Venture Law Lines

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.