Let the Sparks Fly!

Summer’s over, but it feels a little like spring…

Normally this is the time of the year that really stresses me out. It is late September in Ontario, summer is over, the leaves are starting to change colour, and while it is still pretty nice out, it’s real clear that it is downhill from here to winter, with warm days more than seven months away.

But something in the local tech industry feels a little different, and it feels like things are getting better. Some of us have been lamenting the state of the Canadian VC industry for years now, and Rim’s woes should by all rights make the local scene seem even bleaker – but people in the industry don’t seem to be listening. A whole lot of activities that are happening seem to signal an awakening spring and everyone seems just a little more optimistic.

Of note are more entrepreneurs pitching really interesting offerings. I keep meeting Canadian entrepreneurs with great ideas, great opportunities and a yearning for success.

Surrounding that are a number of exits from local companies – most notably (for the industry and especially for us at Brightspark, where we saw more than a 23X return on our investment) is the Radian6 sale to Salesforce.com. This exit proved that great, money-making businesses can be hatched in Canada with local talent, local VCs and a positive outcome for the local economy. Add to that a series of other small acquisitions along with some interesting exits.

And then there are the new micro-funds which are growing despite the stalling of the traditional industry, with experienced and talented managers helping a new series of companies – I am referring to our colleagues - Duncan and Robin at Mantella; Matt at GoldenVP; the teams at Xtreme, bnotions and Real Ventures; Daniel at Klass Capital; Bill Dinardo; and Joel at Trilogy; all who are making a very meaningful difference to our industry. MaRS is expanding, IAF is investing, I hear some traditional Canadian VCs may be finalizing new funds, and the government funds continue their part in providing capital.

We aren’t out of the woods yet, but it definitely feels like now is a great time to be part of the Internet, software, mobile, Cloud, and payment industries. Markets are growing, and these industries are creating value while the rest of the economy questions itself. If this really is a marathon, now is a great time to be heading out…

If we can keep up this momentum and deliver a few more winners, we may look back at this time as the period when the new Canadian industry started thriving.

At Brightspark, we remain thrilled with our VC fund’s performance. Our multiple exits puts our performance way ahead of top quartile funds anywhere in the world. And we think the remaining companies in our portfolio have the potential of taking our fund to new levels. Our focus on investing in great teams, markets we understand, and with an early stage fund of entrepreneurs helping entrepreneurs is paying off really well.

To those people who have written off our participation in the industry, we continue to focus on remaining a significant part of this industry and we think the next few years could be very exciting for our funds and the Canadian industry. 

Welcome to spring!

Kickstarting an industry

Last month, I was lucky enough to join about 250 other attendees at Kinnernet 2009, a “Foo-type” Internet geek camp/ un-conference held on the shores of the Sea of Galilee in Israel. Kinnernet is a by-invitation networking event hosted by Yossi Vardi. If you have never heard of Yossi, he was the founding investor of ICQ (when I met him in 1997). Yossi has invested in well over 80 tech companies – mainly young Internet companies, and has often been called the Godfather of the Israeli web industry.

Yossi has an approach to the market that I think the Canadian startup industry can learn a lot from:
    - Startups need cash, and the biggest help you can give them is cash. It is said that Vardi invests a few hundred thousand dollars in his startups, that he takes common stock with simple terms and no negotiations.
    - If someone has failed before he’s even more likely to invest - “It makes them want to win even more,” he is quoted as saying.
    - He generally invests in young entrepreneurs.
    - Yossi usually hardly looks at business plans at all, and mainly invests in the individual. My favourite Yossi quote is: “Business plans are like sausages, if you knew what went into them you wouldn't eat them.” Another unauthenticated quote: “Judge the individual over the business plan”.

From what I saw at Kinnernet, Vardi has played a major part in stimulating Israeli startups. At every turn, I met another young entrepreneur eager to tell me about their startup. Full of positive energy and drive, it was extremely energizing to meet these entrepreneurs.

In addition to financing, Vardi orchestrates events like Kinnernet where all his startups can interact with each other along with many experienced and connected people from all over the world. And he relentlessly works on business development and finding opportunities for his startups.

It would be amazing if we had a similar process in Canada. If we could find a way of kickstarting 50 (or more!) tech startups with a few hundred thousand dollars each; if we could find a way to orchestrate ways for them to work with each other; if we could help them meet people ready to advise them on lessons learned. 

We have all the ingredients – great universities, superb talent, high enthusiastic young people with ideas. Now we need a way to get the right money to the right people and we may be able to create an industry…..

More "Bill Gateses", not more graduates

The press in Canada has been full of articles about how Bill Gates thinks that if Canada and the US want to stay ahead, they should "focus on improving the quality of education and expanding the number of young people who study math and science in school". He wants us to create new computer scientists, engineers and researchers.

Academics like Roger Martin answered him in the Globe and Mail by saying that North America has its lead because of our great MBA schools (like The Rotman School of Business where he is Dean) and management studies and the creation of more managers.

And the debate rages about how we need more scientists, management students and other graduates. Even the politicians have been getting into the act by agreeing or disagreeing with Mr. Gates about how far behind we are or aren't, and how many more students we need.

I think that they are all wrong. What we really need is more Bill Gateses. We need entrepreneurs who are willing to "go for it", start new companies and create startups like Microsoft was not so long ago. Can you imagine if we could find the formula to create more people like Bill Gates?

As far as I remember, Mr. Gates dropped out of university. He was not a product of any MBA school or school of engineering. He did what he did because of his own drive to succeed, and a market environment that let a Microsoft be created.

Let's create an environment that lets entrepreneurs thrive. Let's help them however we can to get started.

On the other hand, if Mr. Gates succeeds in convincing us that we need more "scientists, engineers and researchers", imagine how many more copies of Windows he could sell...

Startup Crisis

So, when do you panic? As an investor in many startups, we are always dealing with a major crisis in one of our companies. 

The reality of startups is that it is actually part of the normal process to have an occasional crisis. In fact, I use “crisis measurement” as one way of monitoring startups. 

Without over-generalizing, I think it is normal for a startup to have one crisis about every six months. Within a couple of years, it may go down to once yearly. More than one crisis every six months probably means that the company is being too aggressive/ too reckless and less than one crisis every six months probably means that the company is not taking enough risks/ pushing the envelope hard enough. 

The type of crisis I am referring to can range from market or customer issues all the way to existential crises where the company needs to completely question the path it is taking.

The success of a startup often depends on just how well the team, CEO, investors, board and employees manage the crisis. The worst way to manage any one of these crises is to ignore them or hope they go away. They don’t go away. They just get worse. The sooner you deal with issues and face them head on, the better your chance of recovery. 

I keep reminding myself and our startups that one of the biggest advantages startups have over “real companies” is their ability to make changes easily and quickly. Big companies cannot change very fast or very easily – they have to worry about existing customers and previous products. Startups can redefine themselves quickly and easily. In fact, they need to keep reminding themselves that they can make these changes easily. 

The best startups keep testing their assumptions. They put stakes in the ground. They take big bets. BUT, they make sure that they can a) keep evaluating these bets and b) they create a corporate culture and infrastructure that lets them change direction easily when they need to. 

I never think our startups are failing when they have a major crisis. I never think our startups are failing when they make some huge zigs and zags. I do think our startups are failing when they can’t easily adapt to changes in the marketplace or the realization that the facts have changed. I think they have failed when they keep going down a road that they know is the wrong one, but feel that they have an obligation to “finish what they have started”. 

There are lots of factors that cannot be controlled in the startup environment. Making change in the face of these factors can be controlled. Anyone founding a company, investing in a startup or working in a startup has to be comfortable with change. Otherwise, don’t dabble with startups.

VC Industry Lessons

I have recently returned from a 10 day trip to Israel with my partners at Brightspark. We were busy the entire trip with meetings every day including some touring as well. It was a wonderful opportunity to see the Israeli VC industry “in action”. We met with a number of VCs, especially early stage VCs, software companies – early and later stage, angel investors, operating companies, incubators, and investment bankers. We were treated very well, and we learned a lot – now to get rid of the jet lag...
Instead of composing a long blog post, I am composing a few smaller entries with some thoughts and ideas after our travels.

Trying to compare the Canadian and Israeli VC software markets – not much to compare

I have been fortunate to participate in the Israeli and Canadian software industries over the last twenty five years. My first programming jobs were on Data General computers in Israel in the early 80’s when hardware was so expensive that we battled to squeeze business software on to underpowered hardware. Soon thereafter, I came into contact with the software publishing industry when Ontario, Canada led the market (with Atari and Commodore software). By the early 90’s, we had some major software companies in Canada when Delrina, Corel and other led their marketplaces.

Ten years ago, the Canadian and Israeli VC marketplaces were poised to take off from a leveled starting point. The Internet was emerging; both markets had some of the best computer science universities in the world; governments were trying to figure out how to help. When I founded a software company called Balisoft in 1997, we created a software company that had early leading VCs from both countries - Sofinov (CDP) and J.L. Albright from Canada, and Gemini from Israel with government assistance via CIIRDF.

Fast-forward 10 years to 2006. Canada has a VC based software industry that I would describe as quite unhealthy, and the Israeli industry has created huge momentum that seems to be driving an entire economy. The contrasts are amazing. During our trip to Israel, we spent four days traveling from hi-tech area to hi-tech area. We kept saying to each other that we could easily have been in Silicon Valley. And we never even got close to visiting any meaningful proportion of the industry – we mainly visited just the North Tel Aviv Area. We found an industry with more than 60 private VC firms, with exits taking place regularly on a weekly basis, established government programs in place that are driving innovation, and a new presence from the major US VC firms.

Contrast that with the Canadian industry. We seem to have fewer VC’s in existence each year. At the seed and early stage, outside of Quebec we have very, very few funds. It seems to me that the Quebec government is doing something right because they are attracting outside VCs and new activity. But outside of that one glimmer, we seem to have an industry where the best talent moves quickly to the USA, we have very few repeat entrepreneurs, very little momentum in creating success stories; and while we keep hearing about new potential new government programs, there seems to be almost no visible success from these programs.

Sadly for the Canadian software industry, we find that if Israel and Canada were at the same place in the VC industry 10 years ago, we now find Canada very far behind.

We can find excuses and explanations, and there are no simple solutions, but it is interesting to look at what I think are some of the reasons for the difference and what can be done about it. This will be the topic of other blogs posts, but I believe that well focused government programs have been a huge contributing factor to the success of the Israeli industry, and that Canada should learn from this success.

Fortunately, it’s not too late to fix...

Corporate culture is what gets it all done

This week, we had a reunion in Toronto for the company that I co-founded in the 80s/90s called Delrina.  (For some history, see wikipedia).  Amazingly, close to 200 ex-Delrina employees attended (see photos here at Flickr),  but more amazingly this was more than 10 years since we exited the company.  Most people at the reunion had not worked for Delrina for at least 10 years, but still came out to meet their old colleagues.

As we all know, 10 years in this industry is a lifetime.  Yet, people were genuinely interested in catching-up with others that they seemed to really care about.  And most people felt a strong connection with others.  I was amazed how many people came up to me and told me what an incredible experience working at Delrina was and how it formed a strong basis for what they have done since.

I think that a lot of what people experienced in those days was the opportunity for young, inexperienced employees to be empowered.  (A quote from an email I received afterwards: "I wanted to say that working under your leadership gave me the confidence and inspiration to be an entrepreneur.  I run a successful manufacturing business and the basic "think on your feet" management style you had is one that I have used on a daily basis in the complex world of business.")

I got to thinking about what it was that allowed us to be so successful with a team that had lots of expertise and not a lot of experience.  And what was it that has kept people connected all these years later?  I am convinced that it is commonality of purpose and a strong corporate culture.  From the beginning, we were all focused on one thing - winning.  Coming second was not an option, losing was not an option, mediocrity was not an option.

We started Delrina in 1988 and I remember being turned down by VCs in Toronto, Boston and Silicon Valley.  They all said, "You guys have never done this before, and you are based in Toronto, Canada for goodness sake".  (Yes, I have been on the "other side of the table" many times).  We were determined to prove ourselves and were driven to succeed and we found financing from other sources.  Over the next 8 years, we were constantly told how we could not succeed at this from Canada, how our products would not be competitive and why we would not succeed.  But instead, we drove sales to nearly $150M annually, sold more than 30 million copies of WinFax and then sold the company for more than $550M.

The glue that held this together was a strong corporate culture.  A culture of working together, empowerment, trust, respect and caring about the people you work with, and an executive team made up of complementary talents with common goals.  We were a community that was a bit of an island.  There weren't many (any?) other companies like us in Toronto and once we started becoming successful, we started getting noticed.  The more the focus on us being unique, the more the focus on us being public in Toronto and Nasdaq, the more our team worked together and achieved.  This same culture permeated throughout our offices in California and Europe.

I am convinced that this is the "secret sauce" that every startup needs to succeed.  When people look at our successes at Delrina such as our OEM strategy of giving away/selling cheaply WinFax Lite and upgrading people to WinFax PRO, it is often attributed to good timing or good luck.  Yes, luck helps, but before we ended out with that strategy, we tried 30 other strategies.  As a startup, the only luxury you have is to reinvent yourself at every opportunity and your competitive edge is to be able to easily make zigs and zags with ease.  And then, when something works, you need a team that can execute well and capitalize on the proven strategy.  We made this happen with a culture of "No Fear" (I still have my No Fear Delrina t-shirt), a culture of not being afraid to test out new ideas - all held together with a culture of winning.

Now I keep looking for the next Delrina to invest in...

When to Say No

We want to see lots of deals, but the challenge is to meet expectations. Given the volume of deals that we see on a weekly basis, we consistently need to be selective in determining which deals we will pursue and which deals we will pass on.  When I look back at our process, the “No” response often falls into 3 categories:

 

1. No because this does not fit our investment criteria

 

These deals are the easiest to say no to.  These are usually opportunities where we don’t see a domain expert, strong intellectual property or a large addressable market. We are disciplined about these three criteria. (At the same time, as early/seed investors we initially place far less attention to stuff that traditional VCs look at like financial projections, sales forecasts, etc).

 

2. No because we can’t add value

 

These deals are tougher to say no to because while the entrepreneur may convincingly make the case for their business, the opportunity is usually so specialized that we struggle to understand how we can add value in the process because it is so outside of our focus area.  As investors, our goal is to actively work with the team to capitalize on an identified market.  If we’re merely going to get in the way, or can’t leverage our past experience to help in the business-building process, then we are better off to stay out of the way of the entrepreneur.  We regularly meet entrepreneurs in this category that we like, but we know our own limits.

 

3. No because this isn’t a VC business

 

These deals are also tough to say no to because we regularly meet impressive entrepreneurs who have built strong businesses.  They have often started with little and have built a good cash-flow positive business.  While we’re greatly impressed by this accomplishment, we struggle to see the opportunity as being a high growth business or having strong intellectual property.  This certainly doesn’t mean that it’s a bad company or doesn’t deserve outside investment, it just means that it’s not a VC-type investment opportunity.  A VC-type investment opportunity means that we can share a vision in a great exit within a reasonable period of time. These deals are tough to say no to because often the entrepreneur has built their business in the face of much criticism and doubt.  This process builds great character and it’s always nice to see these types of people succeed.  While we can’t invest, we’ll try our best to help in other ways, as best we can.

 

Having been in this industry for some time, I’ve learned that it’s best to be direct and quick with our decision.  The last thing I want is to waste the entrepreneur’s valuable time with a passive aggressive approach.  This certainly helps no one.   A quick "No" is much better for everyone than a long "Maybe" leading to a "No".  (And "No" doesn’t always mean no forever. We have been known to revisit opportunities when conditions change and then make an investment).

 

Evaluating deals is at the core of our business so I always encourage entrepreneurs to submit their opportunities. This allows us to start a dialogue, explore partnership opportunities and maybe say "Yes" to many great ideas.

Web 2.0. It may be 2.0 but it's not new

When we lived through the early years of the Internet, the huge revelation was realizing that we would be able to change everything. We could only dream of the application, and it was all because the network would connect everything. 

I remember the “aha” moments of the day in about 1994. Some of the realization was quite liberating – this industry is changing from a hobbyist 80 million PC market into complete mainstream. We were going to experience a seismic shift that would change the way people would communicate, the way people would access information, the way people would do business and would interact. Our imagination soared with the possibilities. (And some of it was a little daunting, especially if you were tied up in the precursor to email known as fax, but that’s a story for another day). 

Email would be used by everyone. The web would be the window to every company via the browser. All information would be immediately available and accessible because everything was now online. Media would all be changing – one to one marketing, personalized access would change newspapers, tv, movies. Internet packets would replace phone lines, ecommerce would replace shopping malls, advertising would change, business would shift to marketplaces and one-to-one would replace many-to-one. 

Within a couple of years, it did become mainstream, but then unfortunately it got a little ahead of itself. A lot of people were trying to get the dream to speed up. The stock market was rewarding those who could speed up the dream. And those that got ahead of reality started getting the biggest rewards. And, to those of us who were trying to “tame the beast”, it felt like the hucksters and the bankers were taking charge. Of course it came tumbling down. Hard. The market crashed, the hucksters and the bankers ran away as fast as they could to other markets and businesses. And the industry was left trying to recover. 

We all allowed it to get ahead of itself. We all became allured by the size of it and the opportunity. Someone compared it well to the cartoon character that runs off the edge of the cliff and keeps running. It was only when we looked down that we realized there was nothing beneath us and we all fell. 

Those of who did not run away had to start putting the pieces together. We had to try and deal with an investor market that wanted nothing more to do with this dream anymore. Entrepreneurs moved on. Consumers moved on, business moved on. 

But we knew that, like in every technology market, the disappointment wave is part of the cycle. And we knew that after the disappointment wave, the market delivers what it should have been in the first place. This is not unique to the Web, this is often true for technology – the cell phone, the database market, the mp3 player, digital cameras, Bluetooth – to mention a few examples that immediately come to mind. 

Since 2001, the web has been growing organically. In fact it has been growing really fast and pretty well. Broadband is finally a reality, computers are everywhere, and the platform is much more mature. 

And the dream is coming true. Email is everywhere, every company has a web site, we all use the internet for research at every level – travel, purchases, even romance. E-commerce is huge, marketplaces are real, communities are being used. Advertising is creating massive revenue and the Web is taking over from newspapers and TV. And it really is everywhere. 

And now that it works, new companies are delivering on the dreams. The market is delivering on the dream. 

But why call it Web 2.0? This is not something new. This is not anything more than the same dream that we have had since the early 90s. This is the way technology change works. We knew it in 2001. That’s why we hung in. that’s why we didn’t go to banking or real estate (or the beach) and why we’ve stuck with software and the Internet. This time it would take longer to deliver, but the bubble and the crash were bigger that ever before.   

It’s all part of the cycle. If Web 2.0 is the “second version” where you deliver the product that you originally promised, then Yes it is Web 2.0. But this is not something that we didn’t expect after the crash. We knew this was coming - and now the best news is that it has just begun. 

New communities are being created, citizen reporting is real, camera phones real. We are about to see mobile expand rapidly as that promise gets delivered. Standard devices with massive bandwidth, readable screens and decent input methods will open up another dream delivery. VoIP really works now and we’re about to see the promise of reliable, very cheap voice communication to be delivered. And then, standards will drive the home consumer market to delivery, automobile technology will flourish, new generations of PCs and laptops will flourish. 

And the traditional investors? The smart players won’t miss out because they have figured out that this time it is real. 

This is not a new phenomenon. It is the delivery of the dream.

What’s so great about Canadian software developers, anyway?

I have often spoken about the fact that we have great developers right here in Canada.

At Brightspark, our model is predicated on trying to grow more Canadian software companies and, in the process, make lots of money for these developers, our investors (and ourselves).

 

So, what is the “secret sauce”? Well, it's not a secret, it's simply a combination of factors.

1. Schools - We have great universities which create great software developers. Why do you think Google and Microsoft keep advertising here? Why are Google and Microsoft competing to hire
Waterloo grads? Simple – our grads are the best.

 

2. Attitude - Our developers are not looking to change jobs every week. They are not looking to hop from company to company. They are looking for a great environment, which is challenging, interesting, fun, fair, lucrative and with the right value system. Too many developers in “hot areas” like Silicon Valley and Seattle spend a lot of time proving that they are superstars, hop from company to company looking for the next pot of gold and burn themselves out very quickly.

 

3. Focus - We have seen that Canadian companies are able to see an opportunity and then seize the opportunity. So, they spend their time and effort creating great products. They don’t spend too much time making great demos for the CEO to prove that they are great, but instead spend their time making great software.

 

Our opportunity is to capitalize on this. Instead of our graduates being lured away to Google and Microsoft, let's find ways to create more local opportunity. I am not suggesting that we can have companies here that can compete with Microsoft or Google, I am suggesting that we can create GREAT parts companies. The trend is for the large companies to acquire the smaller players. And, in many cases the development teams today stay in their location. So, the opportunity is to create great small companies with incredible developers right here and prove that even if they are acquired they should stay here.

 

I have countless examples of seeing this work. So, don’t get lured away too early. Create your own opportunity right here. And remember, productivity here is high because its too cold to go outside anyway……

To VC or not to VC

Much has been written about the challenges many startups face in finding seed and early-stage investors for their ventures.  The Internet crash indeed scared away many Angel investors while forcing many venture funds to shift their focus to investing in more mature companies.  Even to this day, Canadian VCs who call themselves “early-stage” investors are more likely to gravitate towards companies with experienced management teams, a mature product and a business model with a proven path to revenue and profits.  To me, this does not define “early-stage” investing. 

Entrepreneurs often find themselves frustrated with the financial community and the lack of risk tolerance that comes hand-in-hand with the startup process.  Are there other alternatives?  Do the risk-takers still exist?  I’ve always tried to get out our message out that a viable financing alternative does exist.  Our team strives to find these very early companies with passionate entrepreneurs or technologists who believe in a market opportunity.  Do we need an experienced management team?  Not initially.  Do we need a completed, scalable solution?  Not yet.  Do we need a proven business model?  Eventually.  That doesn’t sound like a typical VC talking, does it?  I’m proud to say that our firm is far from typical. 

At Brightspark, our bets are placed on world-class technology which, we believe, forms the heart of any great software startup.  The reality of focusing on seed investments is that we quite often meet domain experts who are world-class experts in technology, but who don’t often have the skill or the desire to be the CEO of a company.  Without a management team or a revenue stream, these experts are generally turned away from traditional venture capitalists for being “too early”.  I like companies that are “too early”.  To me, that is what our whole business is about - finding and supporting the best and the brightest and helping them to get started. 

We need the next Canadian success story…and it all starts by taking a risk and placing a bet.  We’re up for it…are you?