Tech Capital Partners Blog

Recently I was asked to speak at a TechAlliance / Ernst & Young event in London, Ontario about valuations. I was speaking after Bill Armitage who was clear and understandable so there seemed little point in my getting in an arm wrestle over the finer points of valuation theory. I thought I would try to address some of the questions that I perceived these and many other entrepreneurs have been asking these days: 1. How do I find money? and 2. How do I get the best price.

To shed some light on these questions I directed the audience to the slide below which I have titled the Murphy Balance of Power Equations after the originator and my partner, Jacqui Murphy. I will allow that these formulae may not have the mathematical rigor of those presented by Fischer Black and Myron Scholes for which they were awarded a Nobel prize. But I think you may find them more intuitive.

As Murphy points out, the entrepreneur can find money and maximize price by shifting the balance of power in his/her direction.

No Revenue = No Power: Pre revenue transactions are hard to get done at the best of times. However, even today these deals can get done if there is something special about them… A brand name management team or a locked down go to market channel are two examples of what that pixie dust might be. Having said that, even these entrepreneurs will be price takers.

A Little Revenue = Less Power: The second formula may be somewhat counter intuitive. There are a couple of reasons for this. First, in all likelihood the company will have under performed relative to their initial budget which hands a huge negotiating chip to the investor. Second, there is a huge gap between first revenue and a sustainable business model. Most investors know that the way you generate first revenue is not ultimately how you will be selling to scale.  However, they don’t know how long it will take you to find that secret. It is a bit like being in a taxi cab, the meter ticks away while you are stopped at the light.  This isn’t new, it has been commented on by many. Geoffrey Moore’s Crossing the Chasm presents one formulation: Hitting first revenue with no cash is no fun!

Self Sustainable = Oh the Power!: Being able to present investors with a sustainable business is like holding a pair of aces. There is no doubt that you will attract attention. Be careful not to over play your hand as it is still way easier to say no to a deal than to say yes.

All this makes me wonder, why is it exactly that we are focusing on the finer points of valuation rather than the finer points of sales…which brings me back to a prior TCP blog post: Stop Pitching and Focus on Building

So Tim Jackson brought to my attention this morning that the Communitech Tech Leadership Conference is next week!?! I have it in my calendar. I think I’m registered to attend :). If I’m not, I will be soon…

This year (as they do every year) Communitech has brought in some heavy hitters as keynote speakers:

Seth Godin
“America’s Greatest Marketer” “The Ultimate Entrepreneur for the Information Age”

Jeremy Gutsche
“A new breed of trend spotter” “The perfect kickoff” “Go to guy for what’s next”

Paul Kedrosky
“venture capitalist; an analyst for CNBC television; a columnist for TheStreet/RealMoney; the editor of Infectious Greed, one of the best known blogs on business & finance”

Hands-on workshops also look interesting. Speakers include Judy Bradt, Hubert Saint Onge, Mike McDerment, George Tsiolis, Mark Evans, and Gerry Remers.

And… the pièce de résistance… the Annual Tech Expo of Startup Ideas.

Tons of valuable content and many people who truly care about helping entrepreneurs and tech companies succeed.

Be there or be square.

See ya next week!

This morning I read about the decision by Condé Nast to shutdown Portfolio magazine. It led me to the Mediaweek Magazine Monitor Master List, which then got me thinking about the worst performing categories. So I ended up creating the following table:

So what’s the point? This list is an indication of ad dollars spent on magazine advertising –- i.e. less advertising = fewer pages. No surprise that page growth is negative across all categories, but the worst performers are (and again not surprising) either luxury related or more general in nature. Yes this is a simple analysis but considering the large number of startups focused on advertising revenue, maybe they want to think about Parenting/Kids and Health/Lifestyle/Fitness as an opportunity worth targeting.

Lots of discussion/blogging/articles over the past few weeks about entrepreneurs and innovation in Canada. Here’s where we weighed in: Tim Jackson: Entrepreneurship and the upside to a downturn

The consensus appears to be that yes, we do have great entrepreneurs and great innovation in this country. I for one believe this is true and have worked with a good number of entrepreneurs who have built (with their teams of course) very successful companies.

Lately, I’ve been spending a ton of time thinking about what we as a venture capital community and the broader technology industry can do to support these entrepreneurs. When I look around at the venture capital ecosystem in Canada (and elsewhere) most VCs are either out of cash or have very little cash left to invest (there are obviously exceptions and some VCs have raised funds in the last couple of years). I’m not sure that the majority of entrepreneurs have heard this message. When I look at the amount of time and effort that Canadian entrepreneurs invest in pitching their companies to VCs (here and elsewhere), it makes me want to scream. If we could harness this time and effort and direct it towards selling products and services to real customers, imagine how much revenue all of these companies could generate.

Looking at the funding process today, entrepreneurs pitch their companies to VCs who pitch to LPs. Wouldn’t it be great if entrepreneurs never had to pitch VCs? What if we turned the process on its head and built such great companies that entrepreneurs could choose whether or not to fund their companies with venture capital? And what if VCs had to demonstrate value beyond money for entrepreneurs to want them to invest in their companies…? And wouldn’t it be great if VCs never had to pitch LPs to raise new funds because of off the chart returns?

So how can we help entrepreneurs beyond providing capital?

* By helping them generate revenue more quickly *

Here’s what I’m proposing:

1. Entrepreneurs/companies:

• Map out your industry ecosystem: a) Types of companies you sell to (e.g. carriers) b) Types of companies you would partner with in order to sell (e.g. network equipment vendors)
• Identify the specific companies that fall into this ecosystem: a) Potential customers b) Potential partners
• Identify the specific person/people at each of these companies that you need to get in front of in order to sell your products (great tools for this include LinkedIn and Jigsaw). Figure out where these people are located. Group by geography. Plan trips to visit these regions.
• Search on LinkedIn to identify “connectors” who can introduce you to these potential customers/partners so that you can set up initial calls and then face-to-face meetings with them.
• Commit to building out your LinkedIn rolodex and sharing the connections you make with other entrepreneurs.

Now, these first few steps can be difficult and will take a significant amount of time. If anyone can come up with a cost effective way to help entrepreneurs work through this process, please weigh in below in the comments…

Communitech is one organization that has been supportive in finding creative ways to help entrepreneurs work through this process.

2. VCs and other supporters of entrepreneurs:

• Spend some time building out our LinkedIn rolodexes (many of us know many more people than the ones we currently have listed in LinkedIn).
• Highlight the market sectors where we have experience on our LinkedIn profiles.
• Respond to entrepreneurs who reach out to us for introductions. Go for coffee to learn more about them and their businesses. Introduce them to potential customers/partners and others who can help them generate revenue more quickly.

I spoke with a group of entrepreneurs last week on this topic — “Leveraging Non-Existing Networks Into Guerrilla Revenue Generating Strategies”. Many were skeptical at the beginning of the discussion but by the end, there was a real energy in the room.

I understand why people might hesitate to open up their rolodexes and connect people.

My response:

1. I am not proposing that we destroy our reputations by spamming our rolodexes with Canadian content . I am proposing that we spend a bit of quality time, interacting with entrepreneurs in our sectors and connecting them with potential customers/partners when/where we feel comfortable doing so.

2. We would be connecting our contacts with entrepreneurs who have developed products and services that have real value propositions. Our contacts may well benefit from being introduced to these entrepreneurs.

3. What good are our relationships if we don’t leverage them? We become more powerful and influential by sharing and connecting.

“He who receives ideas from me, receives instruction himself without lessening mine; as he who lights his taper at mine receives light without darkening me” – Thomas Jefferson (tip of the hat to Michael Masnick)

Some ideas to get started:

1. I’ve been told that there are about 300,000 expat Canadians living in Silicon Valley (yes, 300,000). Have you reached out to a Canadian expat today?

2. There’s a small but mighty group called Canada Connects on LinkedIn. Same objective as this post. Please join to help get our Canadian entrepreneurs on steroids.

I’ll be the first to admit this plan is not perfect. Constructive criticism with suggestions for improvement are absolutely appreciated.

I recently returned from Austin, Texas where I had spent a week enjoying the interactive portion of SXSW. A short summary of my SXSW Interactive experience and some tips for those of you thinking of attending in the future:

Panels
I learned quickly that it was a much better idea to pick a panel based on the speakers rather than how interesting the topic seemed. Panel discussions were hit or miss and the great ones usually had more to do with entertainment value. For the misses it wasn’t  necessarily because the content was of no value but because in most cases it wasn’t anything new. This isn’t a bad thing because I think for most people if you’ve been keeping up with industry news then you shouldn’t be completely blown away by new concepts during every panel discussion.

Networking - Parties (Free Beer) & Food (BBQ and Tex-Mex)
Networking, this is what SXSW is really about. If I wasn’t attending a panel session then I could usually be found in one of the many lounge areas talking to all sorts of people and I made a number of great contacts this way. At night there were plenty of parties to attend and of course you always had the option of chatting with someone while eating some awesome BBQ. If you decide to go to SXSW then attending the parties and hanging out is a must…I know, it sounds like a lot of hard work, but it needs to be done.

Experience
One of the greatest benefits is just being there to get a sense of the “scene” and to be part of the excitement. A kind of learning through osmosis I guess, something you can’t substitute by watching podcasts and reading twitter status updates. For the experience alone I would recommend attending SXSW.

The three people who follow me on twitter (@andrew_abou) know that I have spent the last week in Hong Kong and Shanghai. So in an effort to be more hip I thought I would turn the mandatory Tech Capital internal trip report into a blog post. That way when I get asked for either, both will be done!

In Hong Kong I spent a bunch of the time with money managers, bankers and a collection of other CFA type finance geeks. The mood was dour. Portfolios… hence fees are down by 50 odd percent. Real estate prices, while still out of sight, have been cut in half from a year ago and the high-end retail shops in Pacific Place looked like a post neutron bomb era scene in a sci-fi movie where all the people have been vaporized but everything else is intact.

Even more striking, several CFA charter holders were openly questioning the highest tenet of modern finance theory, the efficiency of capital markets. While sounding esoteric, to the great theoreticians of the past century this talk is akin to stoning the high priest on the steps of the temple!

Surprised, and frankly worried about what all this implied about the prospects for a near term economic recovery, I prepared for my next adventure in Shanghai. I diligently packed my bags, making sure to include all my preconceived notions that had been so generously provided me by western media and prior life experiences.

Here is an inventory:

1. China is poor, crowded and dirty. Check.
2. Like in East Germany of old, everyone has a job assigned by the government but they know they will never advance therefore they approach the job in a zombie like state. Check
3. I will get shoved around like in Toronto’s Chinatown on a Saturday morning. Check.
4. There will be armed military on every corner. Can’t forget that one!
5. Chinese people are prisoners in their own land, never able to leave. Check.

Arriving at Pudong International Airport I was immediately struck by the size of this beautiful modern facility. It was well organized and the immigration line moved more like a Disney attraction line than a state border… especially a border of a communist country. Imagine my surprise when I got to provide the border guard with real-time feedback on his performance by pushing an electronic display with a 1 to 4 ranking on it! Providing feedback on service quality is basically my favourite thing in life and here I get to do that for a border guard of a dictatorship! Wow. Make my day. Now wouldn’t that system be great at Pearson International Airport going into the United States. Maybe I will mention it next time I am passing that way.

Shanghai is a city of 9 million people. Is there traffic and smog? Sure. Did my personal space get infringed on a bit? Sure. But no worse than the Toronto subway system. I may have been spared though because many were too busy gawking at this non-Darwinian biological freak show mountain man crossing their path to even think of shoving!

It is also a city that proudly displays its history in layers. Traditional Chinese, English, French… In fact during parts of this history, the Chinese were not on the top of the socio-economic pig pile. For certain governments that would be reason enough to expunge it from the history books.

The current aesthetic is interesting. It is modern, urbane, creative and dynamic but it does not even hint at the traditional architecture that is the stuff of postcards. The current aesthetic is expensive — very expensive. And it is absolutely not just for tourists. In fact, I think the tourist spots are cheaper than certain other parts of the city. And, unlike Hong Kong, these places were crowded.

I did find that species “The communist zombie worker” that I was expecting. I had to look pretty hard though. More often I saw diligent people trying their hardest to serve you. I saw energetic people working to get ahead. And from my conversations, I concluded that there is a belief within the current generation that they can draw a direct line from hard work to achievement.

Three days later, as I was packing to leave, my bags were much lighter because I was leaving many of my preconceptions in the hotel. To be sure, China has massive challenges: unemployment, pollution, human rights to name a few. While they talk about increased openness and change my sense is there are some issues that won’t go away for a long time. But the people I met truly believe there is opportunity. They have hope and drive. That is a pretty powerful combination.

As I enthused on Twitter, my friend Derek Smyth, who is particularly adept at cutting me down to size, observed that I was “only 10 years late to the party.” He is not wrong. Some VCs have been active in China for over a decade. Indeed, some are pulling out because they don’t believe the returns are there. I haven’t done the research to understand why, nor do I think that is a good use of time. Deals that work in Shanghai may well be different from deals that work in North America. Am I going to be proposing a Tech Capital office in Shanghai at our next Monday meeting? Absolutely not. But China is a large, wealthy and growing market. It needs to be considered. We will be well served to nurture meaningful local relationships that help us fine tune product offerings and provide access to markets. That is what I will be proposing in the next Monday meeting.

As my plane climbed away from Shanghai I looked out the window and down there in the Huangpu River was a congo line of ocean freighters, as far as the eye could see, heading to the ports of Shanghai. Debate all you want about the economy, capital market efficiency, and whether I am late to the party but, like parking lots, congo lines of ocean freighters piled high with shipping containers never lie.

Word clouds are a great way to quickly visualize word density in large amounts of text. We’ve all seen word clouds before but not many people create them for their own use and as such are missing out on a tool that can provide some powerful results with minimal effort. I often use them to track high level trends using various news sources. As an example for this post, I aggregated article titles from the business section of The Record (local newspaper) for the months of December, January, and February.

The story from the word clouds above reads as follows:

• December: Canadian economy, auto industry bailout
• January: Auto (Toyota), banks, jobs, recession
• February: Banks, bankruptcy, jobs, losses, markets, sales/profits, lower/fall

You don’t need a word cloud series to be aware of that story but it highlights the ability to pull out this type of information from 3 months worth of new articles and with only about 5 minutes of work. I thought I’d throw in another example, this time for TechCrunch:

Tweaking
The story for TechCrunch over the last 3 months is rather static, mostly covering the same stuff: facebook, google, iphone, launches, raises, etc. I did the same for ReadWriteWeb and it was almost an identical result, an indication that those topics tend to dominate their articles. Depending on what you’re after it may help to ‘tweak’ the cloud and remove words that are either too dominating or irrelevant. After tweaking I ended up with the revised word clouds:

and the resulting story:

• December: Social (network), search, mobile, video and a lot of Betas
• January: Video, social (network), search, music
• February: Mobile, social (network), kindle, search, video

Sometimes the more interesting finds are the words that are picking up steam over time, in this case: Cloud, Platform, Streaming.

Obviously there are a number of different ways to use word clouds (competitor messaging analysis, news analysis, trending, topic popularity, resume analysis, etc). If you’re interested in creating your own, the two apps I use are Wordle and TagCrowd. Wordle allows you to publicly save word clouds so if you decide to try it out please feel free to share any interesting clouds in the comments section.

We work everyday with entrepreneurs who are battling on the frontlines of this economy. It seems that as the news gets worse and worse, these entrepreneurs and management teams are getting even stronger, more focused, and more creative.

It has never been more apparent to me that entrepreneurs and people who choose to work for emerging technology companies thrive in challenging situations, and they do not frighten easily.

Entrepreneurs are going to build Canada out of this recession and they are using everything they can as ammunition.

I thought I’d start a list of “weapons” available to Canadian entrepreneurs:

1. There is amazing talent on the street right now. Many of these folks have received severance packages and are approaching the job market with “flexibility” in mind. Reach out to these people and engage with them as advisors, employees who are interested in working for equity, and/or potential co-founders/partners.
2. Map your industry ecosystem, identify strategic partners and customers, prioritize them, and use FREE social media tools (LinkedIn, Twitter) to reach out, ask for introductions, and ask for help — shorten your path to market any way you can.
3. Attend the “unconferences” (StartupCamp, BarCamp, DemoCamp, mesh) to meet people like you who are wanting to roll up their sleeves and help others (and themselves) build companies with limited resources. These entrepreneurs are not waiting around for venture capital, they are building in the absence of financing with customers, value propositions, revenue and profits in mind.
4. Look to existing government programs for support. Make sure you are filing for SR&ED Credits and applying for the Ontario Interactive Digital Media Tax Credit. Introduce yourself to your local IRAP and OCE representatives to see if they have any programs you might qualify for.
5. Reach out to MaRS, Communitech, and OCRI and hook in to their Entrepreneur-In-Residence programs. These organizations are very knowledgeable about tools that are available to entrepreneurs and they know how to efficiently access a number of government programs.
6. Check out the Microsoft BizSpark program for free development resources and support.

I will be adding to this list as I come across other resources — please do the same.

Build something that solves a real problem, make it easy, and people will want to use it. Build something that you think is “cool” and….well, who knows what will happen. It’s one of those traps that I think we’re all guilty of falling into but time after time it happens all over the place. Software gets bloated, overloaded and ends up as a convoluted mess that nobody wants or cares to use.

“Never underestimate the disparity between developer excitement and user apathy” Ted Dziuba, 2008

It isn’t just developers, we’re all guilty of being sucked into the ‘coolness’ of something without questioning the utility or business impact of implementing such an idea. It is very easy to get caught up in the excitement of “cool” new features and fail to ask the simple questions that can keep us on task:

1. Does the target user care about the idea? Or for that matter, does anyone care?
2. Did we make life easier for the user? - we’re talking about a noticeable impact
3. Does this directly contribute to solving the problem the company is focused on?
X. If you’re in business — Will someone pay for this?

*It is important you not only ask yourself these questions but also ask someone outside of the project to answer these questions, preferably someone who isn’t afraid of being blunt and honest… how about potential users/customers?

Yes, this is a simple concept and these are simple questions, but there is no shortage of real-world examples where these questions would’ve come in handy and possibly saved a lot of time and money. There is a reason we have terms like Feature Creep, Second-System Effect, Bloatware, etc. Here are some classic examples of failures and really annoying products that stick in my mind:

• RealNetworks RealPlayer circa 2000
  • Man I hated that thing and the .rm format
• Norton and McAfee AV
  • I remember when Norton was my favourite AV program…10 years ago. Now every new machine seems to come with this Bloatware pre-installed. 3-page tutorials are necessary to explain how to purge your system of these programs.
• Microsoft Bob
  • Did anyone actually use this thing?
• OpenID
  • I think the answer is a “yes” for questions #1 and #3 but to me it seems #2 is an utter failure at this point and is an extremely large hurdle to overcome. Piggybacking on existing services is a great idea but a large percentage of Internet users just don’t get it and probably never will.
• Google Lively
  • It launched in July 2008 and shutdown in December 2008

I’ll stop there but I’d love to hear some of your own experiences…

I love working with our Portfolio Companies. Regardless of the company, there is consistency in a few things.  A passion and enthusiasm among the teams that from my experience makes for a great work environment, an opportunity to work with smart, passionate, dedicated folks that are committed to building world class technology companies, and unique cultures with great work environments.

If you are looking for an opportunity in a growth technology environment, the following are some opportunities
you should consider:

AideRSS
AideRSS PostRank™ Technology measures audience engagement and provides integrated tools to enable you to customize your RSS subscriptions. Save time, boost productivity, and Read What Matters.  Some opportunities to consider:

• JavaScript Ninja
• Ruby on Rails/Web Developer
• Software Engineer

Some company tidbits - 11 employees, social media, online communities

ecobee
ecobee’s home automation platform allows homeowners to conserve energy, save money, and reduce their environmental impact. The centre piece of the ecobee automation platform is a more intelligent programmable thermostat which implements advanced control algorithms to reduce energy consumption and to shift consumption to off-peak hours. An opportunity to consider:

• Senior Embedded Software Developer

Some company tidbits - 17 employees, green energy technology, downtown core (T) open style loft office space (very cool!)

Metranome
Metranome is developing technologies, applications, and services for the  mobile video market.  Targeting global audiences, Metranome’s goal is to deliver deeply engaging and personal content to mobile users while supporting a broad range of mobile devices and wireless networks.  Metranome’s application for Apple’s iPhone and iPod touch was released in September 2008.  Some opportunities to consider:

• Scalable Systems Developer
• Mobile Application Developer

Some company tidbits - 9 employees, cutting edge mobile video app development, new media, mobile/wireless

Covarity
Covarity is the leading provider of commercial loan monitoring software solutions.  The Covarity dashboard enables financial institutions to perform, the type of analysis typically done at the time of the origination of a commercial loan.  The Covarity dashboard commercial loan monitoring solution is applicable to banks, credit unions, and other financial institutions with commercial lending portfolios.  Some opportunities to consider:

• Software Tools Developer
• .NET Developer

Some company tidbits - 50 employees, SAAS, large enterprise application, revolutionary solution to commercial loan monitoring

If you are new to early stage I would highly recommend you check out both Joel on Software and Joel Spolsky’s recent post Another resume tip.  If you are wondering what it is like to work with an entrepreneurial minded company this is a great post to read. In short, you can’t be afraid to roll your sleeves up. Everyone has to!

For a complete list of opportunities visit Tech Capital’s careers portal.