Venture Law Lines

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).