I just returned from a meet-and-greet arranged in Kitchener by Communitech to connect early stage technology companies to potential investors. Although tonights event felt a bit like an awkward high school dance, I think that the efforts being made by Communitech in K-W are exceptional. Although there were a few wonky concepts, I was impressed by the general quality of the ideas, the execution, and the people passionately fronting them.
Communitech did a solid job screening the opportunities for potential investors, and there was a nice cross-section of potential capital for entrepreneurs. We will be back. And this is important. The more that Communitech facilitates access to capital, skills, and connections, the more vibrant the K-W technology community will be.
I think that Communitech should be held up as an example for other communities of how to establish a cultural core for a vibrant centre of entrepreneurial excellence. More of this needs to be done in order to support intellectual ecosystems and innovation.
Next step is to get these beautiful little startups to maturity.
Showing posts with label VCs. Show all posts
Showing posts with label VCs. Show all posts
9/10/09
Current Anecdotal Trends in VC Funding - From the Trenches
It is amazing that, despite how everything changes, some things never seem to change. Below is an email missive from the trenches in New York from Sheldon Lutch of Fusion IR.
The fundamental sentiment of the note is that after 8 quarters of being brutalized by the market, tech start-ups have become increasingly "pennywise and pound foolish". Not surprisingly, entrepreneurs continue to maintain unrealistic notions of the value of their creations. This has been such a consistent finding for the past couple of decades, that it may simply be in the DNA of entrepreneurs to think that way.
Anyway, we see many of the same trends as Sheldon, and I thought that it would be best to simply re-publish his email.
-------------------------------------------------------------
"Throughout the summer at Fusion IR have seen many companies stop by/call-in ranging from companies needing "A" round capital to pre-IPO-generating revenues and meeting financial milestones.
1.Use of unregistered/unlicensed financial professionals in search of capital.
2.Requesting solely pay per performance services. Risk not shared-reward impractical or impossible to quantify and justify by expenditures of time or effort and market conditions.
3. Unprepared companies from presentation to presentation skills to business plan and throughout all marketing literature. Yet they believe they are and wonder why others don't see it their way.
4.Unrealistic view of financial markets this is not pre- 2008 or pre- 2003.
5. Use of other service professionals to fill gaps -but no real follow up and or guidance( nice meetings -no results).
6. Mapping out of IP not complete or at the highest level of international standards.
7. IP not as robust -learned during deep drill downs.Unaware of conflicting, competing, complimentary IP.
8. Companies unaware of how many vc's ,private equity etc.. have seen/heard of company/deal/raise out on the street-they have been "shopped".
9.An oxymoron- overexposed companies not using or understanding the value of press releases- tweaked for the financial community.
10.Not identifying a business development opportunity from a venture capital opportunity with a strategic player(s) in their industry. Over emphasizing one over the other or at the exclusion of the other.
11.Companies unaware or sensitive to the Wall Street "calendar' are you in the queue or not?
12. Unrealistic sense of timing of potential investment /grant by government or quasi government economic development arms.
The fundamental sentiment of the note is that after 8 quarters of being brutalized by the market, tech start-ups have become increasingly "pennywise and pound foolish". Not surprisingly, entrepreneurs continue to maintain unrealistic notions of the value of their creations. This has been such a consistent finding for the past couple of decades, that it may simply be in the DNA of entrepreneurs to think that way.
Anyway, we see many of the same trends as Sheldon, and I thought that it would be best to simply re-publish his email.
-------------------------------------------------------------
"Throughout the summer at Fusion IR have seen many companies stop by/call-in ranging from companies needing "A" round capital to pre-IPO-generating revenues and meeting financial milestones.
1.Use of unregistered/unlicensed financial professionals in search of capital.
2.Requesting solely pay per performance services. Risk not shared-reward impractical or impossible to quantify and justify by expenditures of time or effort and market conditions.
3. Unprepared companies from presentation to presentation skills to business plan and throughout all marketing literature. Yet they believe they are and wonder why others don't see it their way.
4.Unrealistic view of financial markets this is not pre- 2008 or pre- 2003.
5. Use of other service professionals to fill gaps -but no real follow up and or guidance( nice meetings -no results).
6. Mapping out of IP not complete or at the highest level of international standards.
7. IP not as robust -learned during deep drill downs.Unaware of conflicting, competing, complimentary IP.
8. Companies unaware of how many vc's ,private equity etc.. have seen/heard of company/deal/raise out on the street-they have been "shopped".
9.An oxymoron- overexposed companies not using or understanding the value of press releases- tweaked for the financial community.
10.Not identifying a business development opportunity from a venture capital opportunity with a strategic player(s) in their industry. Over emphasizing one over the other or at the exclusion of the other.
11.Companies unaware or sensitive to the Wall Street "calendar' are you in the queue or not?
12. Unrealistic sense of timing of potential investment /grant by government or quasi government economic development arms.
It is a three legged stool- The Company- The Financial Community and Key Service Provider. Matching and meeting the needs of all - to accomplish the mutual goals of a success and mutually profitable business relationship.
We pride ourselves at Fusion IR at working hand n' hand with clients and all Wall Street professionals. No negative surprises. A fully coordinated approach to accessing the capital markets. Utilizing a top down approach to the investment community on behalf of clients. Meeting with heads of investment banking firms and the related specialty investment bankers at the most senior level of the Wall Street firms. For the companies a bottoms up approach making sure assumptions are replaced with facts. Working with companies to assist them in preparation so that their materials are as good as their technology/science. Driving the value proposition to engagement letters, term sheets, and maybe ad nausea if necessary.
To do it right takes time, money and dedication- this is a labor intensive effort. No short cuts,no tricks-roll up your sleeves and work as team to get the mandate accomplished.Time is money for all of us- investing properly in the right resource,working in an organized fashion to get the answers quickly and efficiently as possible. Build on the information acquired ,become as flexible and open to feedback that will allow the company to adjust to market conditions. Investor relations is not a sprint and need not be a marathon- it is about being Persistent and Consistent. It is about execution of a strategy,it is about tweaking and revising. It is presenting the company with strategic alternatives and access to growth capital and growth ideas, perhaps not considered.
If you aren't raising capital properly your competition is-those with the best technology aren't winners necessarily-those with the capital to complete the task ,execute according to plan and ramp up revenues are.
All the best,
Sheldon
Sheldon Lutch, Principal
Fusion IR & Communications, Inc.
62 West 45th-4th floor
New York,NY.10036
(T) 212.268.1816, (C) 917.570.1179
Sheldon Lutch, Principal
Fusion IR & Communications, Inc.
62 West 45th-4th floor
New York,NY.10036
(T) 212.268.1816, (C) 917.570.1179
8/29/09
R&D subsidies do not create wealth: How do we modernize policy to incent innovation?
I have spoken to hundreds of Canadian entrepreneurs and investors in the tech sector over the past dozen years. A common lament among all stakeholders is that Canadians are good at R&D, but poor at commercialization.
Based on current thinking, this is a decidedly bad thing, becoming worse.
What actually sparked this blog post has been the frustration of seeing really good ideas suffer from persistent and chronic underfunding. The result of which is truncated or even abandoned commercialization of ideas that may have been major successes if funded and supported elsewhere. How many RIMs have been left behind because entrepreneurs could not attract appropriate growth capital? How many entrepreneurs have simply left the country? How many great technologies have been sold before maturity for minimal shareholder return? Exiting this recession, it is an increasingly popular notion that future wealth creation will be generated though innovation...bringing ideas to life. Not production. Not resources.
How are we doing as innovators, and is it even important?
Because wealth creation is increasingly correlated to the presence of innovation in local economies, it now has its own worldwide ranking called the Global Innovations Index (GII).
When the GII was first published in 2003, the Canadian economy ranked 9th in the world out of 82 countries. The 2009 publication ranks Canada 14th, with a projection to 15th before 2013. Canada is included in a cluster of "Second-tier Innovators". Top-ten or First-tier Innovators include the US (8th but dropping), and also Japan (1), South Korea, Singapore, Finland, Ireland and Sweden among others. The Global Innovation Index tends to favor smaller, highly urban countries with a large "creative class" of idea generators. Does this sound familiar? It should. Canada is over 80% urban with hub cities such as Vancouver, Toronto, and Montreal possessing "creative class" populations in excess of 30% of the total population. This ratio is among the highest in the world. And this does not include technology clusters such as Kitchener-Waterloo or Ottawa where the ratios are likely higher. Why are countries like Singapore, South Korea, China, and Finland racing up the charts while, despite the ingredients for success, we stagnate as Second-Tier Innovators?
It's not that policy makers at all levels of government are ignoring the issue. On the contrary. There are a myriad of tax incentives (e.g. IRAP, SR&ED), grants, loans, and direct applied science through the National Research Council, and a multitude of Provincial programs. Almost all of these initiatives are focused on Research & Development. For nearly two decades, policy makers have held true that R&D creates innovation. Many now believe this to be wrong. Although R&D contributes to the process, commercialization actually creates innovation. So how does the Canadian Government shift policies to facilitate innovation?
First. What is an innovation?
At least one of the following five:
1. A new good or a new quality of a good.
2. A new method of production.
3. Opening a new market.
4. A new source of supply.
5. New organization of an industry.
R&D on its own, in isolation, as it is currently funded cannot deliver ANY of those five outcomes. R&D is usually a task within the implementation period of an innovation process, which is defined as:
Conceptualization -> Implementation -> Marketing
Despite the myths, innovation usually does not sprout out of thin air. Consistent and persistent innovation requires an infrastructure or ecosystem.
Access to Knowledge -> Local Adaption -> Financial Incentives.
It is within the innovation infrastructure where policy makers may be able to make some tweaks in order to better support the "creative class" and to help facilitate the commercialization of ideas. The primary problem with the Canadian market is that capital is becoming less available for innovation.
Re-Incent Venture Capital: Both private institutional and Labour Sponsored Venture Capital Corporations (LSVCC) are available to entrepreneurs for commercialization and this has been the primary engine of innovation since the 1980s. However the VC sector is not working as well now as it has in the past because a smaller percentage of available funds are actually invested, and the pool itself is drying up. Relative to VCs elsewhere in the world, there is an unusually large overhang of uninvested capital in the Canadian sector because VCs here may be incented towards risk aversion. As well, rules regarding investment criteria and tax incentives have not been updated for 20 years, making LSVCCs unattractive to the retail investors that they were designed for, relative to recent investment innovations that are more liquid. Policy makers need to update tax rules to facilitate more VC activity, attract more capital, and support higher tax-adjusted returns relative to other newer investment instruments.
Better Enable Public Venture: As VC funding has declined since the tech bubble, more entrepreneurs have taken the public route to commercialization via the Toronto Venture Exchange. Currently, there are over 200 early stage technology companies listed on the TSXV that have become listed through Capital Pool Corporation (CPC) mergers. However, there are only a handful of Canadian institutions that regularly invest in venture technology companies, and that number has declined with liquidity. The single biggest adjustment that can be made in the public markets is to offer flow-through shares for venture technology stocks. Currently, investors can benefit directly from mineral exploration tax incentives with flow-through shares. Considering that mineral exploration and technical innovations carry similar risks, and innovation is a potentially greater wealth creator, a class of flow-through shares should be created for publicly-listed technology companies that can benefit from tax incentives.
Modernize Direct Tax Incentives: A research report in 2005 from Booz Allen Hamilton suggests that R&D spending does not necessarily result in more innovation or performance from by an individual company. In fact, when R&D is effective, it often only benefits gross margin. The key to performance is cross department collaboration and effective innovation processes in the context of a scalable business model. Without a business model and processes, R&D alone is ineffective. Right now government agencies continue to focus tax incentives on the least effective activity in the context of commercialization and performance. Modernizing tax incentives to better encompass commercialization, while reducing administrative burden may help to promote more effective innovation, and ultimately, wealth creation.
Here is a link to a op-ed article by Ron Freedman published by the Toronto Star. He argues that current federal R&D funding needs to be modernized with direct university-based research re-directed.
Knowledge Clustering: K-W, or the Golden Triangle is the best example of knowledge clustering related to computer engineering and the University of Waterloo (and more recently Wilfrid Laurier University). Home grown VCs like Waterloo Tech Ventures, and an active mentoring community through Communitech have also helped to spawn some of the most innovative and successful technology companies in Canada (RIM, Open Text, Descartes Systems, MKS among others). Communities can adjust local tax jurisdictions to help promote knowledge clusters in other industries such as measurement devices, and biotech.
Education: There is probably a bigger issue in the development of finance, business management, and organizational management capabilities focused on technology and innovation. A new generation of people need skills to help to pump out more valuable intellectual capital going forward. Again, policymakers may look at grants and loan incentives to help bring more capability online.
These options discussed are only but a few, and they may not be practical. There are probably many more ideas. It would be interesting to see what others think about this issue.
Disclosure: I own shares of DSG.
Based on current thinking, this is a decidedly bad thing, becoming worse.
What actually sparked this blog post has been the frustration of seeing really good ideas suffer from persistent and chronic underfunding. The result of which is truncated or even abandoned commercialization of ideas that may have been major successes if funded and supported elsewhere. How many RIMs have been left behind because entrepreneurs could not attract appropriate growth capital? How many entrepreneurs have simply left the country? How many great technologies have been sold before maturity for minimal shareholder return? Exiting this recession, it is an increasingly popular notion that future wealth creation will be generated though innovation...bringing ideas to life. Not production. Not resources.
How are we doing as innovators, and is it even important?
Because wealth creation is increasingly correlated to the presence of innovation in local economies, it now has its own worldwide ranking called the Global Innovations Index (GII).
When the GII was first published in 2003, the Canadian economy ranked 9th in the world out of 82 countries. The 2009 publication ranks Canada 14th, with a projection to 15th before 2013. Canada is included in a cluster of "Second-tier Innovators". Top-ten or First-tier Innovators include the US (8th but dropping), and also Japan (1), South Korea, Singapore, Finland, Ireland and Sweden among others. The Global Innovation Index tends to favor smaller, highly urban countries with a large "creative class" of idea generators. Does this sound familiar? It should. Canada is over 80% urban with hub cities such as Vancouver, Toronto, and Montreal possessing "creative class" populations in excess of 30% of the total population. This ratio is among the highest in the world. And this does not include technology clusters such as Kitchener-Waterloo or Ottawa where the ratios are likely higher. Why are countries like Singapore, South Korea, China, and Finland racing up the charts while, despite the ingredients for success, we stagnate as Second-Tier Innovators?
It's not that policy makers at all levels of government are ignoring the issue. On the contrary. There are a myriad of tax incentives (e.g. IRAP, SR&ED), grants, loans, and direct applied science through the National Research Council, and a multitude of Provincial programs. Almost all of these initiatives are focused on Research & Development. For nearly two decades, policy makers have held true that R&D creates innovation. Many now believe this to be wrong. Although R&D contributes to the process, commercialization actually creates innovation. So how does the Canadian Government shift policies to facilitate innovation?
First. What is an innovation?
At least one of the following five:
1. A new good or a new quality of a good.
2. A new method of production.
3. Opening a new market.
4. A new source of supply.
5. New organization of an industry.
R&D on its own, in isolation, as it is currently funded cannot deliver ANY of those five outcomes. R&D is usually a task within the implementation period of an innovation process, which is defined as:
Conceptualization -> Implementation -> Marketing
Despite the myths, innovation usually does not sprout out of thin air. Consistent and persistent innovation requires an infrastructure or ecosystem.
Access to Knowledge -> Local Adaption -> Financial Incentives.
It is within the innovation infrastructure where policy makers may be able to make some tweaks in order to better support the "creative class" and to help facilitate the commercialization of ideas. The primary problem with the Canadian market is that capital is becoming less available for innovation.
Re-Incent Venture Capital: Both private institutional and Labour Sponsored Venture Capital Corporations (LSVCC) are available to entrepreneurs for commercialization and this has been the primary engine of innovation since the 1980s. However the VC sector is not working as well now as it has in the past because a smaller percentage of available funds are actually invested, and the pool itself is drying up. Relative to VCs elsewhere in the world, there is an unusually large overhang of uninvested capital in the Canadian sector because VCs here may be incented towards risk aversion. As well, rules regarding investment criteria and tax incentives have not been updated for 20 years, making LSVCCs unattractive to the retail investors that they were designed for, relative to recent investment innovations that are more liquid. Policy makers need to update tax rules to facilitate more VC activity, attract more capital, and support higher tax-adjusted returns relative to other newer investment instruments.
Better Enable Public Venture: As VC funding has declined since the tech bubble, more entrepreneurs have taken the public route to commercialization via the Toronto Venture Exchange. Currently, there are over 200 early stage technology companies listed on the TSXV that have become listed through Capital Pool Corporation (CPC) mergers. However, there are only a handful of Canadian institutions that regularly invest in venture technology companies, and that number has declined with liquidity. The single biggest adjustment that can be made in the public markets is to offer flow-through shares for venture technology stocks. Currently, investors can benefit directly from mineral exploration tax incentives with flow-through shares. Considering that mineral exploration and technical innovations carry similar risks, and innovation is a potentially greater wealth creator, a class of flow-through shares should be created for publicly-listed technology companies that can benefit from tax incentives.
Modernize Direct Tax Incentives: A research report in 2005 from Booz Allen Hamilton suggests that R&D spending does not necessarily result in more innovation or performance from by an individual company. In fact, when R&D is effective, it often only benefits gross margin. The key to performance is cross department collaboration and effective innovation processes in the context of a scalable business model. Without a business model and processes, R&D alone is ineffective. Right now government agencies continue to focus tax incentives on the least effective activity in the context of commercialization and performance. Modernizing tax incentives to better encompass commercialization, while reducing administrative burden may help to promote more effective innovation, and ultimately, wealth creation.
Here is a link to a op-ed article by Ron Freedman published by the Toronto Star. He argues that current federal R&D funding needs to be modernized with direct university-based research re-directed.
Knowledge Clustering: K-W, or the Golden Triangle is the best example of knowledge clustering related to computer engineering and the University of Waterloo (and more recently Wilfrid Laurier University). Home grown VCs like Waterloo Tech Ventures, and an active mentoring community through Communitech have also helped to spawn some of the most innovative and successful technology companies in Canada (RIM, Open Text, Descartes Systems, MKS among others). Communities can adjust local tax jurisdictions to help promote knowledge clusters in other industries such as measurement devices, and biotech.
Education: There is probably a bigger issue in the development of finance, business management, and organizational management capabilities focused on technology and innovation. A new generation of people need skills to help to pump out more valuable intellectual capital going forward. Again, policymakers may look at grants and loan incentives to help bring more capability online.
These options discussed are only but a few, and they may not be practical. There are probably many more ideas. It would be interesting to see what others think about this issue.
Disclosure: I own shares of DSG.
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