Bridgescale Opens Toronto Office

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?

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

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

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

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?

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

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

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?

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.