT cause problems? Has anyone been watching the increasing tech protectionist tendencies of Europe? Why not just paint a red target on the back of, say Opentext or RIM, and turn them towards the EU?)

What you are really thinking is, why do I care if there's more companies at the SRED refund party? The answer is simple: a tax base of 33 million people. The amount of federal money available is finite, which means that, should the federal government concede the point, the end result may well be less pie for everyone.

Unless advocates can explain where the extra cash to fund an expanded refund program will come from, we need to proceed with caution. Back in high school, I once shared a summer job with Tony Clement. I followed him around the Old City Hall courts for two months, doing furniture inventory for the Ministry of the Attorney General. Let me tell you: even as a university student, that boy could count. I would not bank on him advocating an unfunded policy.

There are valid reasons why CATA and others are advocating SRED cash for bigger industry players, but these needs should be balanced against those of the people currently benefiting from SRED. And you, entreprenuers, need to do the balancing. Agree that there should be cash made available to foreign-backed start-ups, as CATA recommends (although I will note that in my experience, while US VCs and angels have found SRED interesting, it hasn't been a key driver of investing in Canada. It's like leaving cookies out for Santa - sure, he might come, but I know that it's more likely I'll end up eating them)

SRED reform could enhance or further decimate the prospects of Canadian start-ups. Your participation is needed.

Ontario's Emerging Technologies Fund: Progress Report

2010-06-20T17:38:00.004-04:00

With a mandate to spend $50 million a year, Ontario's Emerging Technologies Fund should be the busiest tech investor in the province right now. And after a slow start, it looks like things might be picking up.

On June 10 the OETF quietly announced two matching investments: first, in b5 Media, long-time portfolio company of Brightspark Capital and JA Albright Ventures, and a second investment in Energate, a clean-tech play backed by Montreal-based Cycle Capital Management. These matching investments brings to 6 the total number of announced deals by OETF since its inception in 2009. The Fund notes on its website that it has 9 conditionally committed co-investments deals that will result in $16.77 million being invested this year.

The list of qualified investors who wish to access matching money now stands at 13, with all but two of them local players. The public record suggests that OETF has not yet succeeded in attracting new foreign investors to Ontario. I don't think this is the case, but regardless, it needs to change, and soon. Roughly half of the qualified investors are at the end of their current funds. Given the current LP market, they are not likely to raise new funds anytime soon, which means that while their status with OETF is good news for existing VC portfolio companies, it does not do much for new start-ups.

Now, those of you who know me know that I am now a big fan of OETF, which has participated in matching investments for some of my clients. Right now, John Marshall is my personal Elvis. But I think we as a community need to consider how to lever OETF's spending success to date to aggressively seek additional qualified investors.

Selling the Start-Up: How Antitrust Laws Can Kill Even the Smallest Deal

2010-06-08T07:05:00.007-04:00

There is a special art to startup M&A. Those of you chasing the early exit should be forewarned: if your legal and professional advisors treat the sale of your startup like a typical small business sale, your problems can multiply.

What should a founder who sells his cool new social media tools business for, say, $5 million worry about? For one thing, the intervention of antitrust authorities. Increasingly, authorities are examining (and in some cases, undoing) small private company deals that have anti-competitive effects.

Corporate lawyers who don't specialize in tech consolidations might look at a $5 million price tag and rule out any antitrust concern, on the basis that competition laws in most jurisdictions are focussed on much larger transactions than the typical early high tech company exit. But your advisors need to look beyond pre-merger notification threshholds.

A start-up that has developed truly innovative or disruptive technology can dominate a market niche, or create an entirely new market altogether. If another player in that niche makes an offer, the result could be domination of a potentially huge market.

Consider last fall's $5 million sale by Diebold, Inc. of its money-losing voting machine division to Nebraska's Election Systems & Software. Despite the small purchase price, the result was a merged firm that controlled 70% of the market for voting systems. Fielding complaints from other competitors, among others, the US Department of Justice and nine states filed civil complaints. In March 2010, a settlement was reached which required the acquirer to sell all of the assets it purchased to another competitor, and to waive any rights to the business' employees. On May 19, a sale of the divested business to Dominion Voting Systems was announced. No price was disclosed.

Acquirors and sellers need to draw from this example (one of the uglier ones of many) and make sure that their advisors have all the facts when evaluating the impact of even the smallest sale.

Hiring and Firing: Avoiding the Grey Areas

2010-06-03T11:54:00.003-04:00

As a firm that represents entrepreneurs, we get involved in a lot of hiring and firing. And when it comes to these HR matters, I often want to smack my clients upside their heads.

Firing (or being fired) leads to litigation most often because of lax hiring practices. Founders, investors, early hires - all of you tend to take an almost abstract approach to the agreements you sign. This needs to stop.

An employment agreement needs to function as a roadmap. If there are grey areas, someone will take a wrong turn and litigation will ensue.

How to avoid this? You should not make or accept any employment offer that does not contain terms that allow you to calculate precisely what an employee is to be paid when he or she leaves the business. This means, at a minimum, the offer needs to specify: (a) how vacation accrues (monthly or otherwise), (b) whether unused vacation carries over from year to year, (c) whether bonuses and other incentive-based compensation will be paid out on departure, and (d) what will happen to options or shares held by the employee after he/she leaves.

Without this kind of clarity (and even in spite of it), parties on both side of the table are incented to exploit the grey areas for their own benefit. This may be less of a risk in jurisdictions where employment-at-will is a concept, but here in Canada our laws are pro-employee, to the point where employees are always incented to ask for more unless an agreement comprehensively disposes of all matters.

On the other side of the table, investors and employers often will take a limited view of what their obligations are to a founder/employee who is leaving the business, especially when it comes to stock. Take our friends at RIM, for example.

In 2004, Bryan Taylor, a VP of Engineering at RIM, was terminated without cause a few months before some 40,000 stock options granted to him were scheduled to vest. The options, with a strike price set at 1999 levels, would have netted Taylor $4.4 million if exercised and sold right away. While RIM apparently agreed to pay Taylor several months of severance, it refused to allow him to exercise the options, which vested during the severance period. You can read more about the matter here.

Taylor sued and the matter made its way through the Ontario courts until it was finally dealt with in April 2010. By that time, RIM had conceded that, in fact, Taylor was entitled to the options, but disagreed as to how much cash they should have to compensate him. Taylor argued that he was now entitled to more than the $4.4 million in question, since he would have held onto the shares which would now be worth approximately $12 million. The Ontario Superior Court partly agreed, holding that Taylor likely would have held onto 75% of the options in question.

Next time you sign an employment agreement (as either employer or employee) ask yourself whether the agreement is clear, or whether it’s possible this kind of problem could arise. Then smack yourself on the head and revise.

Yaletown Re-sizes

2010-06-02T13:26:00.003-04:00

A few weeks ago Techvibes noted that Yaletown Ventures partner Steve Hnatiuk had been photoshopped off of the Vancouver-based seed fund's website. Yaletown, which has been know to make seed investments in Ontario green tech companies (6N Silicon), is one of the few seed funds to raise money from LPs (including a recently announced $14 million commitment from Alberta's Enterprise Corporation). PE Hub now confirms that Steve has left to pursue other opportunities in the Canadian VC market, which will be announced in the fall.

Why do you care? If you are an entrepreneur, angel or advisor anywhere but Silicon Valley, it's important to know where the experienced investors are, if only to hide the single malt before they show up at a party. Funds generally follow experience. Stay tuned.

FileMobile Makes Video Social

2010-06-02T12:30:00.002-04:00

It's a constant refrain here in Toronto, a social and digital media innovation centre: you haven't arrived until you've found meaningful technology partners for your business. We congratulate our client Filemobile, who has announced a technology partnership with giant Brightcove, which will see Filemobile's multimedia comments and ratings applications integrated with Brightcove's video players and platforms.

The Inevitable Return of Labour Sponsored Funds

2010-05-28T22:36:00.005-04:00

For several months now there have been rumours that the Ontario government is preparing to reintroduce the kind of investment tax credits that formed the backbone of Labour Sponsored Funds (or "LSIFs"). Whether this is an active policy initiative or wishful thinking, it's an inevitability.

What's driving this evolution? On the one hand, the retail sector is crying (and really, it's SO unattractive when they do this)for investment product to sell to their customers. Thanks to IAF Funding and the new OETF matching funding for start-ups, Ontario has amassed a solid portfolio of Series A ready companies with no real money available to fund them. And, of course, sitting to the east of us all is Quebec and its growing start-up community, taunting us with the sheer velocity of activity driven by similar incentives.

To appeal to a retail community, new LSIFs will have to look meaningfully different than their forebears. Certainly, they likely would need to have much lower management fees, and investment rules that allowed managers to take a balanced risk to investment. (Under old rules, funds had to be deployed the year they were raised to meet tax creidt eligibility requirements. In an up market, there was nothing headier than being a lawyer for a high tech start-up in November, when LSIFs would seek out companies into which they could dump funds before the year closed out). And, of course, there needs to be greater accountability for funds to their retail investors.

There's an opportunity to create a new, evolved retail product that will plug the gaps in our current investment ecosystem - will it emerge?

Accolades for Toronto NanoTech Start-Up Continue

2010-04-27T11:37:00.002-04:00

Congratulations to our client Vive Nano for receiving Frost & Sullivan’s 2010 North American Technology Innovation of the Year Award for its encapsulation technology to synthesize nanoparticles. During a week of local venture capital contraction, it's nice to be reminded why there are compelling reasons to be optimistic about our future as an innovation centre.

The Immigrant Opportunities Fund

2010-04-12T10:50:00.003-04:00

...Okay, there isn't one. But there should be. Here's why:

1. Regional venture capital has lost its appeal. If you ask any North American VC left standing(or bettter yet, their former limited partners), they will tell you that there is very little appetite for the classic venture capital model in any region outside Silicon Valley.

2. As traditional lps lose interest in general venture capital, new players are embracing purpose-driven opportunities. Regional funds focusing on investments that make the world better (clean water, social philanthropy, micro-entrepreneurs) in have particular done better in attracting investors.

3. Helping immigrants who are innovators prosper is not only part of our business history, it's great business today. There are only 33 million of us in Canada, and while we are all thinking as hard as we can, we lack a critical mass that would allow us to play a meaningful role in innovation (and attract meaningful investment) unless we grow our entrepreneurial base through acquisition. It won't do to wait for our base to grow organically, either. The only person ever to profit from natural evolution was Darwin.

4. Current global conditions seem to be creating a unique opportunity. Innovation clusters in places such as Israel and South Africa are finding themselves short of growth capital as US VCs close up shop and retreat. Our own tech entrepreneurs, many of whom have strong ties to both regions, may be able to leverage our proximity to the US with the US limit on work VISAs to attract and grow a larger pool of entrepreneurial talent.

5. A fund focused on investing in (and attracting) immigrant innovation may better leverage government money: there is a growing realization at all levels of government that job creation comes from emerging business, not established ones. Last weekend, the New York Times' Thomas Friedman quoted Robert Litan of the Kauffman Foundation: " Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less....That means that established firms created no net new jobs during that period." Government funding available for job creation in high growth industries makes Canada a compelling candidate for emerging immigrant businesses and is a compelling partner for any private fund investing in this sector.

6. Canada has only a few years at best before we lose the ability to carve out a leadership role in this niche: The need to attract and retain foreign students and entrepreneurs has reached mainstream discourse in the U.S. Right now it seems as if the failure of Congress to figure out how to pass any legislation is all that stands between it and immigration reform. It would be nice to lead, not follow.

Canada is replete with unspent fund of funds money, and business magnates with strong ties to their countries of origin - the ideal set of limited partners. Is there anyone who'll take on the task?

So Far, April Really Is the Cruellest Month

2010-04-07T05:31:00.006-04:00

Toronto, 4:45 a.m:
I am accepting some kind of award from former secretary of state Madeline Albright when the chirping starts. Somewhere, a bird bar has closed for the night and all the birds who didn't find a mate have headed to the park across the street to troll for action. Looking for Mr. Goodbird is happening right outside my window.

4:51 a.m:
I give up on sleep and go to my office to start today's blog post. My dog seems unusually excited about this week's entry. She starts roaming the house and I don't think anything of it until I hear her heading to the basement, which is her emergency rest stop when she is having intestinal distress.

4:53 a.m:
I love the smell of Pinesol in the morning.

5:11 a.m:
I let the dog in the backyard to complete any unfinished business. I can't see what she's doing. I hope she's not eating grass.

5:18 a.m:
Back at computer. A distant rumbling sounds from the main hall. She ate grass. I come downstair and step in dog vomit. Warm dog vomit.

5:19 a.m:
Pinesol also comes in lavendar scent and is safe for wooden floors. Why is no one else waking up? I exhume my buried hostility over husband's seeming inability to hear crying babies at night, too. Inconsiderate bastard.

5:38 a.m:
Starbucks instant coffee does NOT taste as good as a brewed pot. Tim Horton would never lie to me like this.

5:44 a.m:
Birds are beginning to sound needy and desperate. SHUT UP SHUT UP SHUT UP. Haven't they heard of The Rules? Playing hard to get is more effective.

5:59 a.m:
I consider arming self with son's paintball gun and going hunting. Benefits outweighed by thought of Leila Boujnane's outrage. French people are awfully protective of birds when they are not stuffing them in cages and forcefeeding them so there will be foie gras for brunch.

Springtime is for insomniacs.

What Liabilities Do Board Observers Have?

2010-03-29T10:56:00.001-04:00

A few years ago, I was sitting in a board meeting for one of my fund’s portfolio companies, listening to an investor rant on about why the board should turn down an offer to purchase the business. Now, the offer terms were not great, but they meant that everyone would receive some gain on their shares. Given the state of this particular company, this was a gift from heaven and it was hard to see how the board could find that the offer was not in the best interests of all. And yet, here this person was, insisting on a different path. I happened to know that he was in the middle of raising his next fund, and suspected that his position was driven by his desire not to record a modest return on this investment until the fund closed.

The board probably should not have allowed him to co-opt the meeting to pursue his own agenda. He was, after all, an observer with no right to vote on the matter. But this is not an unusual event in private companies – observers often feel emboldened to try and influence board decisions, relying on the belief that their status somehow insulates them from personal liability for their actions.

They are wrong.

The active participation of observers in board affairs can change their status and their liability to a corporation. In Canada, for example, the law imposes liability on those who function as directors, not just those who are elected by shareholders. In the US, there is a similar concept referred to as the "de facto" director. And while there have not yet been reported court decisions in Canada where an observer has been found liable for breach of fiduciary duties, there are to my knowledge claims that have been made (and settled) against investor/observers on this basis.

Angel and private equity investors need to particularly careful about their interactions with investees. Even as observers, investors will often manage the business of a corporation, even leading negotiations for additional financing or sales. It’s not unusual for them also to take an active role in board meetings, or to participate in what are otherwise purely directorial decisions. When things go wrong, it is inevitable that they may well be named in any lawsuit.

It has been the usual practice for sophisticated investors to require a company to sign an indemnity agreement for observers, so that they are protected. I do not necessarily agree that this is appropriate, unless the agreement also contains provisions that bind observers to certain standards of conduct. What are those? Post coming up.

After Bootstrapping: Preparing for the Mid Haul

2010-03-24T15:53:00.001-04:00

Ten years ago, most bootstrapped start-ups were built for the short haul, on an 18-month plan: spend your friends' money, build a prototype and either attract investors or close doors.

Fast forward to today, and it's a different world. There are more bootstrapped, high growth innovative businesses than ever and - more importantly - most of them are surviving well past the 18-month mark.

If you are one of the many who has moved from the short haul to the next stage of growth, consider this your wake up call. It may be time to do some spring cleaning.

A start-up that reaches the mid-haul has meaningful assets: it has built goodwill in the business, acquired customers and built a core team. The manner in which you protected these assets in the early phases of business need to be appropriately upgraded.

Here are the areas where I often find there is a critical mismatch between the advancing stage of the company and its operating structures:

Employee Compensation : Companies heading into the mid haul have a fairly good sense of their growth path for the next 3-5 years. Now may be the time to consider whether options are the appropriate way to incent employee performance, or whether profit sharing plans would better match the company path for the mid haul.

Protecting the Company Brand: Your business now has an identifiable brand and goodwill to protect. Establishing usage rules so that your trademarks are not diluted is important. I will defer you to Jessica the trademark goddess for further advice on this matter, but the important note is this: you must establish corporate standards for how your brand is used in collateral, etc., so that you do not dilute any claim you have to that brand.

Equally important is controlling the way in which your company is discussed in the broader public sphere. Consider establishing company guidelines for employee use of social media, so that expectations are clear. Laso make sure that your alpha and beta testers (if appropriate) have agreed not to disparage any produucts or the company.

Intellectual Property : So many of you have gone all Frodo-in-the-shire and allowed your employees to moonlight that this bears discussion. It is one thing to permit key employees to supplement income in the early years of the business through outside jobs. It is quite another when you permit employees to start their own business on the side. For example, what happens when they start taking customer support questions during your office hours?

Business issues aside, you have no way of knowing what contracts your employees have signed with outside engagements, and these can potentially impact your own intellectual property. The mid-haul is the time to re-think your moonlighting policy,as well as the invention assignment terms your early employees agreed to.

Customers: The mid-haul phase is when your business moves beyond missionary, early-adopter customers who sucked the life blood from you to follow-on customers who may be agreeable to more balanced contract terms. Now is the time to adjust contract terms and to make sure that your contracts follow your current revenue model.

Companies who have adopted a SAAS model for some of their solutions tend to need to pay particular attention to their agreements, in my experience. Most SAAS-based contracts should have provisions that allocate risk between the customer and the business for: export controls, data security, disaster recovery, redundancy backup, sales tax treatment, among other matters. If you've cobbled together your SAAS terms from a business that does not use the same model, chances are you've missed important elements.

I'll blog about each of these items in detail in the next few weeks. Other issues for the mid haul? Let me know.

What Legal Duties Do Angels Owe Each Other?

2010-03-21T22:22:00.006-04:00

Just about four years have passed since the current angel investing surge began, and we now have in our midst perhaps the largest group of active angel investors ever.

With increased investment comes a proportionate increase in disputes, and opportunities for courts to consider the nature of the angel investing relationship.

Earlier this year, the Ontario courts provided guidance on what obligations co-investing angels owe each other. Angel investing has always been done on largely a club basis, with loosely affiliated investors sharing information. How much angels shared with each other has been an unregulated matter.

Now, the Ontario courts have laid out some basic rules in a recent ruling involving angel investor Paul Alofs and his fellow angel investors in Kremeko Inc., the Canadian franchisee for Krispy Kreme donuts. Last June, the Ontario Superior Court ordered Mr. Alofs to reimburse his co-investors a total of $655,000 for failing to tell them that Mr. Alof was exiting his investment in Kremeko. The full judgment was finally published just a few weeks ago and is an important cautionary tale.

You may recognize Mr. Alofs' name, who returned to Ontario in 1999 after a much lauded California success with MP3.com. He was an early investor in Kremeko which raised money for angels and other investors in three tranches over 2001-2003 in order to fund the establishment of Krispy Kreme in Canada.

It was Mr.Alofs who contacted certain other angels about the opportunity. According to the court’s decision, the group agreed to work collaboratively, conducting some due diligence individually and exchange their own views about the opportunity. After the investment, two of the angels continued to collaborate directly – Mr. Alofs would share information packages he received for board meetings with the another angel. Some of them reviewed and discussed other investments with Mr. Alofs as well.

And when the company raised the second tranche of $14.5 million, one of the other angels asked Mr. Alofs for his views, and if there were “any red flags” that they should be aware of. Mr. Alofs reported that he would be doubling up his position (which, unknown to the other angels, he did not do). The angel repeated Mr. Alofs' comments to other angels, and they all participated in the round.

Following the second tranche, Mr. Alofs sold his shares to the some of the other investors and resigned his seat on the board of directors. Before that closing, the court found that Mr. Alofs failed to disclose his sale of shares when asked by the other angels, and did not provide the real detaile for his resignation from the board. When the company went under several months later,the angels sued for deceit and negligent misrepresentation. Had they known that Mr. Alofs was no longer participating, the angels claimed, they would not have further invested.

The court agreed. Given the relationship that one angel had not only with respect to Kremeko but also their ongoing discussions about various other investments” the court reasoned, Mr. Alofs should have known that his statements would be relied upon by other angels in determining whether to invest in the third tranche. The skill and knowledge of the angel did not in the court’s eyes reduce Mr. Alof’s liability: “Because someone is a sophisticated investor does not mean that such person would not listen to others and take their views into account.”

As a lawyer, this ruling has made me re-think the kinds of terms I like to see go into investmet involving groups of angels. It could also be the beginning of increased rules around angel club investing. Stay tuned.

Advisory Board Agreement Basics

2010-03-08T06:43:00.007-05:00

Requests for advisory board agreements seem to be on the rise. Five years ago, I would have dissuaded clients from bothering with an advisory board, largely because advisors dilute founders' equity stakes and typically ended up as short term additions, often squeezed out when venture capital comes in.

But that was then. In the last two years, the number of VC-free start-ups has skyrocketed, and many will likely never add venture capital investors to grow their businesses. In the new start-up reality, the right technical and business advisors can fill gaps in product and business strategy, and even open doors.

What kind of agreement should there be between companies and their advisors? Obviously, I'd prefer it if you bought me a donut, or even sent me flowers and candy before I answer. A gal likes to be wooed before she provides favours. Let's start with a checklist of provisions I recommend advisory agreements contain:

1. Description of the Relationship:

You need to think of this agreement in a similar way to any consulting agreement, and set expectations as to deliverables. After all, your advisors likely are receiving an equity stake in your business; it should be clear how they are to earn those shares. At a minimum, there should be a generic statment that the advisor will agree to meet with the company on an intermittent basis and provide general advice and guidance/ or work on the Company's behalf in the advisor's areas of expertise. The amount of time involved should be specified, e.g. "up to X days per month." Some advisors provide specific deliverables as part of their role and you should be specific as to what these are.

2. Disclaimer of Employment:

The agreement should state that the advisor has no right to employment or continued engagement.

3. Payment for Services:

State clearly what the advisor is receiving (shares or options),their vesting schedule and strike price. In addition, specify whether any out-of-pocket expenses of the advisor will be reimbursed.

The vesting of options need not follow the traditional 3-4 year schedule of most option plans. Many early stage companies allow the options to vest upfront and while I understand the need to attract the right advisors from the get-go, it needs to be tempered with a need to ensure the advisors actually contribute to the business in the way you intend. My own view is that everyone performs better with a carrot dangling in front of them,and any vesting schedule - per meeting attended, over just one year - is better than none.

Do not forget to state that the options are non transferable and that the advisor will be expected to agree that a voting trustee will vote those shares, not the advisor. An advisor is receiving a stake in the value he has created in the business, but he is not receiving a say in how that business is run.

4. Confidentiality:

The law will not necessarily agree that advisors owe you or your company a duty of confidentiality. It is therefore critical that you have nondisclosure terms in place with your advisors.

5. Competitors:

Because advisors have other jobs and investments, it is difficult to get them to agree not to compete with yours or not to solicit your customers. A reasonable middle ground is to ask advisors to notify you if their other work might compromise your business, so that you may terminate the relationship (or at least, limit your disclosure to them while they are so engaged).

6. Ability to Perform Services:

This provision is a statement made by your advisor that the advisor is free to undertake the services required by the advisory agreement, and that there is no agreement that would prevent the advisor from giving the benefit of his/her services. You have no way of knowing whether the advisor is under an exclusive services agreement elsewhere, or whether he/she has a non compete or other covenant in place that would be breached by taking on this role with you. You want to protect your business from any claim that an employer or other party might make that you have interfered with their agreement or induced your advisor to breach his contract with that party.

6. Ownership of Work Product:

As would be the case with any consultant, you need to ensure that you own any written work, suggested product improvements or other contributions your advisor makes to the business.

7. Termination:

Do not be afraid to reserve a right to terminate the advisory arrangement at any time. 50% of marriages end in divorce, and business relationships are no different. Simply state that either party may terminate this arrangement at any time without further payment or penalty, and state what you intend will happen with the shares or options that have been granted (vesting typically ceases).

If you are already using an agreement, please take a look at the terms and consider whether you need to add any of the above rpovisions. If you have other suggestions for must have terms for an agreement, send a comment.

Can Gaming Save the Publishing Industry?

2010-03-04T06:59:00.004-05:00

This week Random House announced the formation of a 15 person division to focus on the creation of "original transmedia intellectual property" or, what my mother would call books.

To be less fancy about it: the book publisher is crossing over into the risky world of creating original content. Random House is betting that its team can fill the gaming industry's need for: (a) more complex plots, better character development and dialogue, and (b) a story that seamlessly threads across games, books, movies and social platforms. It is currently shopping two storylines created by the division, and also announced a deal with software publisher Stardock to work on Elemental: War of Magic, to be released in September.

Publishing and game development are two industries that are heavily supported by government funding. I am wondering how this kind of convergence will impact both streams of funding. Would Ontario's online gaming development funds could be used by gaming developers to pay for this kind of service? Stay tuned.

Budget 2010: Innovation or Incubation Economy?

2010-03-03T12:51:00.008-05:00

Stephen Harper has scheduled the roll out of his federal budget for tomorrow, so that it coincides with the start of "Roll Up The Rim" time at Tim Horton's. I am trying to figure out what this means.

For the last two years, I've started each day with an extra large coffee in a cup bearing the discouraging words, "Please Play Again". Frankly, the messages I've been getting from the federal government haven't been all that different, either.

Now, things seem to be changing: two days in, and already I have won a donut from Tim's. Will the budget be giving out innovation sugar, too?

Early signs are that "innovation" and the "digital economy" will be important parts of the plan. That's the good news. The bad news: there remains the lurking fear that the government will continue to starve less popular parts of these sectors - venture capital in particular. Which could mean that, on the heels of the decline of the past few years, this budget will deal the final blow to the existence of venture capital in Canada in any meaningful amounts.

In the last two years, the preponderance of "innovation" spending has been allocated to pure research, in universities and by larger corporations. In other words, our tax dollars have supported ideas. Commercializing those ideas is traditionally performed using venture capital dollars. And here, we continue to let ourselves down.

Rather than providing funds to VCs for investment,the government has channeled money to Crown corporations EDC and BDC to do the job. The result is that today, Canada may well have the largest government-managed start-up portfolio in the world.

It's understandable how we got to this point. Lord love them, the venture capital community are just not successful advocates for themselves. Their pleas for tax reform have been unanswered for years (although stay tuned on that matter). And their positions on issues have shifted with the markets; you will hear many today bemoan the loss of labour-sponsored funds. However, 4 or 5 years ago (when there were too many funds competing for deals), the CVCA was promoting the LSIFs' demise.

But you need to support all parts of the ecosystem to be competitive. There will always be a need of some kind for local venture capital. And in times such as these, when the markets will not support it naturally, government support is required.

The alternative? We can continue to incubate ideas at the expense of developing businesses that can commercialize those ideas. If we do so, we may well become, as one of my larger foreign clients has said, "just a good place to buy an alogrithm."

Is CALPERS turning off the VC tap?

2010-03-02T10:00:00.004-05:00

A consistent theme in Canadian innovation policy is the need to attract more foreign venture capital to underwrite our local start-ups. This is based on the theory that there is lots of venture capital willing and able to deploy cash north of the border. It's a relativistic theory that is deeply flawed, and as yesterday's Wall Street Journal hinted, one that becoming more foolhardy for the Canadian government to rely upon.

One of the largest sources of funds for VCs and Private equity players in the US has been CALPERS, the largest public pension fund in the United States. CALPERS manages more than $200 billion or so in assets and is reponsible for generating returns that will fund the pension payments to be made to retired California public employees.

In order to generate enough cash to meet these pension obligations, CALPERS typically targets investment that will generate an annual average of 7.75% return on its investments ("ROI"). Generating that level of ROI consistently has led CALPERS over the last 15 years or so to make high-risk, high-yield investments in private equity and venture capital funds. As a result, CALPERS has become one of the largest sources of fuel for the North American venture capital industry, providing more than $25 billion to those fund managers our governmetns hope to attract up here.

However, it now appears that this fuel source may be tapping out. Last year, CALPERS announced that it was reducing the number of funds that it invested in. And yesterday, CALPERS revealed its proposal to reduce the targeted ROI on new investments to 6%.

If adopted, this ROI reduction would allow CALPERS to focus on more traditional, conservative investments - in other words, away from the venture capital funds that Ontario and the federal government are seeking to attract.

This week's federal budget will be an opportunity to assess how self aware Canada's Government is about what will (or can) feed investment in our innovation economy. Will the budget provide the means for local growth? Or will it dangle bait over a drying up river bed?

The Perils of the Informational Meeting

2010-02-04T14:54:00.003-05:00

As VC investing falls, so riseth the requests for meetings with VCs that good startups receive. At least once every few weeks, one of my clients calls to let me know that "X from Y VC cold called me and want to talk about our business and our market." It's always flattering to receive an unsolicited request for a meeting. But there are perils in strategic meetings with VCs, as this recent article from a Boston publication illustrates.

According to Boston.com, in 2006 the founders of Sittercity, a Chicago-area website agreed to a meeting with an entrepreneur-in-residence for Boston's Matrix Partners. No investment from Matrix was forthcoming, and 3 months later, the EIR formed a competing business that attracted more than $16 million in investment from VCs that included Matrix.

No wrongdoing appears to be alleged by either side. Rather, the story paints this as a cautionary tale about what can happen when you fail to understand the agenda of a VC meeting. You could end up disclosing far more than you otherwise would to a potential rival, for one thing, and spending disporportionate amounts of time providing follow-up feedback and details.

Strategic meetings that are requested to get to know your business may well be useful, collaborative events, but the kind of information you provide should be adjusted accordingly.

After Bootstrapping: Preparing for the Mid Haul

2010-01-31T18:30:00.008-05:00

Ten years ago, most bootstrapped start-ups were built for the short haul, on an 18-month plan: spend your friends' money, build a prototype and either attract investors or close doors.

Fast forward to today, and it's a different world. There are more bootstrapped, high growth innovative businesses than ever and - more importantly - most of them are surviving well past the 18-month mark.

If you are one of the many who has moved from the short haul to the next stage of growth, consider this your wake up call. It may be time to do some spring cleaning.

A start-up that reaches the mid-haul has meaningful assets: it has built goodwill in the business, acquired customers and built a core team. The manner in which you protected these assets in the early phases of business need to be appropriately upgraded.

Here are the areas where I often find there is a critical mismatch between the advancing stage of the company and its operating structures:

Employee Compensation : Companies heading into the mid haul have a fairly good sense of their growth path for the next 3-5 years. Now may be the time to consider whether options are the appropriate way to incent employee performance, or whether profit sharing plans would better match the company path for the mid haul.

Protecting the Company Brand: Your business now has an identifiable brand and goodwill to protect. Establishing usage rules so that your trademarks are not diluted is important. I will defer you to Jessica the trademark goddess for further advice on this matter, but the important note is this: you must establish corporate standards for how your brand is used in collateral, etc., so that you do not dilute any claim you have to that brand.

Equally important is controlling the way in which your company is discussed in the broader public sphere. Consider establishing company guidelines for employee use of social media, so that expectations are clear. Laso make sure that your alpha and beta testers (if apporpriate) have agreed not to disparage any produucts or the company.

Intellectual Property : So many of you have gone all Frodo-in-the-shire and allowed your employees to moonlight that this bears discussion. It is one thing to permit key employees to supplement income in the early years of the business through outside jobs. It is quite another when you permit employees to start their own business on the side. For example, what happens when they start taking customer support questions during your office hours?

Business issues aside, you have no way of knowing what contracts your employees have signed with outside engagements, and these can potentially impact your own intellectual property. The mid-haul is the time to re-think your moonlighting policy,as well as the invention assignment terms your early employees agreed to.

Customers: The mid-haul phase is when your business moves beyond missionary, early-adopter customers who sucked the life blood from you to follow-on customers who may be agreeable to more balanced contract terms. Now is the time to adjust contract terms and to make sure that your contracts follow your current revenue model.

Companies who have adopted a SAAS model for some of their solutions tend to need to pay particular attention to their agreements, in my experience. Most SAAS-based contracts should have provisions that allocate risk between the customer and the business for: export controls, data security, disaster recovery, redundancy backup, sales tax treatment, among other matters. If you've cobbled together your SAAS terms from a business that does not use the same model, chances are you've missed importnat elements.

I'll blog about each of these items in detail in the next few weeks. Other issues forthe mid haul? Let me know.

First Close of VanEdge Fund Rumoured

2010-01-20T13:35:00.002-05:00

Just before Christmas I was out to dinner with a group that included Q1 Capital's Mike Middleton, some US VCs and Vancouver's Paul Lee. Paul was originally part of Distinctive Software, a Canadian game developer purchased by Electronic Arts. He stayed with EA for more than 10 years post-acquisition, rising to President of EA Studios before leaving to form Vanedge which, he explained to me, was going to be a new investment vehicle that he and his friends put together to invest in early stage digital media plays.

As it turns out, Paul has quite a few friends. PE Hub reports today that Vanedge is about to close the first $100 million in commitments from partners that reportedly include EA, BDC and EDC. I am wishing I'd put my wine on his tab. Interactive folks - this is the team to get to know. More later.

Bering Media Closes Series A

2010-01-20T13:32:00.002-05:00

Congratulations to our client Bering Media on completing its Series A financing. The trasnaction has finally become public and details can be read over at StartUp North.

Hollywood Tycoon's Facebook Version Gets Notice

2010-01-07T09:25:00.003-05:00

Great post over at Inside Social Games (Dec 17) about our client, Toronto's Social Games Universe, and the newly-released Facebook editions of their games Avastar and Hollywood Tycoon. Nathon Gunn and his team have been pursuing their own vision of social gaming for several years now, and the review of their latest products are yielding praise. The interaction between the two games is drawing particular attention; SGU has designed a "groundbreaking" feature that allows content from one game to exist in another.

SGU is another example of great homegrown talent backed by great investors, including CITY's Moses Znaimer, Live Nation's Michael Cohl, Nelvana's Clive Smith, Standard Broadcasting's Gary Slaight and Zerofootprint's Ron Dembo. You can read more about the company, and its investors, over at the SGU website.

Just How Pressing Is the Immigrant Entrepreneur Issue?

2009-12-14T07:06:00.004-05:00

There appears to be a widening gap between the rate of innovation in Canada and the rest of the world. The statistics should scare the bejesus out of you.

The World Intellectual Property Organization (WIPO) reports that in 2008, 77,501 patent applications were filed in the US PTO by resident Americans.

To match the same rate of innovation as Americans, Canadian residents would have to file 8,488 patent applications during that same period. We fall short by a large margin: in 2007 a total of just under 5000 patent applications were filed in Canada, and 90% of those were filed by non-residents.

Now, there's a lot of challenges to these numbers that can be made- not all innovations are patentable, many Canadian companies file in the US and by-pass Canada, some of the non-resident applicants are really filing innovations by Canadian employees, etc. But as a raw measure of innovation, WIPO's numbers still highlight a compelling and troubling gap between inventions by Canadians versus others.

Let me put it another way (or more accurately, let me quote other WIPO data): For every million Canadians, 151 patents are filed. That's a low, low number when you compare it with the following:

Country : # patent applications/million residents
United States : 800.17
Germany : 581.67
Israel : 224.93
Ireland : 193.99
France : 238.58
Finland : 341.10

What is the rate of innovation that we need to maintain in order to be proportionately competitive with other innovation economies? That's somethign people who don't have clients can debate. Me, I'm just going to point out the yawing gap between Canada and Finland (Finland?!? This isn't hockey! On sheer numbers of daylight hours alone we should have more inventions than they). But the compelling fact for me about these numbers if they cry for a proactive immigration policy that will clsoe teh gap.

RIM Accessories I WOULD Buy

2009-12-07T12:21:00.004-05:00

I remain mystified by RIM's accessories strategy. The Blackberry store is touting some pretty basic stuff as being "authentic" and, therefore, good. "Authentic" accessories apparently are smart looking and smart thinking. If these were, say, cowboys, I'd be intrigued.

Here's what I think RIM should do instead: send a big fat check to Newfoundland, care of Nonia knits, and have the ladies spend this year knitting trigger mitts. There are only so many moose hunters out there who need mittens that allow you to use your thumb and trigger finger. However, the number of Blackberry Storm users grows daily. Sell them next Xmas as Blackberry mittens, and even use a portion of the proceeds for another donation (money from sales by Nonia goes to local healthcare). They're black, they're fashionable, and they're fun. If the Bay can convince everyone that red mittens are a fun item, RIM can.

Start-Up Holiday Guide 2009

2009-12-07T06:48:00.007-05:00

Still gift shopping? Here are our recommendations for the entrepreneurs in your life, gifts that not only show that you care, but also show your support for the Canadian innovation scene:

1. A Very Beta Xmas

Toronto's Cignias has launched its music station line of products - iPod- and iPhone-ready speaker systems with both Wi-Fi and Bluetooth wireless features. The Nao Symphony ($299) includes support for stereo Bluetooth streaming, plus traditional wired connections through an iPod-charging dock and an auxiliary input on back.

I tech news notes; "The novelty here is the Wi-Fi: an Infrared remote control is included to control the docked iPod, but if you prefer to have full library navigation access, you can use an iPod touch or iPhone from afar to control whatever's in the dock; a free MusicNao application can be downloaded from the App Store for wireless remote control purposes."

2. Mereadesso - Because Even Innovators Need to Exfoliate

MAC has turned out to be the Nortel of cosmetics; its alumni continue to spin out new and innovative beauty start-ups,and the latest, Mereadesso, will deliver just in time for Xmas if you act now. Mereadesso's first products comprise one of the best skin care lines I've ever seen. As well it should; its founder (a MAC alumni) has degrees in chemistry and botany, and past stints that include product development and senior roles at Estee Lauder.

3. Pre-HOHOTO: Support Canada's Social Philanthropy Pioneers

NONIA knits was established in the 1920s to raise funds for paying the salaries of public health nurses who provide health care to Newfoundland's remote communities. It's one of the earliest examples of Canadian social philanthropy: women providing products which in turn support other women. A non-profit, NONIA still works today with 175 knitters and weavers in Newfoundland producing all manner of handknit items.

My favourite? The trigger mitters, which are not only good for hunting, but also for attending to cell phones and blackberries in Canadian winters.

4. . Because You haven't Hugged Your Lawyer Today

I want one for our meeting room, I can't even describe for you how much. Captain James T. Kirk's chair comes with all the buttons and controls you could ask for, plus sound effects (photon torpedoes!) and even pre-taped commands ("Mr. Spock! Report!"). Only 1700 or so are being made, and one of them should be mine. Do me a favour, and send one to a lawyer who's helped your business so at least someone can live out my dream.

Vive Nano Shows Us How Creative Fund Raising Is Done

2009-11-24T10:12:00.003-05:00

Those of you who read this blog regularly know that this year, I am a big advocate of grabbing all the government cash you can to grow your business. This is not based on some personal philosphy of mine about the role of government in innovation. It's a reflection of the cold hard realities that come with being an innovator in a region outside of Silicon Valley. Right now, no North American region outside of Silicon Valley has a significant pool of local venture capital available. The money available today to fund innovation comes principally from local, provincial and state governments.

Now, there's no question for me that this will change. For example, it's pretty clear that in Canada, 2010 will be the year local funds begin to re-emerge. But while we wait, growth belongs to those who understnad and act opportunistically to can secure their piece of the local capital pie.

Which leads me to our client, Vive Nano. Yesterday the Ontario Government announced an award of $3.8 million to Vive from the Government's Innovation Demonstration Fund. Proceeds will be used to build a pilot production plant for its nanomaterials. Vive Nano's first product reformulates pesticides so that farmers can better protect their crops while using less chemicals, resulting in reduced emissions and less chemical run-off. Other nanotechnology applications are expected to lead to significant advances in wastewater treatment, fuel cells, biofuels and solar cells.

Congratulations to the Vive team. Watch this space for further developments in government funding as we roll into 2010 - 2011.

Canadian Social/New Media in New York

2009-10-08T11:59:00.002-04:00

On October 28, the Canadian consulate in New York is hosting "The Evolution of Media", a half day event featuring our rock star client Filemobile and other Canadian new media companies. This session also features a keynote from internationally-renowned new media expert Mitch Joel President of Twist Image - an award-winning Digital Marketing and Communications agency. Check out here for more information.

Start-Up Brain Drain: The Next Threat To Canadian Venture Capital?

2009-10-06T19:23:00.004-04:00

When US VCs grow introspective, it’s almost never good for Canada. Which is why we should all be concerned about the self-reflection now taking place south of the border.

In recent months, US VCs have cottoned on to the importance of immigrant entrepreneurs to an innovation economy. This used to be Canada’s exclusive domain; thanks to historical inclination and demographics, we’ve long known we need foreign innovators in order to grow our economy.

Now, US venture capital is catching up. Their zeal is fueled by a recently released study by the NVCA, which notes that (a) immigrants have started more than 25% of U.S. public companies that were formerly venture backed, and (b) more than 50% of the employment generated by U.S. public venture-backed companies has come from immigrant-founded companies like Intel, eBay, Yahoo!, and Sun.

The New York Times has also taken note, citing Harvard Law professor Vivek Wadhwa’s claim that 52.4% of today’s Silicon Valley startups have at least one foreign founder. US VCs are figuring that, to expand domestic deal flow, they need to expand the immigrant entrepreneur base.

As a result, US VCs are now actively lobbying the Obama administration to increase the number of specialty worker visas (referred to longingly by Canadians with dreams of a Silicon Valley life as H1B Visa).

This is not the best of news for Canada, unless you are a young entrepreneur who believes his business would get more and better financial backing if only he could relocate to California. The limited number of H1B Visas in the US has driven high tech growth in Canada, in some respects; in several cases, American businesses who cannot attract or sponsor adequate numbers of high tech professionals have near shored that work to Canada.

In a larger sense, there is an active competition heating up for innovators from outside of North America, one which Canada can ill afford to lose. Canada has some immigration programs for entrepreneurs which are laudable, but not spectacularly effective. There is a need to think and plan for how to capture this desirable talent pool, before new market entrants steal our thunder.

BCE Capital/Summerhill Ventures Scores a Liquidity Event

2009-09-14T10:53:00.003-04:00

Been crawling through the August/Labour Day pile of work. More blogging soon (lord knows, there's lots to blog about!). But in the mean time, rejoice in Toronto's Summerhill Ventures, which celebrates a liquidity event thanks to its portfolio company Intellon,sold for $244 million in cash and stock.

It's nice to see some gains in the US market make their way north of the border.

Ontario's Emerging Technology Fund: Fuhgeddaboutit

2009-08-04T09:06:00.002-04:00

While we were all heading off for the long weekend, those scamps at the Ontario Ministry of Research and Innovation were busy launching their long-awaited guidelines for obtaining matching funds from the Emerging Technologies Fund. You can view them over here, but make sure you bring your time machine with you so that you, too may travel back in time to a place where these guidelines might be relevant.

By creating a process so onerous that no self-respecting angel would bother, the OCGC has narrowed the ETF so that matching funds are essentially available only to for VC investments made in Ontario companies. What VCs would these be? I ask you. The ones receiving funds from the Ontario Venture Capital Fund, which is also managed by this same group? (PS, there aren't any, unless you count the two commitments made to local venture capital funds which have yet to close)

Certainly the guidelines can't be aimed at matching US VC investments, since it requires that the ETF's investment be bought out if at any point the funded company loses a significant Ontario footprint. Most US VCs ascribe to the "scale sales and executive team in a US office" approach to building a company.

The most meaningful investment activity in Ontario in the last two years has been that done by angel investors. As a reward for their engagement, they now must complete a lengthy application, including a statement of their net worth and the names of several personal references, before their investments may be considered for matching money.

It also is not clear who is vetting and assessing these applications or how this can be done in a timely manner: the Fund is administered by the Ontario Capital Growth Corporation, whose board of directors consists of 4 senior public sector employees that have been allocated to the OCGC on a part-time basis.

The ETF was a really brilliant policy initiative that could have accelerated the growth of all those Ontario start-ups that stayed the course in the last two years. The impact of the guidelines? I'm hoping someone has a better view than I.

Do I Have to Embrace Failure If It's Just Our First Date?

2009-07-21T07:45:00.009-04:00

There's been so much blogging about how important the experience of failure is in the development of entrepreneurs, that I feel compelled to speak up for the forgotten: entrepreneurs in denial. You see, I think I might be one of them.

Here's the story: A few years ago, I decided I wanted to set up my own bath and body products business. The idea was to develop the products, build a first stage retail base that would generate some cash flow, then hire someone to run fulfillment and manage retail channels until the appeal ran out. I figured, this would be a great hedge against the ebb and flow of legal work, plus it would give me a great network of contacts in e-fulfillment, marketing etc.

The beauty business is fascinating for a number of reasons. First, it's a virtual business; most small brands outsource 99% of their operations. There are multi-million dollar operations that are run by 5-6 people in Canada. Second, it's all about who you know. The best packaging designers, formulators, and contract manufacturers are closely guarded secrets. This means that getting a business off the ground depends on who you know, and whether they like your concept.(Unless, of course, you want to go the "artisanal" route, and mix your own concoctions in your kitchen and sell them at gift shows. This tends not to scale, unless you are an 80-year old Eastern European woman with the face of a 12-year old.)

I was lucky. I knew someone who hooked me up with the right people, and they loved what I was doing. (My favourite start-up lesson: If you ask people stuff, they'll often tell you what you need to know.) We had a list of products that we prepared, and the first three were soft launched through a web site.

I named the business Corner Office Beauty(Success is Beautiful), and bartered with one of the best consumer marketing people in the business to create the copy. He got in touch with his inner female and came up with some great stuff, such as the tag line "With All You Have to Offer, Why Aren't You in The Corner Office?"

My favourite launch product is our hand cream, Ballbuster. It also turned out to be our hero product in the first year, attracting lots of press, buzz and orders:

I am particularly fond of the box, which has a quote from The Art Of War and a definition (Ballbuster(noun): A task that is arduous, demanding and punishing. 2. A demanding woman who destroys men's confidence.). Others loved the illustration on the lid of the jar (It's a nutcracker. What else WOULD it be?)

Here's some of the press:

Valentine's Day became a big time for our soap, "Transition Man". Things generally ramped up nicely.

But then I discovered something: to really scale a start-up, you really have to hate your day job. And I don't. I love being a lawyer, and I love my clients. For the last few years, my day job has been really busy, and I've let Corner Office slowly, slowly recede. I shut down the e-commerce section because having to work on financing documents while packing and fulfilling orders is not a great way to spend a week night. My retail channels are wondering when I will deliver something new, which means I have to roll out the other products we designed and formulated soon.

As I write this, I am also thinking what to do about one celebrity -backed product that we have been almost-launching for a few years now. If any of you get involved in celebrity endorsements, talk to me first and I will share special stories. Dealing with the talent is lots of fun, but you will end up starting a lot of sentences "Oh honey," for several months afterward.

I may have to use the "F" word soon, but the nature of a virtual business is that you can stay in denial for lengthy periods of time. (Not that I'd know anything about that.) In the mean time, I have one last lesson I've learned so far: it's really, really hard to sell lip balm. You have to make it in large production runs, for one thing, and it's harder to get your retail channels to take it unless you also create appropriate point of sale display boxes and collateral for it.

This means that I now have so much top of the line all natural lip balm (called "Whistleblower") lying about, I can't tell you. Come to my office for a closing, and you will get some. Stopping by for a license? Same thing.

So, if there is anyone nearby who would me to donate like some lip balm for a fundraising event, let me know. It is great stuff (flavoured with mint and lemon, to keep your breath free of the stench of corporate corruption)

I might embrace failure at some point, but right now, I'd prefer it if some of you embraced lip balm.

Will Toronto Be The Next Capital of Angel Investing?

2009-07-17T08:11:00.007-04:00

According to the "Global Entrepreneurship Monitor", Canada only ranks 9th in the world in angel investment. I have no idea who or what the Global Entrepreneurship Monitor is (I am scraping the data from our own National Angel Organization's website) but I have to believe this ranking is based on incomplete and dated information. There are a number of indicators which would suggest that, in the last two years, Canada in general and Toronto in particular has been racing to the top of the pack.

Now, I'm basing my suggestion in part on the sheer volume of angel deals that have churned through our office over the last two years. I figure, if our firm has only a percentage of the addressable market of angel deals in Ontario, then using fancy math, this would extrapolate to practically exponential growth in this area.

There are a number of key drivers of the growth in angel investment in Ontario, that would support this theory, including the following:

- the giant sucking void of seed and pre-seed capital, matched only by the sucking void in public market returns. For many angels, this makes the opportunity cost of placing money in private companies acceptably low.

- new government pools of capital (the Accelerator Fund, IRAP, the Emerging Technologies Fund, to name a few) that are designed to help fill the funding gap. These help mitigate against the risk that there may not be additional growth money available for angel investees.

- the emergence of an angel community, led by the National Angel Association and various angel investor groups who, through broad based public marketing, have marketed angel investment as an asset class unto itself. This has created a kind of validity about the investments that directs new angels to action.

The result is an emerging set of Ontario angels with unique characteristics:

- The angels writing big checks are not, generally speaking, active participants in the local angel community. They find their deal flow through their own focus and interests, rather than community events. The most active Ontario angels are high net worth individuals with successful track records in high tech or traditional industries who have the resources to provide follow-on funding themselves if required. This can protect an investee that is doing well against any shortage of venture capital.

- Ontario angel investments are often purpose driven. They invest because they want to be a tangible part of solving a particular problem - in detecting or treating disease, for example, or in removing a stumbling block that has stymied their own industries for years. (This leads me to wonder whether the Diabetes or Kidney foundations, to name a few, find themselves losing funds from past donors who favour more personal interventiion through investing.)

- Angels who are purpose driven tend to provide more rigourous oversight of a company's execution of its business plan. (This is not the same as providing operational support - more on that in another post.) They also tend to be more effective evangelists of the business.

- Ontario angels are remarkably patriotic. They believe in contributing to Canada's place as a technology leader.

- While Ontario angels are patriotic, they are not insular. Many have invested outside of the region, andhave leveraged the resulting networks for the benefit of local investees.

This is the kind of skill set that most start-up regions can only dream of. It also suggests we are developing Ontario angels that will be long term participants in seed investing. Stay tuned

Bridgescale Opens Toronto Office

2009-06-16T11:23:00.002-04:00

Those of you who remember Rob Chaplinsky from his days as a VC with Mohr Davidow (investors in, among other things, Ottawa's Quake Technologies) will be pleased to learn he has recommitted to the north at his new fund, Bridgescale Partners. PE Hub today reports that the office opening is now official- details to follow.

(Note: Bridgescale focuses on growth equity, not seed stage investing.)

Does SiliconValley Really Thrive Without Non-Compete Agreements?

2009-06-04T08:16:00.004-04:00

I love non-compete clauses. I can go on for hours, maybe even days if there are donuts around, about this particular issue.

If deployed correctly, restricting key employees from competing when they a company leave makes the intellectual property assets of a company easier to protect, start-ups easier to finance, and incents employees to produce. The harder it is for founders or key employees to leave a start-up and pursue the same innovation elsewhere, the better.

During the last two or three years, however, mine has not been the most popular view. Outside of Silicon Valley it has become de rigeur to decry the practice of requiring start-up employees to be bound by non compete and non solicitation restrictions. Critics argue that clauses like this stifle innovation. They point to California, where non-compete clauses are void by state law. California’s ban, they say, allows a free flow of ideas as employees churn between start-ups, which in turn stimulates the continuous generation of new start-ups and innovations.

Over in New England, Spark Capital's Bijan Sabet and others have even convinced Massachusetts legislators to take a similar “open source” approach. In January 2009 legislators even introduced a bill that would copy California's ban on non-compete clauses in employment agreements.

Yeesh.

Now, it seems I’m not the only one who rejects the idea of open source innovation - some of Silicon Valley's larger players may also feel the same way.

Yesterday came news that the United States Department of Justice has opened an investigation on the recruiting practices of Silicon Valley companies like Google, Apple, Yahoo!, Genentech and several others. The investigation is looking into whether the companies entered into agreements to not actively recruit talent from each other, which may be a violation of antitrust laws.

Stay tuned.

Knowing When to Close the Doors

2009-06-01T21:42:00.005-04:00

In the last few months, I've encountered entrepreneurs who've risked it all - house, RRSP, bank balance - in order to keep their fledgling businesses alive. Some of them (most of them) either have or are going to fail, and I can't help thinking that they could have avoided this result had they worked with experienced investors or solid mentors.

Why? Because experienced investors and advisors invest in a business on the basis of acceptable risk. They have invested their time (or provided services) because they have bought into a business plan which de-risks the major challenges of building the business with the funds on hand. Outside investors establish metrics that measure progress of the business and allow them to determine whether the risk is diminishing or increasing. An investor knows how to measure when a risk is too great, and also when to close the doors.

When entrepreneurs rely on friends and family money alone, they often don't build that kind of reality-check into their business. They reckon, even when the market is telling them otherwise, that if they can bootstrap just one more month, they'll make it to the next level. Founders who have bet the farm can be unwilling admit defeat until it's too late to try and recoup any losses.

Outside Silicon Valley there are fewer mentors with who've been in the start-up game long enough to have ridden out the last two boom and bust cycles in the industry. If that's the case in your area, then you need to practice self-help and start adopting some basic rules for how you invest in yourself:

1. It's never a good idea to bet all of your assets on the success of your business, unless you're 19 years old. You cannot assume that there is a white knight investor out there who will take you to the next stage if you just find a way to keep going.

2. If you cannot find some mentors or investors to engage with you, this may be an indicator that it's not such a great idea to begin with. At the least, (in Toronto)go to MARs and use the resources all your taxes have paid for to validate your assumptions.

3. If you are not measuring your progress in an objective, multi-faceted way, then you are engaged in an emotional endeavour. Emotional endeavours have a 50% divorce rate.

Mentoring Start-Ups, Baghdad Style

2009-06-01T10:00:00.006-04:00

One of my favourite friends/clients is over in Baghdad working on fostering local entrepreneurship, all as part of the US's Rebuilding Iraq initiative. Going to meetings in Baghdad presents unique fashion dilemma such as, what suit goes best with body armor?

Next time one of your business advisors/mentors balks about an early morning meeting, show him this picture.

Last thought: Billions are being spent on rebuilding and connecting local businesses in war-torn places like Iraq with the world market. Is there an opportunity for your social media business to grab some of that money and carve out a role?

More on the Embedded Executive Program

2009-05-27T12:38:00.002-04:00

Kevin Carroll at OCE has come to the rescue with more details about the embedded executive program. The embedded executive program (also referred to as "embedded coaching") is part of what the OCE calls its Business Growth Program.

Here's how it works: "The company’s management capacity and needs are assessed by OCE commercialization and business development professionals in collaboration with the company. The resulting project plan may include specific measures to strengthen management, often as part of a larger project plan aimed at various aspects of the company’s development.The company, assisted by OCE staff, [then] prepares a proposal for funding and other support from the Business Growth Program."

This support includes sharing the costs of acquiring the services of an experienced entrepreneur or business manager to work inside the company for a limited time as an embedded management coach who provides chief executive functions, business planning, financial management, technology strategy, human resources, marketing, or other areas identified during the needs assessment.

"A typical assignment," the OCE material reads, "would place an embedded coach inside the company on a part-time basis for up to 6 months. Compensation options for coaches may include pro bono arrangements, honoraria, and future considerations such as equity or conditional deferred fees."

Who qualifies as an "embedded coach?" According to the material Kevin provided, "the company and OCE will jointly select a coach from OCE’s extensive network of management experts." This may refer to the large mentor network registry that the resides somewhere over at MARs, but if it were to be truly effective, one would hope that the OCE would also cost share on any exceptional person identified by the company.

There you go. Over to Kevin Carroll for mroe details.

Rule Book for Tough Times: Who Employs You - Your Company or Your VC?

2009-05-25T20:32:00.001-04:00

Here’s a story I’ve heard before, both in the last down turn in the early 2000s and today: Start-up Company X is going through a cash crunch. Its backers, VC 1 and 2, approach the CEO and tell him his time is up. However, they advise, they won’t pay him out the full amount of severance he negotiated in his employment contract. The Company doesn’t have the cash, they say, and they’ll bridge the Company with additional funds if and only if the CEO agrees to a lesser payout. The CEO, feeling he has little choice, takes the deal.

Not so fast.

Any investor who tries this out on you is relying on the belief that, as an investor, he’s immune from liability for your severance package. But is this the case? Can VCs/angels who step in like this and control portfolio company operations find themselves liable?

This issue has been lurking over North American venture capital for years. In the US, lawsuits have been brought typically based on the "single enterprise" theory, that when a VC makes executive decisions or takes other controlling action, two different entities, it and its portfolio company are deemed to the same legal entity.

In Canada, a similar theory about the liability of controlling shareholders has been advanced. There are also a number of Statements of Claim that have tied this kind of behaviour to liability for oppressive conduct.

To my knowledge there is still no precedent-setting case on the issue north or south of the border. This is largely because most VCs appear to have settled once litigation was launched.

There is a tendency for VCs (and angels, for that matter) to take over the reins of portfolio companies businesses in troubled times. Unless they do so in a way that keeps them separate themselves from their portfolio companies, they invite exposure. There are a number of factors to assess when determining whether VCs (or angels) have crossed the line into liability, but I’m not going to enumerate them here. You want to know, you can always call me and ply me with flowers. But don’t let your own position (or your company’s ability to continue to restructure with a bridge) be compromised because of overly enthusiastic investors.

i4i: Toronto VC Maclean Watson Proves There's More than One Way to Make a Profit

2009-05-25T13:26:00.004-04:00

Last week's $200 million Texas court ruling in favour of Toronto's i4i Inc. may end up returning a gain to holders in Mclean Watson's Fund I and II. The patent infringement lawsuit will no doubt go under appeal, so it is too early to determine if McLean Watson's partners will see any return on their carried interest for their efforts. But kudos to the fund (which has not announced private investments in any new portfolio companies in years)for identifying and assessing that rare bird, an intellectual property portfolio that can be effectively exploited.

Bud-ding into Venture Capital

2009-05-22T12:05:00.002-04:00

By far the most interesting VC-watching these days is on the back end, where old fund managers are being replaced by others hired to manage (and exit) portfolio investments. These new managers may well be the new VCs in 18 months or so.

The folks I keep my eye on are over at Kirchner and Company, where Bud Kirchner has amassed a team that includes Barry Gekiere(ex-Ventures West) and Les Lyall (ex-Growthworks). Kirchner is rumoured to have recently taken over management of a number of former Innovatech start-up investments, among other projects.

Does Ontario's Innovation Minister Wear Pajamas?

2009-05-21T07:21:00.005-04:00

I once dated a man I thought was the perfect match. After a particularly romantic night on the town in Manhattan, I decided it was time to take things to the next level. I decided wrong; soooo wrong. We returned to his apartment where he dimmed the lights and (really, I wish I was kidding)……donned pajamas. The same jammies he wore for the rest of our (short) doomed relationship.

The term “jammie man” has since been used by my friends to describe anyone who falls short of their initial promise, either romantically or professionally. Golfer John Daly? Jammie Man. The Segway? Jammie Innovation. Remake of Beverly Hills, 90210 ? Jammie show.

It looks like there's another name to add to this list - our current Minister of Research and Innovation. As June approaches, we have learned nothing about the promised guidelines for Ontario’s Emerging Technologies Fund. You may recall that in March the Ministry announced that guidelines for the fund would be available in June, with matching funds being deployed in July. Now, the Ministry has posted that guidelines will now not be available until the end of July. It is widely expected that won’t see any money deployed until the fall at the earliest.

What seemed to be a savvy, brilliant move by a Ministry that understood how to preserve start-up innovation in the absence of venture capital now appears to have fallen victim to implementation bloat. John Wilkinson, I regret to inform you, may be turning out to be a jammie man.

Timely implementation of the fund is critical to Ontario's innovation economy. There are scores of Ontario companies who have bootstrapped themselves and raised modest friends and family/angel rounds in the last 18 months. Matching funding deployed now would preserve those jobs, plus those Ontario investor dollars that have stepped in to support those businesses.

While there may be additional thought and debate required on how the guidelines should work for 2010-2014, that should have no bearing on the present, very real need to bridge companies in 2009. Easy criteria: if an an accredited investor (as defined by the Ontario Securities Act) wants to invest in you, the Ministry will match that money. A good starting point. One could expand that in a variety of ways, but loosen the coffers first, and deal with intricacies later.

Is there anyone who disagrees that there is an innovation cash crisis? Now is not the time for pajamas. We need a tee shirt and boxers guy.

More OCE Funding Opportunities: The Embedded Executive Program

2009-05-20T10:26:00.003-04:00

Over the last few months I have found my feelings for Ontario's Centres of Excellence to be changing from ones of friendship to something more. Dare I name it? Can it be...love?

When the expanded mandate (including funding for business acceleration, market readiness etc.)for OCE was first announced, many of us treated it as a non-event. But since last December, when it rolled out its first Accelerator Fund investments the OCE has been going full bore. The OCE may well be the single most active early stage investor in Canada at the moment.

You've got to hand it to them - they've filled the current gaps in start-up funding as creatively as possible. The latest addition? According to my clients, OCE has funds for an "Embedded Executive" program. OCE will provide some funds to pay the first 6 months salary of a senior executive that joins the team of Ontario emerging growth companies. This incents start-ups to add bench strength sooner rather than later. Since team strength is an important metric for attracting growth capital, this is a terrific supplement to other OCE programs.

I don't know much more about the program, but suggest those of you engaged with OCE contact them for further details.

The Challenge (and Opportunity) for Regional VCs

2009-05-07T10:59:00.002-04:00

An oft-heard comment about Canadian entrepreneurs is that they don’t aim high enough. Lately I’ve been wondering if our local angels and VCs are doing the same thing. In focusing on nurturing the local startup community, are they missing a larger opportunity?

Let me start by agreeing that, no question, local VCs need to prove to their LPs that there really is a critical mass of fundable entrepreneurs in Canada. But this focus needs to be applied with a sense of the broader trends in North American venture capital. The industry is consolidating and reinventing itself south of the border. Canadian VCs need to think where they fit in this new, emerging industry. Will local excellence be enough?

To date, Canadian venture capital has not been able to survive as an industry that services solely Canadian start-ups. That doesn’t mean it won’t change, but that’s the track record, neatly summarized in a handful of consultant reports tucked away in certain VC offices. And past results generally drive LP investment decisions.

Expanding investments to the US would be a logical hedge against slower growth here, but this has been difficult for a number of reasons – either LPs (because of their own institutional requirements) require that investment be limited to Canada, or because it been very difficult to get access to quality American deals. What does a Vancouver/Toronto/Montreal investor bring to a syndicate of Silicon Valley investors? Tough question to answer.

These two challenges are also faced by other regional players in the US. And I have to wonder if the needs of regional VCs in, say, Chicago, Philadelphia, Washington and North Carolina present a unique leadership opportunity for Ontario VCs.

Before you tweet away, consider this: in the next few years, American venture capital likely will evolve into a two-part industry, consisting of: (a) a handful of mega funds that operate globally, and (b) some smaller regional players that service start-ups off the Silicon Valley grid. If you believe that Canadian venture capital must expand to survive, then it’s got to figure out how to play in this new North American industry. I think it can do more than play - it can lead. I believe Canadian VCs may be best positioned of all to become leaders in regional venture capital.

Why? Billions of dollars have been to support and grow the venture capital industry in Ontario over the last decade. Since 1998, Ontario has been one of the largest living start-up labs there is – perhaps the largest one outside of Silicon Valley in terms of dollars spent. Ontario VCs and start-ups are uniquely positioned to become strong regional players.

How? We can provide great quality investments in Ontario to regional VCs looking to expand their portfolios, also don't have access to Silicon Valley deals. We can in turn act as good syndicate partners for our US regional partners. We can extend runway for investees by helping them expand by setting up development teams in Canada, taking advantage of job-creation-driven government funding.

As a VC, I was fortunate enough to be part of a fund that could lever its LP’s name (BCE) as a potential strategic partner, allowing us to join US investments and sit at the table with some of the biggest U.S. names in the business. The networking and experience gained was invaluable. Without that kind of entrée, however, Canadian venture capital need to be creative in how we build. And the current consolidation creates a nifty opportunity.

Where will Canada’s start-up industry will fit in the North American ecosystem? Is there an opportunity outside of Silicon Valley that we need to cultivate in order for our local VCs to survive? Is it enough to aim locally? Do we want to go to the matinee, or do we want to go to THE SHOW?

Growthworks: Not Just a VC

2009-05-05T16:43:00.003-04:00

You have to hand it to Growthworks - when management fees fall across the industry, they find ways to diversify.

Last week Growthworks anounced its intent to acquire Mutual Fund Manager Mavrix. To do so, it is likely GW rolled over some of their own management fees received for managing GW assets into buying, effectively, more management fees (i.e., the one Mavrix earns for managing its own assets).

What does Mavrix have to do with venture capital? Nothing, as far as I can tell. But if they provide one VC which a creative source of operating capital, I'm on board.

Why Customers are Shifting to Smaller Vendors

2009-05-04T17:07:00.002-04:00

Great post over at Harvard Business' blog by Peter Bregman on why small businesses will win in the current economy. It was posted back in March, but highlighted today by PE Hub. It many ways, it reflects the experience of many of our emerging tech clients, who have seen meaningful uptake in customer traction in the first quarter of this year.

Bregman suggests that small businesses are benefiting from an across-the-board loss of confidence in larger corporations. Internally, Bregman says, middle and senior management no longer trust that their jobs are secure, which in turn impacts their ability to sell effectively. As a result, large as well as small customers are increasingly turning to lean, smaller businesses where founders are available by phone, and where employees a sense of security and trust, which they in turn communicate to customers.

"We simply don't trust companies anymore," Bregman says. "We trust people."

Bregman concludes that this "gap in confidence" remains a huge opportunity for small companies on the rise: "Small is the new big. Sustainable is the new growth. Trust is the new competitive advantage."

Great stuff. Read it here.

Growthworks Down-Sizes?

2009-04-29T13:28:00.002-04:00

..rumours abound this morning of layoffs in the Growthworks team in town. Stay tuned.

Digital Media Gems

2009-04-27T18:41:00.003-04:00

Rob Tercek was one of the nicest guys you could meet at Williams. Years later, he has become one of the gurus of digital content, starting in the space when it was a theory and rising to his present position (since late 2008) as President of Digital Media for the Oprah Winfrey Network. His blog, which has gone quiet these last few months, is a terrific resource on Social Media and Content, from the unique point of view of someone from the world of branded entertainment programming and the personal development market (an $11 billion market in the US alone). I recommend you it check out here.

Toronto Events: CEO Roundtable

2009-04-21T13:24:00.003-04:00

Attention CEOS: the Ivey School of Business will be hosting another event in its CEO Roundtable Series on May 14 at the National Club, Toronto. The topic? "Excelling in Recessionary Times: How Private Equity Creates Value for Business Owners". Speakers include Bill Wignall (Truition),Sacha Guy (McKinsey & Company) and Ron Close.

It's a closed event for CEOS only, and I recommend you contact the folks to ensure a seat. The event is sponsored by Loewen & Partners, whose principals include the esteemed Jacoline Loewen, author of Money Magnet, and a snappy dresser to boot.

TO RSVP, phone (416) 961-0740 and ask for Anastassia Kobeleva.

Going Outside of Your Comfort Zone

2009-04-16T14:53:00.003-04:00

There's lots of rhetoric out there about how in the current economic conditions we should all take risks, embrace failure and, as entrepreneurs, go outside of our comfort zone. Sometimes I think that this is an inspirational message. Then, I see something like THIS:

This is what happens when Brooks Brothers went outside of its comfort zone, and kept going. It's an ensemble from Brooks Brothers' Black Fleece spring collection. The Black Fleece label was created by the traditional clothier to help it capture the more avant-garde men's market. Every season for the last 2-3 years, Brooks Brothers has invited designers like Tom Ford to re-think the Brooks Brothers esthetic under the Black Fleece label. So far, once they've done their damage, no designer has returned.

Maybe fashion is a good metaphor for innovation. Is your latest idea one that will wear well? How would it look on, say, Jason Calcanis or Terry Matthews? Like an Armani tux? Or, like this:

Another Dear John (Wilkinson) Letter

2009-04-15T14:55:00.002-04:00

Dear John,

I know you don’t like it when I call you at the office, but you don’t seem to return my calls or emails, and, well, I’m beginning to think that you don’t care. We need to talk. About us.

And by “us,” I mean you, me and Ontario’s entrepreneurs. We understand why you’ve been busy with all those VCs and university and hospital researchers. I mean, they prance around you in their pretty white lab coats and their black investor-style mock turtlenecks, talking about genome projects and the loss of future generations of entrepreneurs and investors. What man wouldn’t be distracted?

But you need to turn away from all these fancy promises of future job creation and focus on our needs: the retention of innovation economy jobs that exist today. After all, where have these researchers and investors been when you needed someone to cook your dinners and create jobs for the innovation economy? And when you couldn’t find your socks before the Budget Speech, or VCs who could access the Venture Fund you set up for them, who was there for you, bootstrapping like mad to launch companies to boost your statistics about Ontario’s high tech clusters? We were, and now we want a little respect.

Come July, when the Emerging Technologies Fund is activated, we want you to ensure that investment funds are deployed to match investments in innovation businesses that are made not just by VCs, but by a broad range of others. Let’s face it - until the OVCF deploys more capital, and other VC limited partners ante up alongside them, there just aren’t going to be many VCs with money that, come July will be able to co-invest with ETF, anyhow.

Which means you need to consider whose investments you’ll match. This all turns on who you decide is an “eligible private sector investor.” For example, how do you determine what individual investors trigger matching funds? There is no accepted definition of “angel” nor should we try to craft one now. What if family and friends want to top up an investment offer made by an “eligible private sector investor” – will their funds also be matched by the fund? You want suggested wording for the guidelines? You know all you need to do is ask.

We know you’re concerned about how the Ontario taxpayers will be repaid, and we think that we’ve got you covered. Most investment terms include a right for investors to sell (or “put”) their shares to the Company after a period of time (usually 7 years) has lapsed without a sale or IPO. Which means that, we can ensure the taxpayer is repaid if we don't try and sell or publicly trade our shares (and right now, most innovation companies won't). You need specifics? We can provide them.

We know we haven’t got flashy labs or enhanced portfolios like some of the people you’ve been hanging out with. We’re not asking you to give them up; after all,we’re not ready for a permanent commitment, either. All we want is a little respect. And maybe flowers on our birthday (coincidentally, we were all born Nov. 28).

Entrust Goes Private: More Commentary

2009-04-14T17:51:00.003-04:00

Those of you considering your own exits(or acquisitions) need to take a look at this evaluation of the Entrust/Thoma Bravo deal in the New York Times.

The Entrust agreement signals a shift away from deals that can be terminated because of a broad range of "material adverse changes." A year ago or more, a buyer would have retained significant rights in a deal like this to walk away before closing for any reason, with little obligation other than to pay a termination fee.

Fast forward to today and it appears that the leverage has shifted to the seller. As the NYT notes, the Entrust deal appears locked in: unless certain minimum working capital requirements are not met, Thoma Bravo has very little ability to terminate the deal. There are 16 carve outs from a formerly typical "mac" clause.

Further, the acquisition agreement (filed yesterday with the SEC) gives Entrust astonishingly broad rights to force the transaction to completion. Entrust can sue Thoma Bravo directly and even force it to complete the transaction. In addition, "Entrust [has the right]to sue for the economic benefit of the transaction if specific performance was unavailable — a way to ensure that Entrust shareholders can receive the share premium in a deal dispute".Entrust's obligations to Thoma Bravo if its shareholders reject the offer? Small; Entrust must reimburse fees and expenses up to $1 million.

Contrast this with BCE's deal, and you'll see the shift.

Check out the rest of the post to get a great review of changes to "MAC" clauses sellers are successfully negotiating.

Return of the Heavyweight Entrepreneurs, Part IV: Cignias

2009-04-14T12:01:00.002-04:00

The telecom start-up has returned to Toronto with the quiet launch of our client, Cignias.

Cignias includes a star founding team (some ex-Vixs, another local start-up), which has managed to bootstrap to create working prototypes of their first solutions, the NAO™ docking station and the NAO™suite of applications. NAO "will allow users to truly manage the control and distribution of their multimedia content from anywhere. Functions such as wirelessly controlling the playback of the music on their phone on the NAO™ docking station or wirelessly sending pictures to your NAO™ digital photo frame from anywhere in the world instantly."

Here's yet another example of a start-up that has launched and created jobs and made its first inroads in the market on its own steam.

Entrust Goes Private with Thoma Bravo

2009-04-13T10:18:00.004-04:00

This morning former Nortel spinout Entrust announced its agreement to be purchased by Chicago-based Thoma Bravo, a private equity firm that specializes in acquiring and consolidating public and private software companies. It is not yet clear whether Entrust will be the consolidation platform for other Thoma Bravo targets in the security sector, or whether it will be rolled into another TB portfolio company. Entrust has been an Ottawa staple for years and its alumni have gone on to found other companies, including Ottawa's Third Brigade.

This kind of private equity investment makes me happy, as it is based on the theory that value can be built through consolidation (versus the theory that value can be extracted by breaking up the assets of a business and selling them). It's the kind of exit that can give investors and founders some significant upside despite a sterile public market.

Thoma Bravo is not the only PE player nosing around Canadian companies with more than $50 million in sales - stay tuned.

Pay No Attention to the VC Behind the Curtains: Focus on the Emerging Technologies Fund Instead

2009-04-09T10:42:00.003-04:00

What with all the twit-slapping and bloggering that’s been going on in the last week, I’ve ducked my head and avoided any discussion of venture capital here in Canada. If I had time, I’d probably point to the email I received from a US investor saying “THIS is why I don’t like having local VC partners” and note that the dialogue generally has not been that productive from a marketing perspective. I may even suggest that this is no time to man up, but a perfect time to man DOWN.

But I figure, my job is to sort out what’s relevant for my clients, who are mostly entrepreneurs. So I ask you now to turn away from the carnage and pay attention:

Here’s what you need to focus on: the as-yet unpublished guidelines for getting matching investment money from Ontario’s Emerging Technology Funds (“ETF”). The guidelines, which the Minister of Research and Innovation (the MRI) says will be available in June, will tell us what kind of investment will qualify for additional funds from the ETF.

Since the ETF was announced March 18, little has been made known beyond the fact that the fund would invest $50 million a year for the next 5 years alongside “qualified venture capital funds and private sector investors”. You should care, and care strongly about how John Wilkinson and his team decide to define these terms in the next few weeks.

Why? On the one hand, if the MRI decides that “qualified private sector investors” means any investor who is considered “accredited” under Ontario securities laws, then the availability of this matching funding becomes a meaningful thing for many Ontario companies.

If, however, ETF funds are available only to a smaller group –perhaps only investments made by VCs, and/or angel groups, then that’s another matter altogether. It’s great news for those portfolio companies who have been stranded by their current VC backers’ low cash reserves(although, note to VCs: what are the guidelines going to say about the terms of the follow-on financings you want to put into your current portfolio? I’d watch closely). But it would have catastrophic consequences for those who’ve managed to bootstrap, create jobs, and innovate outside of the venture capital model of investment. Need some examples?

Example 1: Company A is a digital media tech business which has been in existence for two years. It has managed to build product, file patent applications, create jobs for 20 employees and attract its first set of paying customers, all based on the bootstrapping and personal funding of its own founders. In order to ramp up operations and continue development, its owners need additional money. It can raise some from a local angel, and the founders may put more of their own money in, but there will still be a shortfall in the amount needed to truly expand operations. If ETF money matched both angel and founder money, then the Company could continue growth without cutbacks.

Example 2: Company B is an IT solutions company that has been around for two years and has hit every development and revenue milestone its investors (angels, friends and family) have set. Some local VCs have suggested investment to further growth, but on terms that would effectively wipe out the stake of their current backers. Instead, the Company is electing to raise part funds from its current team of angels and founders on terms that preserve the upside for its original backers,and possibly take the business to break even. Should a company which has proven innovation be forced to accept onerous financing terms in order to qualify for matching funds?

Now, there is an argument that ETF should not hand out its money unless it is on market terms, or it will create a portfolio of government investments that have issues with later-stage investment. But that’s NOT the announced purpose of the ETF: job retention and job creation are. Here’s what John Wilkinson said:

“ The Emerging Technologies Fund supports the kind of investment that drives innovation, secures jobs today, and creates jobs tomorrow. We’re committed to supporting clean tech and other emerging technology companies in Ontario.”

I don’t see anything in here that suggests the purpose of the ETF is to create only good candidates for venture capital investment in the future. No question, there are some that will emerge as a result of this initiative, but they are not the ETF's sole raison d’etre.

Nor should there be. Ontario’s innovation economy is not made up of businesses that will ultimately be attractive to VCs. Venture capital invests in disruptive innovation (high risk, high reward). Incremental innovations, innovations that will create companies of $30 million or less in revenues – those are generally outside the VC model, and they form the majority of emerging high tech and clean tech businesses in this province. In fact, in the last two years, most of the province’s most promising entrepreneurs have designed and built emerging businesses specifically so they will not need to access venture capital that has not been there. If the provincial government is serious about preserving the current generation of entrepreneurs, then it needs to make sure that those who are in the market today can access ETF funds.

So what do you need to do? This is an entrepreneur’s issue, not a CVCA, MARs or anyone else's issue. You need to advocate yourselves, and to do it now. Go to the MRI website and send an email (there’s a handy contact form) that gives your thoughts. Ask for more insight (and an opportunity to comment) on the guidelines before they are put into place. Send your lawyers flowers and chocolates and get them to do it for you, if you haven’t the time (although really, it’s something you should do yourself.

You've bootstrapped yourselves this far - don't let your company get locked out of this lifeline.

New Entrepreneurs: Agent Invitation

2009-04-07T11:21:00.003-04:00

And in the category of really smart guys building slick services for industries they understand, check out newly-launched Agent Invitation here. Read the blog and you'll understand the point of pain, the business case, and the customer appeal, all in one post. If only my blogs could do the same......

Return of the Heavyweight Entrepreneurs, Part III: Rypple

2009-04-07T09:26:00.003-04:00

For the last 1 - 2 years our firm has been seeing lots of heavyweights return to the market. When I refer to "heavyweights", I'm referring to entrepreneurs who previously led start-ups that had stupendous, home-run sized exits. You'll see some of them mentioned in Part I and II of this series, and it's time to add our clients Rypple to the talley.

Dan Debow and David Stein were part of the Workbrain founding core. In the last 18 months, they have managed to put together a great team, a great beta, build buzz, and attract money from Edgestone and high net worth individuals that include the founder of PayPal, Office Tiger, among others.

You can read more about them at their web site. Why should you monitor their progress? Because repeat founders with a huge return to investors on their resume are an important attraction of outside capital to Ontario - they're a must-have building block for the rest of us. Go team!

Nortel Severance Package - Enhanced for Ebay

2009-04-01T12:03:00.002-04:00

There are only 3 days left to bid on a wonderful Nortel "enhanced" severance package (eBay item 180340590158). I know others have blogged about it, but I love it so, I must give it the space it deserves. Here are my favourite excerpts from the auction description:

"...This package includes the following items collected largely from Nortel over 17 years of service (subject to change depending on expected Grinch-like behavior from former management; like items will be substituted if reclamation occurs)....

A box. This sturdy 16”x12”x8” box was at one time filled with dreams and unrealized potential. Just like me, you can use this to clear out your personal belongings in 4 hours or less, and later to store mounting unpaid bills as you search for employment in this vibrant economy. In a pinch, you can put it over your head to keep off rain, make “will work for food” signage, or kindle fires in trash bins in back alleys to keep your hands toasty warm. The possibilities are endless. Truly Business Made Simple....

Business Made Simple, Pride In Wireless / The 3+ Club, and “>THIS IS THE WAY >THIS IS NORTEL” mouse pads. ..... First pad features the clever industry catch-phrase ‘hyperconnectivity’, a disease that hopefully will be eradicated in our lifetime.

5 year service coin clock... Unlike our executives, this Birks collectible features hands that do meaningful work. While the hands unfortunately will not wave wildly and seemingly uncontrollably like a certain CEO during employee updates or earnings reports, the upside is that if you were to somehow shake them, you wouldn’t have to wash your hands immediately afterwards either. ......

Nortel Severed Employee’s Enhanced Healthcare package. Everything you’ll need to keep you and your family fit as a fiddle until you can get denied for pre-existing conditions when you do find gainful employment years from now. Contains 500 ibuprofen caplets, a generous supply of band-aids in a protective Medco health band-aid holder, and 300 multi-vitamins. Here’s to your health!...

Plus, if the auction closes before Nortel files for chapter 7, the winning bidder will also get these fine Business Transforming bonus items:

...BIG bonus #2: A Swingline 737 stapler (not to be confused with the inferior 736 or slightly superior 738). This stapler saw me through thick and thin, never complaining about its workload or wanting extra time off, and never once did it jam up while applying cover sheets to countless TPS reports. I got the memo, and I’m going to miss you, buddy.

BIG bonus #3: a sealed pad of NORTEL paper, name tent, name badge, marker and pen. Oh, the fun we had with these babies, learning the whiles of LEAN Six Sigma and how we could improve the invoicing and accounts receivable for a fictitious company then apply it directly to the interworking of a deeply layered, process entrenched, dysfunctional software company with siloed, multi-site and outsourced-to-the-lowest-bidder ownership. It was GEnious. This Is The Way we saved TONS of money.....

Thank you for all that you are doing for this former Team Nortel member. Sleep soundly in knowing that none of the proceeds will go to any member of the ELT or SLT at Nortel. If you are the winning bidder, I promise, not only will you receive the package, you'll get to keep it as well!"

Here's to you, Poppey (eBay member since 1999).

The Return Of Heavyweight Entrepreneurs, Part II

2009-03-31T06:53:00.002-04:00

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.

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

2009-03-25T10:55:00.003-04:00

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.

Has Greenmail Come to Bridgewater Systems?

2009-03-23T15:09:00.004-04:00

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.

The Return of Canada's Heavyweight Entrepreneurs

2009-03-22T23:54:00.002-04:00

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.

Ontario Government Announces New "Emerging Technologies Fund"

2009-03-19T14:41:00.002-04:00

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.

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

2009-03-09T07:18:00.005-04:00

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.

The Perils of Being a Start-Up Hilton

2009-03-05T11:44:00.003-05:00

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.

VC Rehab, Part Two: Les Lyall

2009-03-02T08:00:00.002-05:00

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.

Where do VCs go next?

2009-02-26T17:51:00.002-05:00

Ex- Celtic House guru Andrew Waitman has been quietly building his next empire over at The Pythian Group, where he assumed the CEO role last October. According to its profile, "Pythian is a database, systems and applications administration outsourcing company providing managed services, performance, security, business continuity, governance and compliance services for database infrastructure running Oracle, SQL Server and MySQL, the ERP applications that run on those platforms, and the enterprise operating systems and hardware that those databases rely on."

Bridgewater Systems: The Challenges of Mature Start-Ups

2009-02-20T12:36:00.004-05:00

I’ve been fascinated by the recent press surrounding Ottawa-based Bridgewater Systems, whose current circumstances illustrate well the challenges of a public start-up.

Bridgewater is one of the last Ottawa telecom start-ups to attract significant venture capital, from Vengrowth, EagleOne/Newbury, Terry Matthews’ Wesley Clover and even from strategic investor Alcatel-Lucent, among others. The company had been publicly contemplating an IPO since the early 2000s, before finally biting the bullet in 2007, driven in part by the desire of some of its VCs to generate some cash from their investment.

Here’s where things get interesting. Despite becoming a public company, Bridgewater’s board post-IPO looks more like a private board - comprised of VC nominees, management and in one case a strategic consultant to the business. Great set of board members, but their strengths all appear to lie on the operational side. Which perhaps explains why the Company appears to have left itself without any defensive mechanisms to stave off the overtures of hedge funds such as Crescendo Partners.

Why is being a target an issue? It’s not, if you think your company’s stock is trading at a reasonable value. But whose is at the moment? Even in the best of cases, boards today who have received attractive offers from hedge funds find themselves unable to make a recommendation to their shareholders, due to the reluctance of advisors to give fairness opinions in support of that recommendation.

Public company boards often have in place tools that allow them to slow down or discourage proxy fights to ensure that the best price is obtained in these kinds of circumstances. At our firm, we try to ensure that our public clients understand the kinds of shareholder defenses that can be put in place from day one following an IPO - from the simplest (staggered board terms, which make it hard to replace the entire board in a proxy fight) to a shareholder rights plan and beyond.

As more and more start-ups making the transition to the public markets to accommodate the liquidity needs of their VCs, shareholder defenses are becoming a start-up issue, too. Public company boards differ from those of private ones in that they must split their focus between (a) oversight of operations and (b) awareness of stock market dynamics and how they might affect shareholder value. It’s important to expand the skill set of any company as it transitions from private to public to include someone who understands proxy fights and market dynamics.

The irony here is that companies like Bridgewater, who spent their formative years working towards an exit for their first backers, may well find themselves on the liquidity merry-go-round once more. Hedge Funds generally seek the same return on investment within the same time frame as VCs. Stay tuned.

Venture Capital in Quebec

2009-02-17T06:52:00.002-05:00

Make sure you check the web for Reseau Capital's report on Venture Capital investment in Quebec for 2008, to be released this morning. Quebec has been the most active province for VC transactions in recent times, so these numbers will present indicators of VC activity at its most optimistic. Also an interesting indicator of provincial government appetite for support of the industry.

Les is More, But he's Gone

2009-02-11T07:15:00.004-05:00

Thanks to the healing properties of several cold and flu medicines, I've been off my game for the last few weeks. Which caused me to miss the Feb 4 announcement of Les Lyall's departure from Growthworks. Les came west a few years ago to set up Growthworks Ontario shop, then returned to the B.C. fold last fall, on the heels of GrowthWorks material change report, filed on Sept 6, 2008 announcing that David Levi would be stepping down as President and CEO of GrowthWorks and its managed funds in March 2009, to be replaced by Les.

Fast forward to Feb.4 2009 and the press release that Les Lyall is no longer with Growthworks. David Levi was quoted as saying "Because of the recent downturn and turbulence in the financial markets I have decided to remain in the role of President and CEO of GrowthWorks and its managed funds."

Growthworks Ontario remains in the hands of boy wonder Tim Lee, who earned his stripes at Vengrowth and was known to those of us in the industry for his ability to pick great companies and entice them away from the rest of us, the bastard.

Off to take more vitamin C.

Fraud Prevention: Getting the Facts

2009-01-07T06:40:00.003-05:00

Employee theft and customer fraud are issues for companies at all stages of growth, and there's no better way to consider what are apporpraite controls for your business than to hear the recommended best practices of the experts. If you're in Ottaw next Thursday, you might want to check out PWC's presentation to the National Capital Region Chapter of Financial Executives International Canada.

Kas Rehman of PricewaterhouseCoopers LLP will discuss the the key components of an enterprise wide anti-fraud regime, including governance, fraud risk assessments, ethics, incident reporting mechanisms, communication, intelligence screening and remediation. This kind of overview is a great time-saving way to prime yourself on the subject.

Another option is to call Kas and beg for a copy of his slide deck. You can also try begging Howard Quon here in PWC's Toronto office.

Shop Now for Valentine's Day

2009-01-06T19:35:00.002-05:00

Each January I try to stop at one of my favourite sites, Despair.Com for some early Valentine's Shopping. Their candy hearts - Bittersweets - have lovely sayings such as "U Left Seat Up", "Mommy Issues", "Use Me 2Heal" and "Prenup OK?" Their motivational calendars are also not to be missed - somehow, the site's faux cynicism makes real world problems bearable.

Barry Gekiere Exits Ventures West

2009-01-06T11:09:00.003-05:00

I met Barry Gekiere (or, as we call him in our office, "kitten" )during my first month as a VC. Our funds had invested in the same company which, shall we say, was underperforming, and Barry rolled up his sleeves and dug in in a way that no one else at the board table did.

So it comes as no surprise that Barry would find himself drawn to turnaround management in the current market. His offical announcement yesterday that he has left Ventures West to focus on this area at the Kirchner Group as a Managing Director is a great fit. More and more of my favourite colleagues seem to spend time at Kirchner (Paul Gardner is one of them);maybe it's the coffee.

Looking South: Status Update on Kodiak Venture Partners

2009-01-06T08:34:00.003-05:00

It is more than 8 years since new VC Kodiak Ventures made its name investing in Ottawa based semiconductor plays such as Solidum and Extreme Packets, followed by Tropic Networks, Potentia and BTI Photonics. Since it raised its third fund in 2004, Kodiak has played closer to home, preferring to invest in more companies in Boston (although it has continued to support BTI and had a hand in unsuccessful Simpler Networks up here). With the departure of partner Ilan Carmi a few years ago, there seems to be little interest in continued investment up here. Kodiak is rumoured to be going to market to raise its fourth fund this quarter.

As a hedge against poor market condition, in late November Kodiak let it be known that it has entered into an arrangement with one of its limited partners to provide continued support for some of the older companies in Kodiak's portfolio.

What is a sidecar arangement? In Kodiak's case, partner Tony Volpe told Tech Confidential that some of Kodiak's lps had purchased a small ownership position in a number of portfolio companies as well as put up additional capital for Kodiak to continue to invest in and support those companies.Good news for Ottawa's BTI and Montreal's Airwide Solutions, we can hope.

This kind of sidecar fund is a popular tool that only some local VCs here have been able to secure from their lps. Given that the sale of LP interests in secondary markets reportedly fell to 61% of net asset value in the second half of 2008, let's hope that limited partners find an appetite for further funding.

Don't Forget Canada's Art Entrepreneurs

2008-11-27T10:12:00.001-05:00

I'm a big fan of Canadian art, in part because the struggle to succeed as a professional Canadian artist is so similar to that of Canadian business entrepreneurs. A few events to consider in support of Canadian artists this week:

Mistletoe Magic: tonight the John B Aird Gallery (Bay & Wellesley in Toronto) will be hosting its annual silent auction of small (read: very affordable) art works created and donated by some of Canada's leading artists. Stunning stuff, in support of a great gallery, and great company. Previews today. Great opportunity to buy small works by artists who sell for thousands of dollars.

Out in Edmonton, one of the great longtime supporters of First Nations art, The Bearclaw Gallery, is hosting a Christmas show featuring some of its newest artists. The Bearclaw has a long tradition of fostering new artists, and they have some terrific (and affordable) stuff from a new generation of First Nations artists on display. You don't need to go to Edmonton to check it out - all is on view at www.bearclawgallery.com.

The Failure of Government Funding, or Why I Wish I’d married Buzz Hargrove

2008-11-24T10:49:00.002-05:00

I promised the rest of my firm I’d go back to using this blog for posts about term sheets, and convertible debentures and the like, and I will. But I need one last riff:

I was comparing notes on the state of the start-up world last week with a U.S. colleague. (It’s important to note that since the dot-com meltdown of 2001, it’s become uncool for lawyers to use the term “start-up.” Instead, we call all of you “emerging growth companies” when we talk amongst ourselves.) We both are seeing very little investing in our regions, but my U.S. friend believes Canada is a far better place for emerging growth companies right now. After all, he told me, don’t you have all kinds of government subsidies available?

Here’s the truth about government funding for emerging growth companies in Canada: there is little, maybe none. No government policy or program in Canada today that provides meaningful, direct support for emerging growth companies. What exists instead are a number of job creation schemes that have been launched in the names of “entrepreneurship” and “innovation.” None of these programs have much impact on the economy, because they bet on universities and small businesses as the engines for economic growth.

“Entrepreneurship” is really policy-wonk code for programs to assist first-time small business owners. I’m not going to go into further detail here. “Innovation” is the current buzzword of choice. As Russell Wangersky points out:

“Alberta has an Innovation Fund. Ontario has the Ministry of Research and Innovation. Saskatchewan? The Ministry of Enterprise and Innovation….In Ontario’s 2007 Throne Speech, the word “innovation” is mentioned three times. The 2008 Alberta budget? Seven times. Newfoundland and Labrador’s 2008 Budget? Three times — and Newfoundland has both a department of Innovation, Trade and Rural Development, and an Innovation Strategy. The last British Columbia budget? Seven times, along with the introduction of a $75-million Innovation and Integration Fund….The word is used three times in Alberta’s 2008 Climate Change Strategy, four times in the 2008 federal budget, and on and on.”

In government policy-speak, “innovation” refers to job creation money for pure research. In some provinces, it even extends to real estate development to provide facilities from which that research can be conducted, mentored and commercialized. The underlying rationale for this kind of government financial support seems to be that if academic researchers had more money or prettier labs, they would come up with better ideas. Or, people with better ideas will immigrate from other places to innovate here. (Or Saskatchewan. Or New Brunswick.) Immigration policies are interesting, but they don’t have anything to do with creating emerging growth companies or driving growth of an innovation economy, except in a very theoretical way.

What happens next? Because a focus on pure research does not yield near-term economic results, there is an inevitable policy shift. After all, researchers are not capable of commercializing the results of their new, improved thinking. And so a second layer of innovation-related funding inevitably follows: the creation of government- funded mentors and advisors to support early-stage rollouts of companies. In Ontario, there is even tax incentive legislation proposed to further incent the rollout of university-originated companies to assist.

But what if the ideas are, ultimately not fundable? Governments will move to a third cycle of innovation policy – job creation for investors. At the provincial level, it often starts with a direct government investment program. Form a crown corporation, staff it up and start spending. At some point, many tens of million of dollars later, the province will realize that it is not in the business of investing, and it will hand off its portfolio to an outside manager. Since many investment decisions were driven by political concerns and job retention, the portfolio is often not much of a prize for a manager to acquire.

At this point, the innovation policy cycle usually shifts again – to the fostering of a venture capital infrastructure to support local businesses. Why not allocate government dollars to professional investors like VCs, so that they can properly manage and nurture young start-ups? A fund of funds, like Ontario’s Innovation Fund, is then created to search out desirable VC funds and provide them with capital.

Of course, unless there is a mandate to deploy that capital immediately, it can be years before it makes its way into a VC fund and then to emerging growth companies. As far as I know, there have been no announcements of investment by TD Capital since assuming the management of Ontario’s Innovation Fund. And really, who’s to blame them? Every other fund of funds appears to be standing back from the market – if the Ontario government did not insist that their $80 million be deployed in a timely manner, why go against the market?

Now, with anecdotal evidence such as this as to the negative impact of “innovation” funding on economic growth, you might think that at some point government would look to providing some direct economic incentives to increase growth – things like tax breaks. But the cycle remains ghoulishly popular - Alberta and Saskatchewan currently are at various stages in the formation of their own fund of funds programs. Really, someone should take them out for a drink and speak with them. But will it make a difference? Saskatchewan is like your girlfriend who keeps dating married men even after you try and talk her out of it. Is she ever going to learn?

Where are emerging growth companies in the midst of this? Government seems to bet that the markets will take care of them – if enough venture capital is fed into the system, this and SRED will provide adequate stimuli. This may well work if there’s no market meltdown. Many of our clients have been the unintended beneficiaries of government programs that are intended to develop and drive growth in specific industry verticals such as nanotechnology, genome research and clean tech. There is a tremendous amount of money available, provided you can match government money with private sector funds. And it is here that the absence of capital grinds growth of emerging companies to a halt.

The one exception to Canada’s policy cycle grind appears to be Quebec (although recent revelations about the Caisse may suggest otherwise), where the government and its financing institutions seem to have determined that spending on high risk, high tech companies will provide more economic stimulus to the region. I grow fonder of the province each time I do business there. If Quebec were a man, I’d buy it a drink and flirt with it in front of my husband.

But, in the current climate, with innovation funding tied up in policies that bank on some distant future, emerging growth companies in the rest of Canada have few options. As the government considers an economic stimulus package for January, it’s time to ask whether innovation policies should be re-worked to preserve and stimulate growth for current innovators, rather than focus on developing possible future classes.

Of course, asking questions is a rhetorical exercise if one has no voice. And I’m not sure emerging growth companies in Canada do. We have relied on related bodies such as CATA and the CVCA to advance some kind of policy that will assist. We’d be much better off if we coaxed Buzz Hargrove out of retirement. Sure, the speeches would be longer, but we’d be heard.

Time for Management BuyOuts of VC Companies?

2008-11-17T16:44:00.000-05:00

The numbers are clear: since 2007, hundreds of millions of dollars have been invested by VCs in new companies, or follow-on investments made in existing portfolio investees. Equally clear is that a number of VCs are in stasis; either they are not succeeding in raising new money, or they are winding down their current fund and shuttering operations to wait out the current market. Either way, the implications are clear: a number of portfolio companies must either grow organically without new funds, or find an entirely new investor syndicate to (a) support further growth, and (b) battle with incumbent VCs who will wish to retain their stake. In parallel, investees may find themselves with an entirely new set of investors if a retiring VC sells it sposition in the secondary markets - probably at a discount.

A question I am increasingly asked is whether, given the circumstances, it makes sense for management to pursue a buyout of a VC investment, rather than wait to see who shows up at the next board meeting. For later stage investees, I can understand the appeal. If a VC has limited follow-on funds to support its investment, management must slow growth and bridge the business through cost cutting and hardship. (This leads to what I've come to call the fundamental "Achievement Gap" between Canadian and American venture capital - backed businesses.) In this scenario, it makes more sense for management to perform if they own signficantly more of the business. Likewise, if a VC is discounting its equity position as part of a portfolio liquidation, managemetn may well want to offer the same money for better autonomy.

The key driver of any MBO is a belief that a placing more equity in the hands of management will drive more value in a business, through a combination of financial engineering (cost cutting) and strategic growth. At a thousand-foot level, it's easy to see how this might appeal. And, until teh market collapse this fall, the TSX Venture Exchange was a regular vehicle fo choice for achieving liquidity for VCs and increased holdings for management. Now, private debt might be necesssary. Certainly there are a number of companies that might have the early revenue, together with leverageable assets, that might attract the kind of debt that would finance an MBO. How will this play out? Something to watch.

Startup Empire: Notes on the Side

2008-11-11T06:34:00.001-05:00

Preparing for Startup Empire this week? It's important to come away from these things not only with an informed view of what your investors want, but with a view to the potential pitfalls of those requirements. You'll save yourself a lot of time if you develop your own view of what terms are acceptable risks for you to take with an investor, and what terms need some adjustment. Take, for example, term sheets, and preferred shares versus debentures. As you listen to the presentation on this, I want you to keep in mind a few things:

1. In the current environment, everything is relative. The investment you get in may be the only source of ready cash you see for the next two years. As a captive investee, you therefore need to carefully consider how the balanced control provisions your investors request are.

2. A convertible debenture financing now perhaps a more dangerous instrument than before, since it can place significant control in the hands of the lender. Debt holders have rights that shareholders don't - they can call their loan and request their money back. This means that a debenture holder can shut you down if you don't have the cash to pay them and they want out.

3. In Canada, most VCs (and some angels) will insist that a debenture be secured. This allows the investor to take certain actions upon non-payment of the loan. This means that if there is a default, the investor may take possession of and sell the your business' assets and apply the proceeds to the repay the debt.

4. A VC will tell you it would be irrational for them to actually do this, as the return would be pennies, and that's logical in most cases. HOWEVER, there are several scenarios when an investor may decide it wants any remaining cash back from the business.

5. One way to mitigate these risks is to pay very close detail to the "boilerplate" language in the security agreement you're asked to sign. Make sure the events of default are narrowly tailored - they should NOT include insolvency or other standard items that make it easy for the debenture holder to trigger repayment. This is the same conversation you have with any investor, but in a different language (the language of debt) - make sure you have it.

6. Related, but different point: increasing numbers of US resident angels and friends and family are joining rounds of investment here. There are a few implications to keep in mind:

- US residents are typically taxed on conversion of debentures to shares if part of the amount converted is interest. Interest-bearing debentures need to be altered to debentures plus warrants (one example) to provide the same risk of return.

- even if your US investor wishes inerest, usury laws in some states (including California) limit the amount of interest that can be charged on a debenture to rates well below norms up here (depending on size of debenture and size of investor)

Trialstat: When Start-ups Go Into Receivership

2008-11-10T08:08:00.000-05:00

In what has to be the oddest piece of reporting on the high-tech scene I've seen in a while, this morning's Ottawa Business Journal breathlessly reported details of the receivership of Celtic House portfolio company Trialstat. The piece - and again, I remind you this is on the front page of the on-line edition - sets out amounts owing line by line to insurance brokers,lawyers and accountants. Is there really so little to report on the Ottawa scene that a summary of a court filing appointing a receiver merits front page coverage?

If you are going to write about a receivership like this, here are some points to consider mentioning:

1. A receiver is appointed to take possession of the assets of a business on behalf of secured creditors, pay out priority claims (employee wages) and distribute the remainder to the secured creditors. Privately-appointed receivership effectively places the assets and the business in the hands of its secured creditors, and out of the hands of management.

2. If, however, a receiver is appointed by the courts, this can signal potential conflicts among creditors. It also (in theory) reduces the lenders' ability to control the sale of assets of the business, since these steps are now subject to court scrutiny.

3. With many start-ups there are often not enough receivables or commercializable IP to bother with the expense of a receiver, court-appointed or not. Here, the story might be different. One could speculate that Celtic House, with its track record for incubating its own companies, might be seizing the ip for its own for future re-development. An alternate thought: conventional wisdom has it that SAAS model businesses are unlikely to be completely shut down - if there's service revenue with margin, the saying goes, there's probably a buyer for the service. Receivership may be a way to complete a sale of the business with maximum returns to the lenders (BDC and Celtic House) - unsecured creditors and shareholders are cut out of the process.

4. Jonathan Barker, a prince of a guy, was one of the first Ottawa-area entrepreneurs to build a business based on a SAAS delivery model. It will be interesting to see where he and his team go next.

It's Not a Cold Sore, It's a Paper Cut

2008-11-09T10:37:00.000-05:00

Now stop staring at me and lend me your lip balm.

Notes from Seattle on the New Green Deal Economy

2008-11-04T06:59:00.001-05:00

Great read from Cascadia Capital’s Michael Butler on why the new energy economy will thrive in the U.S. He sets out 10 core factors that indicate we are in the early stages of a “post-petroleum era.” My favourites:

- combatting climate change has reached a tipping point and is embedded in the collective consciousness.

- The U.S. is entering a period of “re-regulation” which will favour alternative energy

- “[W]hat other growth options do we really have? The harsh reality
is that our use of leverage over the past 10-20 years covered up a lack of growth in our economy. We simply were not as productive as we thought we were. Where will our future growth come from?Information technology, biotechnology and telecommunications are maturing as GDP boosters, manufacturing is re‐tooling for the knowledge workforce, and defense spending will be scrutinized, so even though alternative energy is virtuous and vital, it may ultimately win by economic default.”

You can download Butler’s proposal for a “new Green Deal” Economy from Cascadia’s web site. He’s been writing some of the most interesting pieces on the next 10 years out there; his is a voice to monitor.

So Sue Me?

2008-11-03T18:41:00.000-05:00

I wear my pink ghetto roots with shame today, as I read with despair (courtesy of my buddy Jessica) of the launch of Sue magazine, "For women in litigation." This month's topics include; "Feeding the Male Ego", "Girls Just Want to Have Funds"...No no no no no.

The New Funding Gap for Canadian Entrepreneurs

2008-10-31T10:27:00.002-04:00

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 commericalize a product and build a start-up?

Yaletown's New Fund: The New Kind of Closing

2008-10-28T09:53:00.000-04:00

Vancouver's Yaletown Venture Partners made it official today, issuing a press release about a first closing on their $100 million fund. They have $65 million in committed capital for early stage clean tech and IT.

Today's release - aimed at both potential investees and potential limited partners - is an interesting reflection of the times. Three years ago, a VC generally woudln't announce that one could only raise 2/3 of the fund it marketed. Now, it's an achievement to be celebrated.

The fund is open for additional LP investmetns for another 12 months.

Looking for Something to Do Next Wednesday?

2008-10-22T07:00:00.000-04:00

Pathways to Education is holding its annual Gala at Casa Loma. Pathways has been helping children in Regent Park stay in school through a variety of assistance and mentoring programs. This grass roots initiative has been so effective that the Ontario government has announced a $19 million grant to expand the program to other neighbourhoods. It's the poster child for how to build a successful not-for-profit startup.

Great food and great networking, and of course, the usual eye candy (CBC's Evan Solomon is returning as host) - contact dgomes@pathwayscanada.ca for details.

Trio Capital: Under Construction

2008-10-21T18:41:00.001-04:00

Monitoring how VCs and private equity players are reinventing themselves to play in the current economic environment is fascinating. Compare the website for Vengrowth today and 3 years ago, and you'll get a sense of the ongoing evolution. Others are still playing their cards close to their chests, but merit watching.

One of the lesser known stories of the last two years is that of Trio Capital. Trio is staffed by a group of ex-telecom luminaries, including Microcell's Andre Tremblay and Nortel's Pascal Debon. Trio partnered with the Caisse in 2006 to launch the Telecom Media Fund, an investment vehicle seeded with $200 million for telecom investments. The amount seemed astonishingly large for a group of first time fund managers. Their first investment was $50 million into Cellfish Media, followed by one other publicly announced deal.

There have been rumours that the direction of the Trio/Caisse partnership has changed, and its current "under construction" note would bear that out. I'd never count out Andre Tremblay, and so I'll watch to see how he repositions Trio - this is a team with the skills to make buyouts in telecom.

Government Investment in Venture Capital: Should There Be Rules?

2008-10-21T14:09:00.000-04:00

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.

Hacking hell

2008-10-16T10:29:00.000-04:00

Some days, I want to second-guess this whole decision to stay a boutique-sized law firm. Like this morning, when I learned our firm web site has been hacked, or something. The site wasn't that great a visual experience to begin with, but this morning, anyone who typed in "venturelawassociates.com" landed on a page with a skull. Not the best branding for us.

Now, I have to take someone off other matters to try and fix this damn thing. We are a bunch of lawyers - how do you think this is going to end? It's only 11:00 am, and already today we are well on our way to becoming another "how many lawyers does it take...?" joke.

This is my life as a Covergirl.

After Venture Capital: Other Sources of Money

2008-10-16T07:24:00.000-04:00

For the next 12 months at least in Canada, the largest pool of seed and growth capital that businesses can directly access is in the hands of the government. You already know about SRED, but have you considered how other government initiatives might be used to accelerate your business? Take a look at the following and consider how you might follow the example of other emerging businesses and partner with larger players (channel partners, customers, suppliers) to access some of the larger opportunities:

Second Career Program (Ontario): offers up to $28,000 to laid off workers for tuition, education and other training costs incurred in job retraining. A potentially great a venue for laid off high tech workers to upgrade skills or add new ones while forming a new business.

Next Generation of Jobs Fund (Ontario): Announced in 2007, the program has $1.15 billion earmarked for grants to businesses in bio-economy and clean tech, advanced health technologies and digital media and communications. The fund provides grants of up to 25% of the total eligible costs of projects of up to $25 million over 5 years, which means matching funds will be needed once the grant is approved. Those funds may be easier to get for later stage companies, given the size of the grant. For earlier stage businesses, creating an eligible project in tandem with a larger channel partner or strategic partner could be an effective channel to this cash.

Recipients: VC-backed 6N Silicon was recently granted $8 million as part of a proposed $50-million expansion that will see the company opening a new manufacturing plant in Vaughan and creating 84 new jobs over the next five years.

Automotive Innovation Fund (Canada):Announced as part of the last federal budget, this program earmarks $250 million over five years to support strategic, large-scale research and development projects in the automotive sector in developing innovative, greener and more fuel-efficient vehicles. The first investment, announced last month, puts $80 million in Ford's Renaissance Project for Windsor, Ontario. The Renaissance Project will include the establishment of a new flexible engine assembly plant in Windsor, as well as the creation of a new North America Centre for Diesel and Advanced Powertrain Research and Innovation, which will perform research into engine efficiency and new fuel technologies. Is there an opportunity for emerging companies to participate in eligible projects put forth by Ford or others?
Sustainable Technology Development Canada: Still the granddaddy of grant programs for new and emerging technologies in the area.

Garage Canada: Failed Experiment?

2008-10-15T10:48:00.001-04:00

Two years ago, much was made of the lunch of a Canadian affiliate of Guy Kawasaki's Garage Technology Ventures. Tom Sweeney (formerly of Bluetooth start-up Classwave Wireless) and Louis Desmarais(ex-Skypoint Capital) tagged to lead the fund, and spent the next 12 months or so marketing the heck out of the brand. A few investments were made - Group IV in Ottawa, Thermoceramix, Inscape, Lure Media. Then, about six months or so passed with a continuing silence.

Now, the Garage Canada web site is down, there is no reference to the affiliate on Garage's US site (although Tom used to be listed as an advisor) and there comes news that some of the former fund staffers are forming a new entity St Lawrence Capital(no website yet). What happened to the portfolio, and the undeployed capital contributed by Quebec LPs like Caisse and Soldiarity Fund QFL?