Canadian technology companies believe they might secure financing by participating in these events. The reality is, VCs don’t typically fund companies that participate in these events because the companies have already pitched (unsuccessfully) most of the VCs prior to the competition…

Rather than pitch competitions, we need events that provide support for our entrepreneurs. If we give entrepreneurs the education and tools they need to build successful companies, the money will come. We need to stop focusing on pitching and financing, and start focusing on education, networks and revenue.

There are some events in Canada that I would like to shine a spotlight on. These events are focused on entrepreneurs as opposed to VCs — which, in my opinion, is how it should be. Events like mesh, StartupEmpire and Entrepreneur Week provide opportunities for entrepreneurs to learn, build their networks, and develop strategic partnerships. I am also a huge fan of the “Camp” un-conferences (BarCamp, DemoCamp, StartupCamp, etc.) where entrepreneurs support and encourage each other.

VCs are at these events looking for entrepreneurs who are focused on building their companies. A couple of weeks ago, almost every VC firm in Canada was represented at StartupEmpire and the Founders & Funders dinner during Entrepreneur Week was packed with VCs — all of whom were working the room. Build a great company and we will be there (of course, by then, you might not need us, which is great).

First I should declare a few things:

1. Deadpool members are failed companies that have been reported by and entered into the deadpool by TechCrunch. Does this mean the list of companies is biased in some way? It could be but we don’t know for sure.
2. I did a high level analysis to determine the reason these companies failed using publicly available information. Obviously there are many uncertainties in this approach, most notably:
   • many things can contribute to the failure of a company, reducing it to one or two reasons is a difficult task and obviously I wasn’t able to capture the entire picture but this is an approximation
   • what is reported publicly and what really happened aren’t always the same

The Process: I already had the list of deadpool members, from there I spent some more time collecting info to determine:

• the reasons for failure
• the location of the company
• if the company was funded by an outside investor

The result of my analysis:

Reasons
What probably isn’t surprising is that there are a number of common reasons for failure among startups.  What is surprising is that most reported reasons are secondary problems. Sure, a company might have had to close shop because competition was fierce but it could be that they weren’t differentiating themselves effectively, or maybe they blame poor user adoption. The reality is they were trying to solve a problem nobody cared about. When I dug deeper I found that many of the companies suffered from the same usual problems we all hear about on a regular basis.  Some of the key takeaways are:

• Business Model / Funding
  • Lack of funds and cash flow problems came up as a reason for failure in the majority of companies. Again, in many cases this is a secondary problem… If you’ve been at it for a few years and can’t generate enough cash to sustain yourself, at some point the primary problem might not be a lack of funding but the lack of a business model.
  • You need a way to generate money. We’ve all heard this a million times and I’ve written 2 other posts that deal specifically with identifying a suitable business model: Selecting a Business Model, Part 1 and Selecting a Business Model, Part 2
• Competition / Differentiation
  • Granted, it can be a tough market out there but if you can’t carve out some market share for yourself because of competition then maybe there is something else going on. Without a doubt, certain markets are extremely competitive… If that is the case then you should try to answer many of the necessary questions before deciding to enter the market.
  • What differentiates your product from the competition? Why are people going to buy from you or use your service over the competition? Does competing head on with an incumbent that has unlimited resources (compared to you) make sense?
• “False Problem” / User Adoption
  • “User adoption was not what we anticipated.” There are many reasons why this may be but I think in many of these cases you’ll find that the company started off with a “False Problem.”
  • The “False Problem” is when a company tries to solve a problem nobody really cared about in the first place, or creates a new service with a marginal improvement or slight variation over an existing one.
• Shifting Strategy / Implementation
  • Yes a company does have to adapt to market changes and customer needs but when you don’t have a sound strategy you just end up confusing all stakeholders and slowing implementation. Don’t try to reinvent your company every 6 months.
• Partnership Issues / Regulation
  • This is the Single Point of Failure (SPOF) problem. You rely on a single partner to provide data or services and if they disappear or turn off the tap then your business fails. Another extreme example is businesses based on legal loopholes or arbitrage… If these holes get plugged you’re out of business immediately.
  • It’s a good idea to identify if your company has any SPOFs. If you do have a SPOF then you’ll want to figure out a contingency plan in case the unthinkable happens but more importantly, how you can remedy the problem so you will never have to deal with it.

Geography
Maybe this has to do with the TechCrunch bias I mentioned earlier but most of the deadpool members originated from California and Washington state, 72% of the members in fact. Seattle specifically seems to be a hotbed of Deadpool members. Interestingly, no Canadian companies made the list (even though there have been failures) as reported by TC.

Why Use Executive Search?

There are a number of reasons that you may choose to engage an Executive Search Firm.  A few of these may include:

• The need to engage an experienced professional to source, attract or entice those individuals with the appropriate skill set, competencies, and qualifications that you can not get to on your own otherwise.
• The organization is in a period of change or flux that demands the expertise of a search firm with experience placing top executives in specific industries.
• The need for confidentiality which may not be achieved if you were to engage the search on your own.
• And for some, the assistance provided in handling all screening interviews, managing candidate concerns, referencing, offer negotiation and closing the deal.

Selecting a Search Firm

Time taken up front to identify, screen and select the appropriate search firm will be saved through the search process by working with a firm that is appropriately matched to your needs.  The following are some things to consider when selecting a search firm:

• Company alignment - Which firm is best aligned with your organization, that has the appropriate professionals by way of reputation and past experience, with an ability to identify and access those individuals with the right skill set and competencies demanded by the position being recruited for?
• Organizational understanding - Which firm has a solid understanding of your  business and the culture of your organization, and appreciates the challenges you face - strategically, operationally and organizationally?
• Confidence - Which firm instills the confidence that they can get the job done, that they have the appropriate resources and search methodology in place to execute, will prioritize your search relative to others they are working on, and will approach the search in a way that aligns with your organization?

Evaluating Search Firms

I would suggest a few things to consider when evaluating your shortlist:

• The Basics - There are a few important basics you should consider.
  • The size of firm - I am less concerned with the size of the firm, as I am with the ability of the firm to meet and deliver on your needs.
  • Geographic area covered - What is the geographic reach of the firms you are considering?  Not where they say they can go, but where they have gone in past with proven results.
  • Industry knowledge and specialization - Don’t settle.  Find a specialist that has the appropriate domain knowledge and expertise to meet your needs in searches where it’s necessary.
• Benchmark searches - Look at their track record - relevant searches, relevant positions, appropriate industry and appropriate stage of company if it is important.
• Search strategy - What will the firms approach be to the search?  How many candidates will they present? What level of status reports can you expect (verbal, written, to what frequency)? And what is their approach to the market with your search specifically?
• Hands off clients - Who are their past clients they have worked with and can’t touch? It would be important to know if any companies that may employ the type of person you are looking for is on their hands off list.
• Guarantee - It would be prudent to understand what the firms position is with respect to guarantees.  How long will the firm offer a guarantee? Will they replace the candidate? What if you don’t feel they have the capability to replace the candidate, will they credit fees? When will they consider the job description to have been changed substantially enough to warrant a new search (in which case they may ask for a new retainer)?
• References - Ask for minimum of three to five professional references.  Get comfortable with the references yourself.
• The Firm - Do your research on the firm.  What is their reputation in the industry?  Get an understanding of who your account manager will be and what their level and capability is within the organization. Ensure it aligns with the needs of your organization and search.

Finding a Search Firm to work with

There is no shortage of options when it comes to Executive Search Firms.  The key is to find the firm that is appropriate for your company and your current requirements.  Board members, advisors and investors will have suggestions on who to engage and will have had good and bad experiences they can reference with firms so they are a good starting point for referrals.  Lean on your network for referrals, ideally lean on those that operate within the same market or product environment, for suggestions on who they have had success and challenges with in past.  You can also reference the Worldwide Association of Executive Search Consultants, a professional association that represents retained and executive search consulting firms worldwide.

It is best to consider Executive Search as an engagement as opposed to a transaction. It is best to evaluate which firm you can establish a working relationship with that will allow you to achieve the desired outcome that suits both parties.

Jennifer Brooy, Vice President of EDC Equity talked about the shift to the “communication age” and our use of the internet to interact and communicate — how markets are now telling us exactly what they want. She suggested that we look and listen to the large and rapidly growing markets like China, India, Brazil, Russia and Southeast Asia. A couple of years ago there were a flurry of “India/China” events… I wonder how many Canadian companies have explored opportunities in either of these countries. Looking at the chart below, at a macro level, the US is still a huge market. Looking at growth of GDP: China, India, Russia, Southeast Asia… all growing at a more rapid pace than the US. And the population bases and export growth — China and India — huge. And import growth — Brazil and Russia.

But what do these types of charts mean to individual Canadian companies? I think the question each company needs to think about is: Where is your market? Where is your biggest and best opportunity? Not necessarily in your own backyard. And not necessarily in the country with the largest GDP. Think about the specific segment of the market you should be addressing and think about it in a global context. Now where is your biggest and best opportunity?

Jennifer spoke about the strengths of our country:

• We have a strong fiscal discipline.
• We have a solid economic base not withstanding what’s going on right now.
• We have a sound banking system — some of the soundest banks in the world.
• We have water and energy resources.
• We have diverse and talented human resources — multi cultured, multi language, multi coloured.
• We have the highest educated population base in the world. We have the highest per capita of post secondary graduates.
• We have proven ourselves as technology leaders and we are innovative and adaptive.

We have some amazing resources we can capitalize on. Jennifer spoke about the reverse brain drain phenomenon where people have come from China, India, Brazil, and Mexico to North America, Britain, and France. These talented people have been educated in our best universities, have worked here, and have learned our culture, our ways of doing business, and our approaches to innovation. She suggested that Silicon Valley might not always lead the pack in terms of innovation due to this reverse brain drain. These educated and experienced people are going back to their roots and exporting this intelligence back home. How do we encourage these people (both Canadians and non-Canadians) to work for our companies? How do we make sure they are aware of the opportunities? How do we incent them to stay once they’re here? We need to make sure we are providing challenging, fulfilling career opportunities and compensating fairly. We need to make sure our companies have the financial resources and market opportunities to thrive. Jennifer expressed concern about our floundering venture capital industry and its impact on our tech industry. And the impact of globalization on our small and medium sized enterprises that make up the lion’s share of our economy.

EDC has developed a number of programs to help Canadian companies address these concerns and take advantage of these opportunities. Some of these programs, like the equity/investment side of EDC, are not well known. EDC invests directly in Canadian companies that are born global or that want to grow and go global. EDC also invests internationally in funds (one more disclosure, EDC is one of Tech Capital’s LPs) and now has several fund investments in China, India, Southeast Asia, Turkey, a pan European investment, a fund in Israel, a couple of funds in the US, a Caribbean fund, a Mexican fund and is starting to roll out into Latin America and next year Africa. They are actively building a network of people and companies in other countries that Canadian companies (venture capital firms included) can reach out to, learn from, and work with. I would suggest that companies look to EDC for assistance in building relationships with companies in other countries. “EDC Equity is your investment partner with global reach. We’re here to help. Going global is not easy but we’re here to demystify, to de-risk, and to get you connected.”

Rajiv Pancholy, Chairman and CEO of TenXC Wireless challenged startup companies to think about going global as a strategic imperative, rather than an afterthought. He broke his presentation down into three segments: (1) reasons for going global, (2) what you need to do to go global, (3) the challenges you will face in going global and who you can turn to for help.

Rajiv made an interesting point that in the technology business, there is now clear evidence that the adoption cycle for new ideas and new technologies is significantly shorter in many other parts of the world vs. the more entrenched conservative thinking that permeates through the big customers in North America and Western Europe. “Customers in Asia and the emerging economies will pull you along faster than you ever thought possible.” In a world where there is less and less capital available for technology companies, a quicker path to market and revenue certainly sounds attractive…

Rajiv made it very clear though that “going global” should not be an afterthought. Most startup companies don’t have the human capital and resources to go after multiple markets at the same time so companies should pick and choose carefully. “Going global requires a lot of effort, focus, and staying power. You must have right resources in place. Going global requires a lot of long journeys, a lot of long stays in foreign countries, and dealing with different cultures. You must have people on your team who are willing to pay the price on a sustained basis.” I certainly remember my time as Director of Marketing at a startup technology company — supporting sales teams in Asia Pacific, Europe and North America. Almost all of our resources were devoted to the North American market… I’m amazed at what our remote teams were able to accomplish on their own.  Certainly not an ideal situation… 

You also need to rethink your business model. Rajiv referenced management guru C. K. Prahalad and his big warning to North American businesses. To go global, companies need to completely change their business models to properly address the target market. Work from the market backwards rather than relying on your traditional ways of doing business.

Some additional tidbits from Rajiv’s presentation:

• As a young company, you need to understand that when selling to companies in developing countries it is not just your product they are buying. Yes, they want your product and they understand your value proposition but they see you as representative of your company and they are attempting to build a relationship with you. They are hungry for the knowledge behind the company and want to discuss the thought process that went into the product. Reps and agents typically fail in these early stages although they can be helpful later on.
• Patience is a bad word and breeds a sense of complacency. Do not be “patient” to develop your business in another country. If you put in a sustained effort anywhere in the world you will get to your goal sooner rather than later.
• There are obviously some local complexities and it can be hard to know who and what to trust. There are many rumours, assertions, and stereotypes and you need to learn to navigate them. Doing business in other countries is not necessarily that different at the end of the day. Beware of falsehoods, rumours, and innuendos.
• Getting to meet the decision makers is a big issue. When you are representing a small company you typically struggle to get an appointment. You need people who can open doors for you. You also need to project an image to convince customers to trust you with a significant piece of business. TenXC has used what Rajiv calls “force multipliers”: Canadian Trade Commissioners and EDC to help broker introductions. EDC has helped TenXC by “opening doors, giving introductions, speaking on our behalf, facilitating meetings, to extending to us certain financial tools and capabilities to be able to handle that level of business.” EDC invests in organizations and companies so when they make a phone call, they are not making it on behalf of a supplier, they are making it as an investor to the group CFO. EDC can also introduce you to an ecosystem of people who have been part of major transactions and have been vetted.
• Other groups that can help: the Canadian expatriate community all over the world, networking organizations like The Indus Entrepreneurs (TiE), and the ethnic communities here in Canada.

“Don’t be afraid of going global. Yes you’ll have to pay the price, yes it will be arduous, yes it will be physically draining, but it can also be extremely exhilarating and can make success happen a lot faster than you think.”

There were a number of other interesting speakers who also spoke at the event including:

Scott Aldsworth, Vice President and East Coast Regional Director, High Street Partners, Inc.
Peter Crombie, Partner, Emerald Technology Ventures
Robert Genieser, Managing Partner, Vertex Venture Capital
Ajoy Mallik, Global Head, Venture Capital for the Co-Innovation Ecosystem (COIN), TATA Consultancy Services
Jevon Macdonald, Founder, Firestoker.com, (co-Founder of StartupNorth.ca, WirelessNorth.ca, CommunityNorth.ca and StartupIndex.ca)
Rob Lane, CEO, Co-Founder, Overlay.TV
Maggie Fox, CEO, Social Media Group

Hold the date for the next CVCA PD session on “Deal Trends” taking place on February 26th, 2009.

And you probably have seen:
Ron Conway: Cut expenses now
Benchmark: Conserve Capital

Whether you are funded or embarking on fundraising, these are very well argued essays on capital management that might inform your approach.

I hesitate to add the following link because of the gratuitous use of the F-bomb, so be forewarned. However, Dave McClure does add an interesting counter perspective to the discussion

Dave McClure: Fear is the Mind Killer of the Silicon Valley

I concur with the need to focus on efficient deployment of capital. However, I would argue that there is an important difference in the Canadian VC market…

We have been living in a low liquidity market for 2 to 3 years.  At this point, liquidity in the Canadian VC market is lower than I have ever seen it and the specter of the formation of new capital pools gets bleaker by the day.

Attracting capital today is a monumental task.  A build it and they will come, “Field of Dreams”, strategy based on a solid dose of hope is not the kind of plan that would attract a lot of attention.

Companies that have been funded need to recognize that subsequent rounds are not an entitlement.  In fact, it is not necessarily the case that the existing syndicate will be ready to support you.  As we have seen over recent history, when a VC fund finds it has less capital than anticipated it will triage the portfolio in an attempt to allocate cash resources to the perceived winners.  At times, VC funds can use pretty crude metrics to make these decisions which do not necessarily take into account the fact that in technology the path from A to B is never a straight line.

The immediate reaction may be to reduce burn, which of course is pretty easy to do. You might not have much of a company left after blindly cutting costs but it can be  done.  Certainly, one wants to come out of the other side with a strong position in the marketplace rather than being the company that blew its lead due to timidity.  However, slide 49 in the Sequoia presentation is a sobering diagram.

So here is the question I think we all need to be asking:

How do you balance capital conservation with business priorities?
These discussions need to be held at the management level, at the board level, and with the investors.  It is likely there won’t be general agreement so a consensus will need to be built.

Obviously, the specific tactics will differ for every situation.  However for venture backed companies good shareholder management will be a key success factor.  For this, I can offer some general suggestions:

• Be realistic:
  • Your customers will change their buying patters.  Have you included this in your analysis?
• Over communicate with your investors:
  • Nothing is more frustrating than a portfolio company that only reaches out to investors when they need money. Failing to communicate puts your investors on the defensive immediately. If your VCs are half as “value add” as they told you they would be when they invested, they should be able to provide some very good input.
• Set expectations early:
  • Don’t be unnecessarily negative, but now is the time to deliver the bad news. Lay a realistic foundation as a basis to move forward. Setting this baseline now will hopefully keep you from having to spend half of every future meeting explaining missed targets that aren’t realistic in today’s market.
• Determine the ability/appetite of your investors to continue supporting you:
  • Selling your investors on your company is a continuous process.
• And last but not least, be upfront.  And ask your investors to be upfront with you.

Own all intellectual property
Any acquirer is going to want to know they are acquiring all IP rights. This means from early on you need to ensure the company owns all of its intellectual property. You need to ensure that everyone who has played a role in development has assigned their rights to the company. Specifically:

• All individuals who “touched” the IP prior to a company being formed need to have explicitly assigned the IP to the company. Even if you had friends help you brainstorm early on it is important that they sign IP transfer agreements.
• If developed in a university setting, all students will need to sign IP transfer agreements.
• Once incorporated, all employment contracts should explicitly state that the company owns all IP developed by the employees.

Standardize employment agreements
It will drive potential acquirers crazy if every employee has their own form of employment agreement. Best practice is to use one standard form of agreement for all  employees. Obviously items such as salary will change from employee to employee but the basic form of agreement should be consistent. This also makes negotiations with potential employees easier as you can simply say the form is non-negotiable.

Make option agreements comply with regulatory requirements
There is no significant cost to ensure your private company stock option plan is consistent with that of a public company so why not make it compliant from day one. This makes it easier for an acquirer as they will not likely have to take any accounting hits (stock based compensation charges) that could impact their willingness to complete a transaction.

Don’t have change of control provisions in option agreements
During the “bubble” there was a tendency for stock option plans to have a provision that provided for full vesting of options on a change in control (i.e. an acquisition). Today that is not the norm. Full vesting will scare an acquirer who will be concerned about the ability to keep the company intact after acquisition. If they do agree to proceed notwithstanding the acceleration, it will usually mean a reduced price because they will need to allocate some portion of what would have been included in the purchase price towards retention bonuses and/or new stock options to provide an incentive for employees to remain. Today’s market is such that only a handful of employees will usually have accelerated vesting – usually only the CEO and CFO as often both are not retained post acquisition.

Be consistent with customer terms and conditions
Do you have a standard set of terms and conditions that govern sales? If not, you should put a set in place immediately. While I realize early on you need to be flexible and work with customers, you want to try to be as consistent as possible. Ideally you want things like warranty periods and support hours to be consistent from customer to customer. You want to make it easy for an acquirer to get through diligence and standardized terms make it simpler.

Avoid complicated tax/business structures
At the risk of offending well meaning lawyers and other advisors, stay away from complicated corporate structures. Yes, in theory moving your IP to an offshore entity and then licensing back to Canadian and US operating entities may save you some taxes down the road but the reality is you are spending time and money up front for a benefit you will not realize until you are profitable. More importantly, you are unlikely to realize the benefit at all because you will likely be acquired before the benefits kick in. A foreign structure will make it more complicated for an acquirer who may even want the structure unwound before completing the purchase.

The Process: I first identified each TechCrunch deadpool member from 2007 to the present and collected info on:

• The type of Service/Product
• The launch/founded date
• The reason for failure (if available)

I didn’t include certain companies depending on criteria such as acquisitions (Yahoo for example) unless there was a major failure, or companies that had been entered into the deadpool but were revived at a later date. The end result was a list of 43 deadpool companies. (Obviously more than 43 companies failed during this period but remember I’m just looking at the deadpool with a filter).

The second step was to categorize the companies so that I could come up with the following breakdown of the deadpool for the last 21 months or so.

All categories are 2% of total unless otherwise labeled.

There are a numerous ways to interpret this chart. A few examples are:

1. Failures: The chart shows that certain areas such as Social Networks, MVNOs (Mobile Virtual Network Operators), Media Streaming, etc. tend to have higher failure rates than others. In other words, one might think that these are all bad bets and you should stay away.
2. Variety: The chart more or less confirms that nobody is immune from failure. There is an assortment of companies from very different areas that make it into the deadpool.
3. Hot Areas: At a basic level, the chart helps to identify areas that had a high level of startup activity preceding this period. If you reason that the number of failed companies is proportionate to the number of new entrants then the chart shows that a few years ago Social Networks, MVNOs and Media Streaming were hot areas (and may continue to be today).

Unfortunately, the conclusions aren’t that black and white. #1 has some truth to it but not in each case, #2 is pretty obvious, and #3 is probably close to the truth. I think all three of these points are valid on some level but the issue is, without proper context, it is difficult to say with confidence if any of these categories are particularity worse than the other. The MVNO market has certainly been very risky and has seen its fair share of failures with obscene amounts of Venture Capital money being spent but how does that compare to Social Networks or Group SMS? To provide the proper context I would need to take a single category from the pie and then perform a similar analysis on that single category to understand what percentage of companies in that that specific category fail (for example Social Networks), repeat that for each category, and then compare and combine with anecdotal evidence. That is a lot of work, and maybe I’ll get to it some day but for now I’ll skip that and move onto the data I actually have.

Once I had the data collected it was easy to come up with the following:

Average number of months from launch to deadpool: 21 months
Standard Deviation: 15 months

Longest ‘alive’ period: 76 months (6.3 years)
Shortest ‘alive’ period: 2 months

So it looks like if you’re past the 3 year mark the odds of hitting the deadpool drop off dramatically. Nothing surprising here except for the quick 2 month member.

I will continue the analysis and see if commonalities can be found between these companies that may shine some light into what precipitated the journey to the deadpool. I’ll save that for the next post.

I’ve made the list of the 43 companies available for download if you want to check it out. It is in Excel format: Deadpool member (xls)

In the meantime I’d like to hear your thoughts on what the chart means to you and any related stories you may have…

For companies looking to build a reputation as an employer of choice on campus, there are a few things to consider to help build your brand.

1. Co-op and career services help employers promote themselves on campus by assisting with coordinating some campus specific events. Information sessions allow companies to target students by discipline. They offer an intimate environment to talk to students directly about your company and the opportunities it offers. Career services may also assist in organizing and advertising campus associated career fairs in the spring and fall for students looking for opportunities.
2. Consider a campus ambassador. A current or past co-op student that will talk up your company to students on campus and why it offers a great work experience. You can get creative on how you incent your campus ambassadors… a little can go a long way.
3. The best way to advertise opportunities to students is to get in front of them (obviously). Student groups and class reps have a captive audience and are best positioned on campus to disseminate information to students.  Students lean on class reps to keep informed.
4. Traditional print advertising through campus news and bulletin boards. A call to the Federation of Students should help you navigate student advertising opportunities, or point you in the right direction for further info.
5. Hold an open house. Build your co-op or new grad value proposition, and then showcase why you offer a great place to work. Students are looking for more than a job, they are looking for an “experience”. Promote your corporate culture and boast about your co-op and new grad experience to catch student’s attention.
6. If it fits with your corporate culture consider hosting a campus ‘event’ at the local watering hole for students. Targeting specific disciplines or student groups can create a buzz on campus among the students you will one day try to recruit.
7. Research social media marketing opportunities that exist for the student groups you are trying to tap into. Students are blogging and on the web. Niche campus groups can be targeted on Facebook, consider podcasts, mobile app’s and video opportunities… sometimes very little money needs to be invested to get some viral advertising working for you.
8. Sponsorship of student group associations, sporting events, campus events and student run activities will get your name in front of students. Commitment to continued sponsorship can help build momentum on campus.

Staying tapped into student groups on campus makes sense for a few reasons:

• For companies looking to hire co-op students it helps to attract those high caliber students that have their pick of opportunities.
• Attracting returning co-op students who have a co-op term under their belt will allow them to hit the ground running with a good feel for the business and corporate culture.
• Staying tapped to the best and the brightest supports new grad recruitment efforts.

Building a brand on campus as with any other branding effort isn’t a one time event. It is something that needs to be nurtured and will build momentum over time. A mixed approach will show the best results.

Not sure this is the ideal time to be writing this post as markets are crashing all around me but nevertheless, here I am, several years out of school and seven years into my career as a VC reflecting on how I got here…

Looking around at my peers, there seem to be a couple of traditional paths people follow to become a VC. Some people get an undergraduate degree in engineering/finance and then an MBA, join an investment bank or venture capital firm at the Analyst/Associate level and then work their way up through the organization over time. Others are successful entrepreneurs who have built a number of companies before joining a venture capital firm at the Partner level. A while back, Seth Levine wrote a couple of blog posts: How to become a Venture Capitalist and How to get a job in venture capital (and the comments are just as informative as the original posts).

My journey started with passion for marketing and technology. For as long as I can remember, I’ve been interested in bringing technology products to market and building technology companies. I remember thinking in university as my peers were clamouring for marketing jobs in the consumer products industry “who would want to sell butter?” Luckily, one of my first jobs out of school was working for a technology focused marketing consulting firm and following that, working at PixStream, a technology company focused on distributing and managing digital video across broadband networks. My first exposure to venture capital was at PixStream in 1999/2000 and the experience (through the bubble) was a wild ride. Following PixStream’s acquisition by Cisco in 2000, Tim and Andrew at Tech Capital invited me to join the firm as a marketing operations resource for the firm’s portfolio companies which I did for a few years before focusing more on the transactional side of the business.

Learning about what it means to be a VC is certainly easier today than it was a few years back. Information that used to be shared through apprentice-based learning is now more accessible as VCs all over the world are sharing best practices and adding transparency to the industry. There are also courses you can take through the Venture Capital Institute (high level overview of a number of aspects of venture capital) and Harvard offers an Executive Education program Private Equity and Venture Capital (focused more on private equity but some venture capital content). I’ve heard good things about the Kauffman Fellows Program although I haven’t experienced it myself.

Venture capital is a difficult industry to break into, and from time to time the job is not very fun but working everyday with brilliant and creative people who are building exciting technology companies somehow makes it all worthwhile.

In very general terms, exits usually fall under one of the following categories:

Bankruptcy
Obviously not a good result. A bankruptcy occurs when a company does not have assets available to settle its liabilities. A company can elect voluntarily to declare bankruptcy or a creditor can apply to the courts to have bankruptcy proceedings start. In either case, a third party (called “a receiver”) is hired to liquidate the assets and distribute any proceeds to the creditors.  Whether or not a VC will realize any proceeds in a bankruptcy depends on the nature of the investment and the extent to which there are other creditors. In broad terms, the receiver get their fees paid first followed by the  government for things like payroll withholdings and sales tax. Next come the secured creditors - a VC may get some proceeds here if they hold secured debt or preferred shares. Last to be paid are the common shareholders and it is very unlikely in a bankruptcy that there will be anything to distribute to this group. So in summary, not a good result for anyone.

Orderly wind-up
This is similar to a bankruptcy but in this case the decision to close the business is made while there is enough cash to settle with the creditors. The liabilities are paid out and then, like in a bankruptcy, any remaining assets are distributed to shareholders in order of priority (i.e. preferred shareholders before common shareholders).  Again, not usually a very good result for the VC or the founders.

Public Offering
This is what many founders aspire to and in fact, like many VC firms, we expect our companies to act like they will be public companies one day. The process to go public is not easy and we are big believers in making things as easy as possible from day one. For example, securities regulators and stock exchanges have rules regarding stock options and stock option plans. Why not make your plan and option grants comply with public company requirements from day one so that there is one less thing to worry about in the event you eventually take the company public?

I believe there is a misconception about how people make money on an Initial Public Offering (IPO). Lets say you are the founder of a business and own one million shares, the company goes public at a price of $30 per share. You get $30 million right? Not so easy. On paper you are “worth” $30 million but you won’t be able to liquidate those shares. On the public offering, the underwriters (the brokerage firm that sells the stock) will require that all shareholders agree not to liquidate their shares for a certain period of time (say six months). For a VC, this is not ideal but it is understood it is part of the deal. What often happens is right before the lock-up period expires, the underwriters will try to arrange a sale for any investors who want to sell to avoid having a large block of shares hit the open market. Unfortunately, management will not usually be able to participate in this share sale. The markets don’t like to see founders selling large blocks of stock as it sends the “wrong message” (i.e. why don’t the founders believe in the upside potential of the stock?). If the stock is very sought after, the underwriters may agree to allow the founders to sell a small piece of their shareholdings but the reality is that as a public company it will be very difficult to realize all of your “paper wealth”. This is the catch 22 for founders –  most aspire to be public companies but the reality is it becomes tough to actually liquidate their shares. Once the company has a track record as a public entity founders should be able to sell shares using a predetermined formula (e.g. 1% of your holdings on the 10th of each month). From a VC perspective the IPO is usually a good result as it provides liquidity.

Financial sale
The sale to a financial buyer, usually a private equity firm, is unusual for early stage technology businesses because financial purchasers are looking for companies that are cash flow positive - a rarity in the tech world :). Usually a financial acquirer will fund the purchase through a combination of debt and equity. The debt lenders will base the amount they are prepared to lend on historical results and future cash flow projections, making positive cash flow a must. I sit on the board of Q9 Networks which recently announced it has agreed to be acquired by a private equity firm. I chaired the special committee of the board that dealt with the sale. After the transaction closes I will share some more thoughts about private equity acquisitions. From a VC perspective a financial sale usually provides immediate liquidity.

Strategic sale
In our experience, this is the most likely exit for VC backed technology companies. Strategic sales occur when another company buys your company for strategic reasons. The reasons can be any of the following:

• The purchaser needs to enhance their product offering and does not have time to develop internally so buys a company that has already completed development (buy vs build).
• The purchaser wants to make sure their competitors do not have access to your products or technology.
• Your technology is so proprietary it is unlikely the purchaser would have been able to develop the solution internally.
• Your technology/product will allow the purchaser to generate significant “pull through” revenue. i.e. the purchaser believes that by combining your product with their existing product they will now have a competitive advantage that will allow them to win significant new business and/or differentiate themselves from competitors.

Assuming the acquirer is paying in cash or is publicly traded, a strategic sale is usually a very good result for the VC because we are able to liquidate our investment immediately. For founders the liquidity will vary. Sometimes an acquirer will require the founders/senior management to put their proceeds in escrow with the amounts being released over time. This escrow ensures the founders remain with the business during a transition period. In other cases, the founders are able to fully liquidate and they are retained through new employment contracts and/or equity in the acquirer.

So which of the above should you aspire to? Ultimately I think you want to make sure you have options and never be in a position where you are forced in a specific direction. The overall advice we give to our founders is: “build the company on the assumption it will go public but recognize that a strategic sale is more likely so don’t do anything that will make a sale difficult.” I will cover what this means in a future post.