Bailout-shmailout! SR&ED tax credits have been available since the 1980s. For those of you out there who are not claiming these credits, perhaps you should be. And for those of you that already are, then you should note that for tax years ending after December 31st 2008, the claim application process got a facelift: you will have to use a revised claim form (the “Revised T661”), and you should be prepared for this new approach to claiming these credits.

What’s the difference? Well, the biggest change is that you will have to write your project descriptions with word limits of 350 words for the Technological Advancements and the Technological Obstacles (aka Technological Uncertainties or Technology Base Level) sections respectively; and you will be limited to 700 words for the description of the Work Performed. Up till now, there have been no such limitations.

A quick survey of a set of SR&ED project descriptions for start-ups showed an average of 900 words for the Work Performed section. The Technological Advancements and the Technological Obstacles sections both came in under 250 words. But now, the Technological Objectives have to be included with the Technological Advancements. And there is no place to provide any background information. So, for all but the smallest projects, we have a new challenge – we have to be very concise.

I recognize that entrepreneurs are all proud of the way they push the boundaries of technology to amaze customers, and the desire to describe in great detail the impressive advancements made resulting in a viable business with amazing potential – but basically, Canada Revenue Agency is saying “we don’t have time to read all that – just give us the facts!” And they are right – the purpose of these narratives on the Revised T661 is simply to prove that Experimental Development actually took place. The quicker that can be described clearly, the sooner you can get back to your technology development, and the sooner CRA can give you your tax credit.

So in the Work Performed section, focus on no more than three or four of the major technological challenges you tackled during the project, relate those efforts very clearly to the Technological Advancements and the Technological Obstacles, and don’t bother with any background material.

The Revised T661 brings other important changes to how you make your SR&ED claims, some of which we’ll cover in future posts. In the mean time, consider SR&ED credits to be your “stimulus package.”

Craig: Thanks for taking the time to speak with the StartupNorth readership. To start, can you give the ‘30 second elevator pitch’ on Maple Leaf Angels.

Rob: Sure, Maple Leaf Angels was founded in 2007 and is based on Toronto. We are an angel group that has approximately 40 accredited investors as members. We hold 10 investment events each year where 3 companies present to our members at each event. Those members that are interested in a company will engage the company in due diligence and if they like the deal will close an investment.

Craig: One question I frequently get asked is if Maple Leaf Angels invests as a group/fund or individually. Can you clarify this.

Rob: At this point, Maple Leaf Angels is a deal facilitation organization. We screen deals and present the best ones to our members. If our members are interested, they ultimately write individual cheques into an investment. Not all members of the group will invest in a given deal.

Craig: What types of deals has the group done?
Rob: Since inception, we have done 17 deals for approx $5.5m. Examples include: Regen, Signalink, Homestars, Well.ca, LiveHive, Multiplied Media, Spartan Biosciences.

Craig: What types of deals do we do and how much can a company expect to raise?
Rob: We are industry sector agnostic so don’t have any given sector preferences. However, we tend to see a lot of technology oriented deals. Our sweet spot in terms of deal size is $200k-$400k and our members like to see deals where this type of capital investment in a company can help make meaningful progress. As such, we tend not to fund capital intensive companies (i.e. a company needing to build an industrial processing or manufacturing facility) or companies with long time windows to commercialization (i.e. pharmaceutical or medical devices).

Craig: Can you comment on the geographic angle?
Rob: Most angels like to invest in companies that are local to where they are located. This is because they like to get to know management during due diligence, have access to the company and be able to help the company with their business network post investment. Since our members are largely based in the greater Toronto area we tend to do a lot of deals in this area and to some extent Waterloo. That being said, with recent co-investment initiatives between other angel groups, we have done deals with companies in the US and other regions of Canada.

Craig: What stage do companies need to be at to get funding?
Rob: Of late given the economic/credit market issues, we have been seeing a lot more deals and a lot stronger deals in terms of where a company is at. Realistically a company needs to have a beta product and be looking for funding to help advance the product and drive sales.

Craig: So what about the person with an idea & a business plan?
Rob: At this point, it is not likely that our members would fund such a company, there are just too many other deals out there that are at a more advanced stage.

Craig: How should companies apply for funding via Maple Leaf Angels?
Rob: We have a link on our website where an entrepreneur can submit their business plan. Note that we are currently in our summer break (we don’t hold investment events in July/August) and our website will be under-going a refresh. Also note that given the volume of deals we are seeing of late, its best to try get a referral.

Craig: What happens ‘behind the scenes’?
Rob: I do a first vetting of companies that apply. For companies that look to be good matches to our criteria, I usually call them up to discuss further. We have a selection committee of 4-6 members that meets each month prior to an investment event. I narrow down to 6-8 companies for the selection committee to evaluate. During the selection committee meeting, companies are asked to do an abbreviated 15min pitch to the committee (either in person or via phone). Based on these presentations, the selection committee selects the 3 companies that will present to our members at the next investment event.

Craig: So how many companies do you see each month before you narrow down to the 6-8 that will present to the selection committee?
Rob: It varies by month and has been quite high this season. On average, I would get 30-40 applications each month.

Craig: Any suggestions for companies for how they should approach Maple Leaf?
Rob: My 3 suggestions would be relationships, persistence, and external referrals. In terms of relationships, I get a lot of deals that our members refer to me. All of our members have strong business networks and generally know of a lot of start-up companies. If they have gotten to know the management & seen their progress, this carries a lot of weight vs somebody out of the blue showing up and asking for funding. In terms of persistence, rightly or wrongly, there is an in-balance between the demand of people looking for funding and the supply of sources of funding. With just the sheer numbers of companies out there looking for funding, companies need to be persistent in getting noticed and getting their message heard. Lastly, in terms of external referrals, Maple Leaf Angels has relationships with a variety of professional service firms (i.e. Cassels Brock, PWC), government funding agencies (i.e. IAF, IRAP), and mentor organizations (i.e. MaRS, ISCM). Often time a company will have a past working relationship with one of these organizations. So if somebody from one of these organizations calls me up and says they have been working with a company and feel they are a good opportunity, that obviously carries a lot of weight.

Craig: What are the common pitfalls people have when applying for funding?
Rob: The main pitfall is being able to properly pitch. People not being able to clearly explain what their company does or what the business model is. Or people focusing too much on explaining the technology and not what the investment opportunity is. A lot of people think they know how to pitch, but a surprising number of people do not do a good job at pitching (either to the selection committee or to our members).

Craig: Can you comment on how long it generally takes for a company to ‘get the cheque in the bank’?
Rob: From the time they present to our members at an investment event, if this is the first outside investment, it generally takes 3-4 months to close the deal. This includes the time for our members to complete the due diligence, term sheets, legal. If a company has had prior outside investment and there is an existing investment round in play, the timeframe can be shortened to 1-2 months as you would save time on the term sheet and companies will have a lot of the legal aspects already in place (i.e. shareholders agreement).

Craig: Lastly, why should companies consider Maple Leaf Angels for their funding needs?
Rob: Our group brings 2 aspects to a company. One obviously is the capital. But another and often stronger benefit is the operational expertise and networks of our members. A lot of times when our members invest in a company they are willing to get quite involved with the company to help them out. This can be in the form of being on the board, being an advisor, or using their professional network to open some doors. Having experienced business people to give advice and help give sales/alliance connections is extremely beneficial to an early stage company.

Craig: Well thanks again Rob for discussing Maple Leaf Angels today. I know there is a lot of work that will happen over our summer break and we look forward to having another great season starting in September.

craig at mapleleafangels.com

Dana White along with Frank and Lorenzo Fertitta, as Zuffa LLC,  purchased a near bankrupt UFC for $2 million in 2001. By 2006, the UFC grossed more annual pay-per-view revenue than any other ‘”combat sport” promotion, think boxing, mixed martial arts, etc. The 2008 estimated revenue was close to $250 million through a mix of pay-per-view, live event tickets, television deals, advertising, video game promotion deals, and other varied revenue streams. It had become a huge business. Big enough that Mark Cuban has creating HDNet Fights as a promotion and leveraging the HD television outlet to highlight other combat sport promotions.

Love it or hate it this is big business. It’s no longer “human cockfighting” as it was referred to by Sen. John McCain (R-Az).

So how do organizations like Zuffa LLC and Oscar De La Hoya’s Golden Boy Promotions make money. And what can software startups learn from these marketing organizations. MMAFrenzy provides “A Look Behind the Curtain: Zuffa’s Finances Come Into Focus” that provides a breakdown of the financial side of a private company. And Portfolio.com provides insight into the wheeling and dealing that is Golden Boy Promotions

Television Licensing & Promotion

Television promotion is about “the people who create something worth watching and the audience”. Both Golden Boy and Zuffa have crafted television deals to help them reach fans beyond their strong base. Golden Boy Promotions has a deal with HBO and Zuffa has a deal with SpikeTV to broadcast their shows to cable audiences. For both promotions this allows them to focus on building brand awareness, create superstars and sell their live pay-per-view events. In the case of Zuffa, this has resulted in the creation of new content specifically for their television broadcast partner with the reality television show, The Ultimate Fighter (orignially created for $10M), and a host of other shows out of the archive materials from live events. The networks either sell premium cable subscriptions (HBO) or advertising (SpikeTV) based on their audience reach and demographics. Better content equals more diverse people watching, which allows for a shift in advertising demographics (details on Traditional Television Business Model and Video on Demand). The Ultimate Fighter has become the “most-watched original series on SpikeTV” with over 1.8 million viewers.

Pay-per-view Revenues

UFC has 5.1 million pay-per-view (PPV) buys in 2007. The PPV are split with the PPV distributor. The PPV buys number is reported for most major sporting events, Yahoo!Sports has a summary of the 2008 business which the UFC was reporting $237.9 million on 5,315,000 buys (average price of $44.75/purchase). Assuming a 60/40 split between Zuffa and the PPV distributor that generated approximately $142,740,000 in revenue.

Live Event Ticket Sales

Average ticket price in 2007 was $250/ticket. For example, UFC 99 attracted 12,800 fans and had a live gate of $1.3 million for an average seat price of $101.56. Different venues and fighter cards have different results, UFC 90 drew 15,359 fans and had a live gate of $2.85 million for an average seat price of  $185.92/ticket. (As a side note, these figures include the seats/tickets that the UFC gives away as part of the promotion. If you assume that 30% of the seats are given away to promotion companies and others the price per seat changes to $145.09 and $265.61 for each event respectively). The interesting part is that these numbers do not include any of the costs associated with running a live event: arena, security, medical staff, athletic commissions, promotion, etc.

Other Revenue Streams

The great thing once you have an audience, content and a recognized brand you can look for an infinite number of ways to monetize it. You start to ask questions like how do you find new audiences? How do you increase the average revenue per user (ARPU) of your existing users? What are new channels for reaching the audience? What other partnership and revenue generating opportunities exist?

Video game rights licensing. Subscription internet video. Wait it seems that was tried and failed. No it looks like another opportunity presented itself with Heavy.com. Apparel deals with TapouT. Once you’ve built an attractive global brand, the world is your oyster. Zuffa has negotiated broadcast distribution rights in Australia.

What can startups learn?

1. Build a product that people want to pay you for
   I know this sounds cliché. And is not always as straightforward. Just look at the broadcast licensing and pay-per-view revenues for sports promotion. There are complex relationships between the people that produce the content and the people that watch the content. It involves cable companies, advertisers, intermediaries. But it starts with creating a product that people will use, in this case a product that people will watch/use and pay you for.
2. Engage and support your loyal fan base
   The goal of the adoption funnel is to move from awareness to loyalty. You need to nurture and support the audience that is passionate about your product/service. Go read Kathy Sierra or Saul Colt to learn about how to inspire your customers to become evangelists. It’s about figuring out how they help their customers “kick butt better than their competitors”. Who are your super stars? What are you doing to help them kick butt?
3. Don’t be afraid to self promote and create superstars
   You’ve got to love Golden Boy Promotions, the UFC and Saul Colt. They are masters of self promotion. Dana White, who owns 10% of Zuffa, has become an instant celebrity from his appearance on SpikeTV’s The Ultimate Fighter. The non-stop promotion of UFC Pay-Per-View events through the SpikeTV audience (2.8 viewers million for TUF9) help reinforce known revenue streams while building characters and superstars. Do all of the commercials feel like their cross promoting other UFC events? Well there is a reason for that, 75% of the UFC revenue comes from PPV sales. Startusp need to find ways to promote the features and solutions that help solve problems, inspire users and make superheroes. Rinse, lather, repeat. By refining their messaging and telling a better story, startups make it easier for customers to tell their story. Saul Colt (who is a big deal) does a great job promoting his companies (Zoocasa, FreshBooks) the power of community and sharing and asking the audience to promote using the channels that are important to users.
4. Diversify your revenue streams
   There are many different ways to diversify revenue streams. Look at consulting companies that run training events (educating others about great design). Music television channels that are game companies (isn’t it all about music distribution regardless of channel). Go read Peter Frisella’s 2 awesome posts for a review of the different types of business model (part 1, part 2) to figure out your business model. Have a look at Alex Osterwalder’s Business Model Generation and look at his presentations on SlideShare to learn his Business Model Canvas.

Building a successful startup is hard work! But after watching combat sports, building a startup sure beats the hell out of getting punch in the head for a living.

DemoCamp Toronto 21 is sold out! But that is no reason that startups in Toronto shouldn’t get together.

Raymond Luk from Flow Ventures will be in town for DemoCamp and suggested that we host an informal StartupDrinks event the night that immediately after. July 29, 2009 coincides with the next Montreal StartupDrinks and for Ray it maximizes his time in Toronto to meet entrepreneurs and hear about the great things going on in this city.

What is StartupDrinks?

A simple concept: startup culture in cities around the world gathers around a bar to have a pint and discuss what they are working on, what they need help with and what they can do for each other.

Basically, the idea is that if you are involved in a startup or looking to get into a tech startup, come have a drink, meet new people and discuss startups. No rules, no keynotes, no schedules, no sponsors, nothing fancy, just some plain good old drinks, great people, hopefully good weather, hopefully awesome startups to talk about :-)

Where is StartupDrinks Toronto?

The location is still up in the air. It’s looking like it will be at Pogue Mahones at 777 Bay St starting at 7pm.

Where do I register?

Really simple. Sign up for the Canadian Startups! Facebook Group and then RSVP on the event page.

Possible Exits

Entrepreneur.com list five (5) possible exit strategies:

1. The Modified Nike Maneuver: Just Take It (basically preferred shares that pay a huge dividend)
2. The Liquidation
3. Selling to a Friendly Buyer
4. The Acquisition
5. The IPO

For me, #3 and #4 are almost identical. And #2 is not something you should aim for just staring out. Liquidation is something that happens at the end of your business. Whether it is something that happens in bankruptcy or other it is not a useful model when you are trying to grow a business. So if you merge #3 & #4 it leaves you 3 realistic exit strategies. This is not rocket science.

• Operate profitably
• Get acquired
• Go public

We know what the IPO market for tech companies looks like. That leaves companies with 2 choices. Build a profitable business or get acquired.

When I talk to startups everyone seems to think that acquisitions are a dime a dozen. That even based in Toronto, Montreal, Ottawa, Waterloo that they are prime acquisition targets for Microsoft, Google, Oracle, Cisco and other Valley companies. Which surprises me! Sure all of these companies have done Canadian acquisitions, they are the exception and they are done for very specific reasons.

Why acquire a startup?

Benjamin Kuo talks about the takeaways looking at the acquisition deals done by Google, Microsoft and Yahoo. The other companies that have done a lot of acquisitions include Oracle and Cisco. Summarizing the 2007 Microsoft acquisitions including Multimap (mapping), Global Care Solutions (healthcare), Palarno (enterprise chat), AdECN (advertising network), aQuantive (public traded – advertising tech), TellMe Networks (mobile voice solutions), and Medstory (health search), he concludes:

Key takeaways from this, at least if you want to be acquired by Microsoft: you really need to expect to be in business for at least seven to 10 years; you need a lot of traction and a product that people have been using for awhile; enterprise software is hot, consumer web services are not; and you need to have a fit to their strategic plans.

Companies get bought for a variety of reason:

• technology;
• customers;
• people/talent;
• the scale for monetization offered by a corporate giant.

It starts to make a very short list for entrepreneurs about what’s important regardless of the type of exit you’re looking for. You need to have technology, customers, the right talent and a path to monetization. Companies are looking for technologies that solve problems with shared customers and that round out their offerings (then there is a the whole question about do we build it or buy it). They are looking for great teams of engineers, sales people, designers, i.e., the talent. And often large public companies bring a scale and access to market and manufacturing that are just not available to startups without huge amounts of cash. 

Does this all sound familiar? It’s pretty similar to investment criteria. There’s nothing wrong with building defensible technology that solves a problem for customers with a team of rockstars on a common technology platform.