Let the Sparks Fly!

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...

Going to the CVCA

I am on a plane to Vancouver heading for the CVCA annual conference. (No wireless access to e-mails with Air Canada so got lots of time on my hands). For those of you not familiar with the Canadian venture capital industry, CVCA stands for Canadian Venture Capital Association. Tomorrow starts their annual conference where VCs and LPs from Canada (and a few from elsewhere) get together to network and dialogue on their industry. It is always interesting to experience the exchanges and atmosphere of the event. It does change significantly depending on market conditions. This year should be pretty bubbly (not to be mistaken with bubblish) and upbeat.

VCs can be very strange and interesting beasts. They usually compete for fundraising but not always, they can collaborate if they happen to be in different niches or geographies. They usually partner for deals but not necessarily if the market is heating up and deals become rare gems or if their Fund is too big. They usually share due diligence information and market intelligence but not always if it happens to be very proprietary and part of a “hopefully” unique investment theme.

What happens when you fill a room full of venture capitalists? I know that there are lots of jokes about this; it is like filling up a room with lawyers I guess, but this is not the purpose of this note. I think it can actually be nicely compared to a typical “woman wants a man” scenario…

First, they want to show that everything is going well; they are independent, having lots of fun and completely in control. If they talk about their portfolio companies, they are getting tremendous traction, have significant interest from partners and potential investors and can’t respond quickly enough. This is the part where you want to hook the guy. This is the part where you want the other VC to be a little destabilized (the compete part) and get the desire to investigate into those portfolio companies and also spread the good news (the partner part).

Second, they want to show that they are somewhat vulnerable to spark the “save the girl” syndrome in a man. Remember King Kong??? They touch a little on their challenges; complain about fundraising and reporting and all. This is the part where you bond and get sympathy. This is the part where you create an ally for the future. This is also the part where you gather information from your partner/competitor. What is he investing in, is he doing well? Does he have a competing play to one of your portfolio companies?

Thirdly, the woman completely hooks the man in proving how sexy she is by walking off with the other guy. VCs continuously wave at numerous other parties, usually other VCs, and they sometimes throw a little intriguing note like: “are you still coming by next week, we need to talk about this opportunity we touched on last week…” or worst, walk slightly to the side and whisper something about a potential deal. This usually is enough to completely hook the previous bait even if the whispering is only about the next round of golf you are planning to play. 

I know it seems a little simplistic and it is much more complicated than that in real life but is it really? In any case, flirting as a VC can be a lot of fun and in the current bull market, it is actually quite pleasant since at least 80% of what we say about our portfolio companies and our Funds is true or at least we believe it when we say it. You will probably find similar dynamics in any industry that strives to find the right balance between competing and partnering, succeeding as an industry versus succeeding as a company. Looking forward to it!

Interview with a 7 year old

Last weekend, my daughter, 7 years old, had to prepare an interview with one of her parents about their job.  She chose me, lucky her - I am a venture capitalist. Explaining what a venture capitalist does to most people is not an easy task to start with...imagine what it's like for a 7 years old. 

It would have been much easier with my husband who is in the retail business. You buy things and you sell them and make money in between. So for the first time, I really tried to explain in simple terms what we do. Here is what her transcript looked like: 

"My mother is a venture capitalist. She meets people that have ideas for software, like Word and games and Barbie.com. She then chooses the one she thinks are good and gives them money (I don’t like the give part, but invest seems to be a very strange concept for her). Then those people work on their idea, mostly writing on the computer. When they sell their idea and receive money, they give it to my mother. That’s it." 

Sounds very simple, doesn’t it? Of course, we did not get into details like ownership, Limited Partnerships, value creation, liquidity constraints and patents etc. But she got the basis of it. It is all about great ideas and great people.

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.

The WOW Meeting

A few weeks ago, I walked out of a pitch meeting with an entrepreneur and the only thing I could think about was how to close this deal quickly and make sure that I scooped it from the competition. These meetings don’t come up that often but it is a great feeling when they do.

I then started thinking about what those WOW meetings are made of. It’s not easy to explain and I don’t think that there is a generic formula. It’s more about a combination of things, more an art than a science. 

• It usually is not a structured, Power Point, kind of pitch but an exciting and very dynamic discussion.
• The entrepreneur is completely passionate about his project and communicates that passion.
• He knows his sector inside out, well aware of competition or alternative solutions.
• He is very smart and confident but not overly pushy.
• Obviously, it is a clear and clever solution to a real market need.
• The entrepreneur shows a certain level of independence leading us to believe that he is not desperate and will succeed with or without us. 

In the middle of the meeting, I usually start thinking about how I can pitch Brightspark so that he accepts a term sheet as fast as possible. If the entrepreneur is really paying attention, he may even feel this change of mode, this sudden rise in interest. However, I have been a VC long enough to manage the poker face strategy! 

My two partners and I experienced a WOW meeting this fall. We ended the meeting in this very typical neutral tone: “We will look into it and come back to you within 2 weeks”. We then walked out completely excited about it. During the 15 minutes drive from this meeting to our office, we had already finalized our investment strategy, valuation, terms, negotiation tactics, etc. The entrepreneurs that had just pitched us had no clue that we were that excited about the deal. 

The greatest feeling is when the WOW effect lasts and turns into an investment. We see so many companies, ideas, and projects that although we may get excited about something, it may only last a day or two and then we move on to the next thing. The WOW meetings are the ones that truly maintain our interest and hopefully end up in our portfolio.

I can’t wait until the next WOW meeting!

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.

Camp Startup

I have been asked many times to describe the differences between being an employee of an established “large” company and being part of a small startup. The best analogy that I can find is that being in an established company is like staying at the Hyatt while a startup is comparable to going camping. And when I say camping, I don’t mean a luxury RV with power receptacles and satellite TV parked at a full service national park.  I am talking about backpacking in the wilderness with just your tent, food, utensils and a collection of some of your closest friends. And remember, you are camping not because you want to, but because you don’t have any real money to spend, otherwise you would be staying at the Hyatt!

Now don’t get me wrong - I love camping and it can be very rewarding in terms of its experience, but it is “different” to being in a five star hotel, or for that matter, just being in ANY establishment with a fixed roof, running water and indoor plumbing.

As early stage seed investors we (at Brightspark) are constantly faced with the challenge of ensuring that the companies we invest in adopt the right culture and operate in a manner commensurate with their stage of evolution. There are certain behaviors that work best and make sense at a particular stage of development. For anyone who has gone through the experience, you typically understand what is expected at an early stage.  However, if you have not been there, it is left to your imagination as to what to expect.

The universe of employable people who have been through a true startup experience is extremely small. I often meet individuals who insist that they understand startups because in their previous company, they operated a separate division or that that they were part of a small business unit or that they joined a company when there were only 40 employees. After a short period of time “camping”, they realize that they were in fact just part of a group who lived at the Hyatt.

Initially you will notice a lot of similarities between the big hotel and your previous big employer. Here is a comparison of what you initially found there and what you will find when camping or at a startup:

 

The Hyatt	Established Business	Camping	Startup
Nice Address	An address	No address	No address (initially)
When you check-in you are shown to your room	On the first day someone takes you to your office	You pitch your tent	You have to find a location to house your new offices
Ornate Building	Nice building	Tent	A roof over your head
Reception and Grand Lobby	Receptionist	Tent	Don’t worry nobody is going to visit, yet
Phones, Fax, Internet	Phones, Fax, Internet	Tent	No communication infrastructure, you have to find it, buy it, install it, configure it, maintain it
Maintenance	IT department	You and your camping buddies	Er…, you and your developers
Room Service	Operations, assistants	Tent?	No Services

So, like camping, creating a startup requires that you setup the infrastructure yourself and maintain it on a daily basis. Many things you took for granted back at the Hyatt, or back at the big company, just don’t exist anymore. You have to take care of them.

Once you get over the infrastructure hurdles, you then have to realize that you have to change many of your habits, expectations and your overall outlook. In a startup you have limited funds and you have to make sure that you have as long a runway as possible to ensure that you don’t run out of money before you deliver your product or find customers or, in general, get to the point where other investors will put in more money because you have proved that you have great technology and are addressing a large problem with a huge marketplace!

Just as in camping, you take enough food with you that will enable you to have a great time, see the sights and not have to go and seek out civilization or the nearest 7-Eleven before you have to.

In a startup, you are competing with many other smart people, like yourself. All of you are in a race to get to market first, get the best publicity and be noticed by the major players. You cannot assume that you are smarter than anyone else or that you have the luxury of time. You are starting off from scratch, you have no credibility, you don’t work for the big company anymore, people don’t know who you are and you have to establish your name and gain credibility. It’s like meeting someone on the camping trail and saying that although you do live in a tent, a very nice tent, you used to always stay at the Hyatt. Sure.

I think you get the picture; actually, I am sure you don’t. On your next vacation, grab a tent and a backpack and you will understand what a startup is all about. And enjoy it, because when you do begin your startup, you are not going to have time for any vacations for the next few years!

 

 

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?

Welcome to the Brightspark blog!

Hello and welcome to Brightspark’s blog.  My name is Mark Skapinker and I am one of the Managing Partner’s of Brightspark Ventures, a Canadian seed-stage software venture fund.  I’ve been hoping to launch Brightspark into the blogosphere for some time now in order to share our team’s personalities and provide some unique perspective on the startup experience and our views on the technology industry.  Having been in the software industry for many years now, I’ve certainly seen many fads and bubbles come and go.  But the allure of exciting technology mixed with the adrenaline of the startup adventure is what keeps my passion alive about this industry.  My partners and I launched Brightspark in order to help cultivate the startup industry in Canada. 

I’m hoping to use this blog to invite the other members of the Brightspark team to also share their thoughts, as well as inviting the CEOs of our portfolio companies to share their views on their own startup experiences.  So buckle-up, get ready – let the sparks fly!