Green Technology

3 Jan 2022

Adrenaline Fund Pumps a High Energy First Year into Early Stage Investing

2021 marks the first full investment year for Adrenaline Fund which uniquely applies a passive model, fuelled by our startup and angel ecosystem, to early stage investing. Adrenaline Fund was founded in 2020 in cooperation with 2 other sub-funds in the Archangel Network of Funds. Through the vagaries of. the COVID-19 pandemic, 2021. was our first full year of investing fuelled by a remarkable group of Limited Partners who are accredited investors interested in our Purpose.

PURPOSE

The entire team at Archangel Network of Funds, and the Adrenaline Fund, is driven by a core Purpose, developed over years of building and supporting early-stage companies. In a nutshell, we want to directly impact Canada’s economic prosperity into the future by:

Investing in Entrepreneurs who are building the future of the Canadian Economy through Innovation,
Lowering barriers for accredited investors to participate in, and gain more experience, in early stage investing, and
Accelerating, and directly supporting, the Canadian Angel ecosystem while enabling Canadian startups to scale up to global leadership.

In this post, I’ll further explore our unique model, an exceptional team, what we’ve done so far, and propose a future where this impact can grow many times larger than our results to date.

TEAM

The Adrenaline Fund team has unparallelled experience in building companies, mentoring startups and selecting and investing in the next generation of Canada’s tech leaders but at the early stages. In addition to myself, our team includes Benton Leong and Amber French, and is ably complemented by Venture Partner Danielle Graham and the large Archangel Network of Funds team, many of whom are pictured above. Years of strategic business leadership, coupled with some of the most sophisticated selection and investment savvy, are a big part of what makes Adrenaline unique.

MODEL AND WHY IT WORKS

As mentioned, we believe that the Adrenaline Fund model and thesis is unique, at least in Canada, by fusing the power of a passive approach (like an ETF in the public markets) to the early-stage Angel investment ecosystem.

First of all, the investment decision is designed to support the existing Angel ecosystem through a set of rules to govern the investment process. At a high level, the Rules, shared with LPs, stay largely the same but are tuned in response to changes in. the ecosystem. Thus, rather than active decisions, the focus is on tuning the rules and working to ensure that the angel and startup ecosystem remain of high value.

In case some of you think, like a colleague initially did, that such a “blind investment process” is a bit crazy and perhaps akin to wagering on slot machines, nothing could be further from the truth. The secret sauce of Adrenaline is the collective value-add of the ‘qualified lead investors’ who mentor and provide ongoing strategic oversight (e.g. as a board member or board observer).

In fact, research by Brian Smith, Professor of Entrepreneurship and Finance at Wilfrid Laurier University along with global tech investment trends studied by BDC Ventures, shows an almost 25 times multiplier of success for such angel-backed companies. In summary, in generating larger ‘Scale Up’ companies (with valuations reaching US$250M), Canada has a dismal 0.3% track record (or 1 in 300) compared to the 2.5% number for the us (or 1 in 40). Within the Angel ecosystem, specifically GTAN where the study was conducted, an amazing 8% of investee companies reached the $250M threshold. Unpacking the reasons for this incredible out-performance would include factors like: the GTAN selection process, the ongoing value-adds of experienced ‘deal leads’, the strength of the ecosystem support in the Toronto-Waterloo Tech Corridor where GTAN focuses, and syndication with other capable seed/angel stage investment funds.

The bottom line is that, while adding the energy of investment to an existing process that works, Adrenaline Fund is set up for success.

Further, he model is structured to be open and accessible to the greatest number of Accredited Investors by having the aggregate investment staged over 5 equal annual cash instalments (say $250,000 at $50,000 per year). Since the fund is structured to segregate ‘Vintage Years’, and each Vintage aims to invest in 8-10 companies per year, this ensures a diversified portfolio of 40-50 companies at an extremely affordable entry point. The Vintage structure allows new LPs to join once at the beginning of each year, thus growing the maximum amount of each Adrenaline investment and helping startups even more.

Most importantly, the fund attracts investments from individuals who had never been angel investors since it provides deal flow and deal structure for new investors. In other words, we are unlocking new capital to support Canadian innovation.

PORTFOLIO

The portfolio reflects the diversity of innovation in 2021, transcending the software and consumer focus of a decade ago, with more and more patentable intellectual property and deep tech. The 2021 vintage portfolio comprises:

Artificial intelligence / machine learning (2)
Enterprise SaaS (2)
Fintech (1)
Medical Technology, including Advanced Materials (4)
Networking and IoT (1)

We are excited to welcome the following companies as our first Adrenaline Fund vintage, reflecting the powerful value-adds of the Angel Ecosystem we support:

gives operators of public and private networks visualization of the Quality of Experience of machines and people at the edge of the network

delivers ForceFilm™, a digital “sense of touch” for surgical robotic, industrial robotic/automation, and aerospace sectors

collaboration and facilitation software helps teams inclusively ideate asynchronously, land on decisions together, and communicate plans for action

delivering Explainable AI technology to uniquely analyze data and models, to optimize automation and human-in-the-loop decision making

delivers accurate, rapid, lab quality allergy testing right to the allergists’ clinic

delivers Prelivia, FDA approved technology promoting healthy blood circulation & tissue oxygenation for the bed ridden or chair bound

fosters team engagement and culture for distributed teams through a marketplace of employee experiences

a deep-tech AI providing automated crowd and visitor monitoring and capacity management in high-foot traffic workplaces and public facilities

produces responsive antimicrobial advanced material to prevent infection at the medical device-tissue interface for the dental industry

Fintech firm delivering integrated, AI enabled payment solutions to small business

Amber, Benton and I are pleased with the successful validation of our passive, rules-based model for Adrenaline Fund and are excited for how this will grow in 2022 and beyond.

Feel free to reach out to any of us to learn more and get involved. We’d love to have you on board.

24 Sep 2021

A Personal Carbon Reduction Plan

Today is a Global Climate Strike in cities and towns all over the world. In late 2019, was a crescendo of activity including the first Global Climate Strike and UN Climate Summit. It feels almost like time, and action, has been paused by the COVID-19 pandemic. Now in late 2021 marks a return to that pivotal time. With a summer of extreme weather events including the most wildfires ever globally, we are entering a cycle including COP26 in Glasgow. And, for those of us who are boomers, the fact that these climate strikes are led by our youth and children, should add poignancy to the state of the world we have bequeathed the next generation.

As a society and as thoughtful citizens, how can we respond? Thinking beyond surviving the worst pandemic the rich world has experienced in our lifetimes, this is the perfect time to set priorities and make life plans and we must include addressing the greatest existential crisis challenging humanity and the world we live in.

Everywhere the sense of urgency has increased. Scientific models show that the amount of carbon we can pump into the atmosphere must be limited if we are to keep to an increase of between 1.5°C to 2.0°C, which already will be a much changed earth. This remaining capacity to emit carbon, also known as our Carbon Budget, is shrinking rapidly. Hence, each year that passes, such as between 2019 and now, means that living within this carbon budget requires more drastic action and at a much faster pace.

I strongly encourage everyone to take their own personal actions. They are so important to signal to others that the Climate Crisis is serious and to help mobilize action.

Systems Change

Personal actions will never be sufficient. We also need local, regional, country-wide and global systems change to accompany our personal actions. This might be described as re-jigging our long held systems of regulation, taxation and even the incentives in our market economy. In effect, we may be re-writing the rules of capitalism itself. Examples of this include:

Setting a sufficiently meaningful price on carbon to give monetary incentives that nudge business and personal decisions and purchases toward a carbon neutral world.
Ensuring that this carbon price is revenue neutral and doesn’t fall unduly on the less wealthy portions of society.
To ensure that carbon pricing is fair to local industry, a key measure needs to be adopted. Border Carbon Adjustments ensure that the product, say, manufactured in China with coal fired electricity and inefficiently shipped, has a much higher price because of all that carbon used.
Completely removing existing fossil fuel subsidies which the IMF estimates to be an incredible US$4.7 Trillion globally or 6.3% of GDP. Even more surprising, they continue to grow. In Canada, our fossil fuel subsidies grew to CAD$18 billion in 2020. These subsidies are perverse, acting like a reverse carbon price, often nullifying the other actions taken.
Related to fossil fuel subsidies, we need to pressure financial institutions to stop financing the fossil fuel industry. In Canada alone, our big 5 banks financed an incredible CAD$137 billion in 2020, a figure that grew 50% over 2019.

We must keep up the pressure on our elected officials of all political stripes. While we are doing this, here are my thoughts on personal actions we can take. Its a complex topic, but by breaking into down into more digestible chunks, a seemingly intractable problem moves closer to solution. Here are the major categories I use, and note that I will provide further commentary on each in following posts:

Residential

Being a northern nation with really cold winters, means that our homes consume a lot of energy which can be between 20- 25% of our personal carbon footprints. In most of Canada, it takes a lot of energy for home heating as well as cooling and domestic hot water. We also use loads of energy for cooking, laundry, home entertainment, lighting and more.

While we can, and should, reduce our energy and electrical load through active management of our device choices and lifestyle, the biggest gains come from making our homes inherently more efficient.

I am currently designing and building such a sustainable, carbon zero (or negative) home in part to show a direction for the coming years. I hope that this will lead to real insights to help future homes be more sustainable, even the average house.

Of course, most homes aren’t new but have been around for 20, 30, 50 or even over 100 years. Retrofits of those homes are an important part of the mix. Audits against the Energuide for Houses standard help determine both your home’s energy rating, but to help define a path forward. Combing this with systems change, through financing or even property tax abatement to encourage this trend, is clearly the way forward. Systems change that encourages individual action is key. Even the august Conference Board of Canada has published a policy recommendation Green Homes: Sustainable Finance for Residential Retrofits. We can only hope that the appropriate levels of government are spurred into action.

Transportation

Personal transportation may represent over 30% of our personal carbon footprint. Note that I am, somewhat arbitrarily assigning logistics and freight to produce and deliver goods to us into the personal Consumption category below. While we can work to reduce our footprints by living in compact cities with lots of walking and bicycling, this does not work for all. The largest component is the electrification of transportation represented by the acceleration of the move from legacy ICE (Internal Combustion Engine) vehicles to EVs (Electric Vehicles). We are also starting to see this trend in small trucks and eventually event transport trucks. Beyond cars, I make several suggestions:

Public Transit – try to take public transit as much as possible to reduce congestion, whether streetcars (trams), buses, subways or commuter trains. Beyond the reduced footprint from shared vehicles (sort of like a giant carpool) most of these modes of transportation are electric or moving in that direction.
Commercial Aviation – This is a key target of activists like Greta Thunberg who refuse to fly (see ‘flygskam‘) there is no question that flying is a growing source of personal carbon footprint. Consider reducing your use of flying, and for those trips you must take, you are strongly encouraged to purchase carbon offsets (see below).
Taxis and Carsharing – Again, you are strongly encouraged to purchase Carbon Offsets for the kilometres you travel in taxis. Until the pandemic, Lyft (and not Uber) purchased carbon offsets automatically. Although that has been cut, they are committed to more EVs and even have ‘Green Mode’ in some cities which are electric vehicles. You wise choices do make a difference.
Carbon Offsets – There are many carbon footprint calculators you can use, for example to offset air travel or other transportation. As I shifted from ICE to EV vehicles, the amount I have to offset is reduced. A good place to start is Carbon Zero and I would recommend choosing local projects that you can better understand when you purchase offsets. And perhaps tell others via social media what you are doing to help educate more people. Another more grassroots approach is to support the urban forest, which is a great carbon sink. Check out Tree Trust which is available in an increasing number of Ontario communities.

Consumption

The old adage of ‘Reduce, Re-use, Recycle’, and in that order, remains true even now. We live in a society where consumption, beyond any real need, has taken hold. And, it is harder to buy quality products that last – witness of the incredibly ugly footprint caused by the trend to ‘Fast Fashion’.

Another aspect to consumption is excess packaging, much of which is made from plastics. Plastics pose enormous problems to our biosphere and in particular the oceans and so reducing or eliminating single use plastics is an urgent need. Further, most plastics are made from oil and hence are another form of fossil fuel consumption. I will soon write a ‘top 10’ list for ways to reduce your personal plastic and packaging footprint – which directly reduces your carbon footprint.

I hope that this provides a high level roadmap to both personal action, but also where public policy needs to go. Of course, it over simplifies a fiendishly complicated topic. At the same time, by dissecting de-carbonization I can only hope that it inspires action, at both a personal and government level.

15 Jul 2019

Investing Through The Unfolding Energy Disruption

Although a life long mathematician and technologist, recently much of my focus has been on being a savvy investor, in many asset classes from private seed/angel investing to public markets and alternative investments. While Canadian investors have traditionally thrived on conservative, cash generating value investing and fixed income plays, the future is rendering such risk averse models obsolete, making it critical to adopt a forward lens, looking out, perhaps a decade into the future.

I have lived through many market disruptions in which “software is eating the world.” Such disruptions include the “Kodak Moment” of digital photography rendering mining of silver oxide to supply the ecosystem around film irrelevant in a digital photography age. Another exemplar is the upending the entire value chain for newspapers and other ad-funded media by the likes of Google (Adwords) EBay (classified ads).

Energy has driven world economies for time immemorial and may even have led to the fall of the Roman Empire. As modern societies have become wealthier, energy consumption has seen stratospheric growth. The simple reason is that Energy underpins the creature comforts of modern society, including food, shelter, transportation and consumer consumption. There is widespread concern that this nonstop growth model that underpins our economy is ultimately unsustainable, particularly as rich country ways spread to the rest of the soon to be 10 billion people on planet earth. The younger generation, who will ultimately see the limits of such consumption in their lifetimes, has embraced a more pessimistic view of their future and adopted a focus on lifestyle changes, including low carbon (vegan or vegetarian) diets, not owning a car, and trying to eschew rampant consumerism.

Essentially, there are two paths open to a more sustainable way of living:

conservation, in which individuals strive to lower their environmental (primarily carbon) footprint, and
a technology revolution in which traditional energy is replaced, for example by renewables, and even more radical, technologies that remove carbon from the atmosphere.

Thus, futurists have long predicted the same fate for energy driven by new technologies that include renewables, storage (battery and other), Digital Electricity, subjecting the global energy market to its own “Kodak Moment” of digital disruption. The future has arrived, and today in 2019, this energy disruption is already in full force, potentially rendering oil, gas and coal essentially obsolete over a time as short as the next decade.

What does this mean for the Canadian investor, including business, government and insurance companies who all will see their future results impacted by how this unfolds?

I have been researching a formal presentation around energy disruption for investors, but this recent CBC article spurred me to publish this post and perhaps have readers send me their thoughts and research.

Fighting climate change may be cheaper and more beneficial than we think | CBC News
Governments aren't calculating the true cost of fighting climate change when they fail to take into account side effects such as fewer deaths from air pollution - co-benefits that make the net cost of climate action as low as zero, growing evidence shows.

The above article is instructive inasmuch as it paints a picture of a better world achieved by strategically and aggressively re-allocating resources in our economy. The suggestion is that to do so, far from being foolishly spendthrift, is our most rational and positive outcome. What it doesn’t say is that to delay doing this, by allowing others to capture leadership in the “new”, post fossil fuel, growth industries, render Canada a much poorer (aka “third world”) country in the future.

The fossil fuel (coal, oil and gas) industry is facing many headwinds, which has moved economists from a previous narrative of concern about “Peak Oil” (ie. the world is running out of oil) to the new narrative of “Peak Demand” (ie. demand will drop as energy consumption is disrupted by new technologies). Here are some of the head winds and their implications:

Over the last decade, coal power, one of our greatest carbon producers, has already been rendered uneconomic, with declines in coal mining and production starting from around 2010.
Solar and Wind electricity production costs continue to drop and since 2016 are cheaper at scale than oil, and now gas (including Gas Peaker Plants).
The electrification of transportation, from cars, buses, trucking and more, is continuing to grow rapidly year over year. Current estimates call for Peak Petroleum Vehicle (ie. those “ICE” or Internal Combustion Engine powered) sales to occur by 2023.
New technologies, particularly in the areas of energy storage, are quickly coming on stream. Year over year more than doubling in such storage capacity further indicates exponential disruption at work.
Carbon pricing, in whatever form whether carbon tax or cap and trade, is needed for the market economy to work and will certainly become pervasive as the climate crisis escalates. It will require the majority of people to demand government policy and action. Current government policies seem to be held hostage to the oil and gas lobby instead of the wishes of the general public, although some parties try to disguise oil and gas wishes as “for the people”.
Fossil fuel subsidies in Canada, including taxes and direct subsidies, are estimated to be between $30 and $50 Billion annually. I continue to work at sourcing more definitive subsidy data, but it is clear that simply better allocating these subsidies to a cleaner future must happen.
Because the oil industry has known about our current Climate Crisis for many years (40 or more) and actively spread misinformation and hugely lobbied governments to ignore the long term effects, litigation for the damages caused by climate change will only escalate. This is analogous to the class action suits against tobacco companies for spreading misinformation about smoking in the 1960s and 1970s that have made these industries Wall Street pariahs today. In essence, this misinformation and deflection is an attempt to delay the inevitable, at the cost of real future damage to our world and the people inhabiting it.
Fake News Has a Cost: various industries have spent billions of dollars bombarding us with a continuous stream misinformation in order to distract and deflect us from proper policy. While the Kohl Brothers who make money from coal are legendary, examples of other myths include:
- apparently the power unions and nuclear industry heavily fund anti-wind energy misinformation, such as Wind Turbine Syndrome
- the auto industry funds significant misinformation about EVs, and this isn’t just in Buzzfeed, but in fact finds itself in otherwise reputable news media like The Globe and Mail: See The Trouble with Electric Vehicles – Winter and Out in the Cold with a Hyundai Kona Electric.
- consider both the cost to all of us when this misinformation helps form government policy and also the notion that those promulgating this misinformation may attract future liability for harm stemming from real harm their actions inflict on society.
For those not familiar with Exponential Innovation, it can be deceptive because humans tend to see growth as linear and get caught off guard as what look like small numbers rapidly balloon into much larger ones. The perceptual problem that people have with Exponential Technology Adoption curves is explained here: The Problem With Exponential Innovation : People

The above just skims the surface of the major disconnect between reality and lobbying and misinformation. Those who want to drill deeper into this fascinating world of energy disruption may wish to check out this video by futurist and technologist Ramez Naam from Singularity University.

Ramez Naam - Future of Energy

All of this leads to predictions that, by around 2030, both the price of oil and the public market stock prices of public oil majors crater. In the process, some economists predict that globally US$100 Trillion (yes that’s right) of fossil fuel assets will be kept in the ground, and hence written down. Such a staggering number means a huge economic dislocation for countries, companies [and investors].

Here are some closing thoughts:

Short Coal, Oil and Gas: and their ecosystem. Although no one can be sure about the timing, the fact that the coming energy disruption will have a hugely detrimental effect on these industries is irrefutable. Don’t get caught in the massive price (commodity and stock) swings that this market disruption will unleash. You heard it here first!
See Beyond Partisan Politics: because parties, and elected representatives, seem more beholden to the 100 largest global fossil fuel companies than their own voters, the time is long overdue to return politics to a grassroots level of democracy where the views of citizen voters actually count. In the US, there is a movement to pressure local representative to refuse fossil fuel industry funding. It will be interesting to watch this unfold here in Canada. No doubt our coming economic transition will be a gargantuan effort — I liken our upcoming transition to the effort to win World War II – everyone united, regardless of party line, for a common cause. It would be good to emulate the spirit of such a war effort. In spite of past failures of partisan politics, the net/net is that citizens can mobilize and collectively push our elected officials toward policies that actually help citizens and our planet.
Insurance: The current climate crisis may up-end the property insurance business and make insurance coverage unaffordable for many homeowners. To date, the insurance industry has led in research and advocacy around resilience and adaptation to Climate Change. The day is fast arriving when that will have to change. Increased weather volatility may make the climate so hard to model that realistic pricing of risk, which determines policy premiums, close to impossible. Lastly, as litigation starts to segment companies by liability for knowingly contributing to climate change, the insurance industry will undoubtedly be forced to respond both in their own investment portfolios and in the core insurance business.

As an investor, citizen, and voter I know that we need a significant reset in how we respond to the inevitable decarbonization of our economy. No one suggests it will be easy. Conversely, further inaction and delay will result in hugely greater pain, and suffering.

It’s your choice – where will you place your investment?

29 Oct 2012

Tech Terroir

In the world of wine, the concept of terroir describes a centuries long process in which the climate, soil, grape varieties and dedicated vintners, symbiotically develop a unique “sense of place” for a wine region. A favourite of mine, the garrulous and quintessential Californian vintner, Randall Grahm, while trying to establish the old World notion of terroir in California postulates that it is a long term proposition and can take centuries to develop.

As both a wine lover and serial tech entrepreneur, I firmly believe that building a tech cluster is similarly a very long term process. Ironically, the epicentre of tech clusters is in California. The Silicon Valley, which got its start in the 1950s remains the major cluster worldwide as “… no other place as yet has the Valley’s scale and resilience.”

Although I started my tech startup career in the US, it was in the Canada’s leading tech cluster of Waterloo where I built major companies and was one person who got that cluster started. Like Silicon Valley’s origins in Stanford University, the Waterloo cluster was initially fuelled by University of Waterloo. Over time, a combination of executive and programming talent, capital and professional services capabilites led to the current state of almost 1000 technology companies. By contrast to Silicon Valley, Waterloo is a must younger cluster, having started just over 25 years ago compared to the 60 years of Silicon Valley. It continues to mature around some key ingredients such as global strategic marketing capabilities and sufficient capital to fund on a globally competitive basis. Experienced people may well be the most important ingredient in a cluster’s maturation.

Further, I feel that all who have been fortunate to build wealth and experience in business, owe an obligation to “pay it forward” to the next generation. My own contributions include significant startup mentoring, Board and strategic roles in organizations like Communitech and Innovation Guelph, and for the last 3 years a Board role and chairing Selection Committee for the Golden Triangle AngelNet (GTAN). In just 3 years, GTAN has grown to about 150 paid accredited investor members who bring a wealth of experience to the 25 funding transactions to date. And, it goes without saying, that many of those financings might not have happened without GTAN having emerged to fill a significant funding gap as VC’s became largely extinct. Acting as a superangel to syndicate angel network deals is a tremendously labour intensive exercise, but one that I and others believe will pay off in the long term economic prosperity of our region.

I firmly believe knowledge-based companies to be the key ingredient of our future economic prosperity, so such company-building competence is mission critical for our region, province, country and globally. As globalization occurs, we see more and more regions clambering to reap the riches of the innovative, tech startup world.

To that end, at Verdexus, we have always taken a transatlantic perspective, primarily to have a more global window on building companies that can achieve world leadership in their chosen businesses. Over the years, I’ve worked with startups across the United States and Europe in the dominant clusters such as Boston, Chicago, Silicon Valley, London, Munich, Berlin, Stockholm and more. To round out my experience, over the last few years, I’ve sampled some key emerging regions by volunteering as an expert judge in places as diverse as Brussels area, Warsaw and Torino. A week ago, I had the opportunity to judge startups associated with the European Space Agency in Toulouse France as well as in Istanbul, Turkey. The latter Istanbul venue, EU Venture Forum was jointly sponsored by EUREKA (the pan-European research and development funding and coordination organization) and Europe Unlimited from Brussels. Collectively, these more than a dozen regional events ultimately feed into a pan-European venture prize in Berlin in December.

It has been very instructive to visit various clusters. This grassroots view, from the perspective of startups, reveals much in common globally but also a few surprises. Based solely on interacting with local startups, on a global perspective, it is clear that culture and experience vary greatly across various Euroopean regions. For example, I was pleasantly surprised that Warsaw had some of the smartest and most sophisticated business startups I’d seen anywhere. And, remember, they are pitching in English which is not their native language. Conversely, the cluster around Torino appeared to have a long way to go before its startups would begin to measure up globally.

Pitching in Istanbul

Similarly, the startups I saw in Istanbul were impressive. Some companies, following a model also common to the emerging markets of Central and Eastern Europe, were essentially cloning an existing business model into the 80 million strong Turkish market. More significantly others were clearly building globally strong technology startups. One pleasant surprise was that, of the eight companies that I coached the day before the forum, three had women CEOs. This was a surprise for Turkey, but sadly women-led companies remain all to rare in Canada

The calibre of engineering and basic technology talent was very impressive. That said, it was also clear that the level of support ecosystem around these startups is very limited – at least compared to what we see here in North America. One direct challenge was that in Europe companies appear to receive generous R&D funding which seems to encourage more of an engineering mentality than a market-driven one. In essence, projects stay too long as “science projects” and the culture and skills to get projects to market seem to suffer as a result. Although this is a generalization, there are many exceptions.

In the area of capital, the meltdown in Venture Capital A Round investments is about 3-4 years behind what already occurred in Canada. One particularly European challenge is that more and more of the VC funds have moved their offices and focus from regional markets to London, meaning that companies in the regions often have less direct access to capital. Conversely, the growing role of Angel Networks and Superangels to fill the gap is still in its infancy in Europe. I suspect that will change over the next two or three years. Venture funders like to either be close (1 hour travel) to their portfolio companies or, at the very least, to have a local investor who can “provide adult supervision”. Increasingly, experienced serial entrepreneurs will be called on to fill that key local role as Angels and Superangels. It is clear that the notion of Tim Draper going to Estonia and finding Skype is definitely the exception rather than the rule.

And that takes me right back to the notion of “tech terroir”. As global innovation increases, and people around the world vie to build ever stronger tech startup ecosystems, it is the dedicates entrepreneurs in the sector who magically nurture these maturing ecosystems. As one of the entrepreneurs that I coached mentioned, she wants to:

“make innovation easier in Turkey and to make life easier for entrepreneurs”

So, in addition to building a great global business, she also takes time to help move the needle of her local ecosystem forward. It’s a very encouraging sign that continues to inspire me as I engage with the new globalized world of tech startups.

15 Mar 2009

Who Killed Canadian Venture Capital? A Peculiarly Canadian Implosion

“Fortes fortuna adiuvat” – “Fortune favours the bold” – Latin proverb

The current economic meltdown has unleashed brutal forces acting on all aspects of the business world, but certainly innovative startups in fields like software, web, wireless, green technologies and life sciences are at grave risk. In Canada, our startups have generally been world class innovators, but severely underfunded when benchmarked against US and leading European countries.

Not only has the credit crunch forced most Angel Investors to the sidelines, but the supply of Venture Capital (VC) in Canada has contracted almost to the vanishing point.

Tomorrow’s Canadian Business documents this very well in VC Financing: Cold Realities.

Having started my first software company in the mid-1980’s, I am well aware that although VC money was available and well established in the Silicon Valley, VC money for knowledge-based startups such as mine was then nonexistent in Canada. Through the 1990’s, however, Canada started to build a cadre of new funds that showed early promise of replicating a US style VC funding ecosystem

In the early millennium when Verdexus investigated raising a institutional fund to fill a gap in the Canadian market with our “hands on” model and accessing global capital sources. It gave our partners a chance to look to VC best practices on a global basis and figure out how to apply to the Canadian context. While we didn’t proceed at that time, I’ve had the good fortune to work on projects with top VCs from the US and several European countries, giving me a global perspective on how Canadian Venture Capital measures up.

Sadly, I believe that the 2000/2001 tech bubble, or dot com meltdown, stopped the maturation of our VC industry in its tracks, a body blow from which the industry has never recovered. It is to this time that the root causes of our current VC meltdown can be traced. A few of the main reasons holding the VC industry back can be summarized as follows:

Impact of the Labour Sponsored Investment Fund model on our VC ecosystem.
Lack of balance between financial and operational skills: The Banker Effect.
Lack of International Funding discipline in our VC industry.

I will explore each of these causes in turn.

1. Labour Sponsored Investment Funds

Labour Sponsored Investment Funds (LSIFs, also known as Retail Venture Capital Funds), have been a particular sore spot, as a 2005 Globe and Mail Report on Business article “Labour-sponsored Love Lost” points out. Considered good public policy when launched in the late 1980’s, both Federal and Provincial governments gave individual (retail) investors a significant tax incentive (up to 35%) to invest up to $5 000 with a minimum 8 year hold period. In essence, many funds totalling hundreds of millions of dollars were raised by firms like VenGrowth, Covington and Growthworks as were numerous very small funds.

Lacking the inherent financial discipline imposed by typical venture capital structures, in which several “funds of funds” (legally dsignated as Limited Partners, or LPs) invest in a fund managed by a General Partner (or GP). The LPs in this sense have much leverage, not just in choosing their GPs, but also in ongoing oversight, not to mention the choice to re-invest in the next fund raised by the GPs. This LP/GP structure is the model employed world wide and has generally stood the test of time.

The thousands and thousands of retail investors in a typical LSIF exert no such control and hence we’ve seen Management Expense Ratios (MERs) as high as 4-6% versus the 2% private equity industry norm and Carried Interest (the portion of the investment gains shared by the fund) as high as 30% versus the 20% norm.

More importantly, although at its peak, more than half of Canadian VC money was in LSIF funds, returns were, as Doug Steiner says, “lousy.” How lousy? Studies show that average fund returns, also called Internal Rate of Return (IRR), are negative. The best fund appears to have produced a measly 1% IRR. In the US, funds aim for 30% and there is a long term track record of many funds in the 18-20% range.

Undoubtedly, individual investors didn’t have a lot at stake with those huge tax credits and it can be argued that LSIFs encouraged loads of job creation in the all important knowledge economy. All of that is true. My main concern is that the attraction of the LSIF model impaired the formation of a more mature VC ecosystem based on the normal LP/GP model mentioned above.

2. The Banker Effect

Credit: AIAlex.com

In the US, both in California’s Silicon Valley and in the Route 128 area around Boston, the VC industry has always been populated by a healthy mix of the financially oriented fund managers coupled with serial entrepreneurs who have founded and build technology startups. The composition of the partners at Canadian VC funds has always been different than this international norm, having many more banker types than operators. The experiences Jonathan Geist relates in the Canadian Business article are symptomatic of this difference. Too much focus on the numbers is like looking in the rear view mirror when startups need to be focused on the future – building market share, refining partnerships and developing strong go-to-market execution.

Again, I believe that this gap can be attributed to us being a less mature VC and startup ecosystem. In the late 1980’s and 1990’s finding seasoned technology startup operators would have been almost impossible. Most were still building their first startup. However, had things unfolded as they should have, many of the startup founders from the 1980’s and 1990’s should now be partners at Canadian VC firms. That didn’t happen because the dot com meltdown appeared to remove the ability to the industry to make changes or take risks. Ironically, this exacerbated an already more conservative VC culture here in Canada, and this more risk averse approach actually contributed to the lower IRRs seen when Canadian VCs are compared to their US or European peers.

3. Lack of International Money

The fledgling LP/GP VC industry of the 1990’s was funded by a relatively small ecosystem of LPs, such as OMERs, Caisse de Depot, Teachers, CPP, BDC, etc. Thus every VC fund was essentially not differentiated by its LP composition. In essence, a closed group of Canadian fund of funds all were chasing this same relatively small asset class. Furthermore, the relaxation of Canadian content rules coupled with these aforementioned low IRRs, sent the Canadian LPs looking elsewhere (mostly abroad).

What is the right recipe to change this situation? Quite simply, access to more global sources of money. The thousands of US, European and Gulf institutional fund of funds investors have largely ignored investments in Canadian VC funds. This is partially because of the chicken and egg of lower IRR returns. But, more fundamentally, it is primarily because the Canadian startup and VC ecosystem had low visibility to these international funds. Several years ago, I spoke to a large €6 billion LP fund at EVCA in Barcelona, that had investments in 40 tier 1 VC firms in each of the US and Europe. Ironically, that LP’s sense of the Canadian technology scene was limted to Nortel. Since Nortel hasn’t really been a star for many years. Clearly we have a long way to go market our great technology stories to the world.

The Way Forward

Unlike this sign, I don’t want to end this piece on a note of doom and gloom. Nor do I want to leave the impression that there aren’t very talented people in the Canadian VC industry. Nothing could be further from the truth – our long term VC gap arises from long term structural challenges, such as a lack of discipline as imposed by global LPs and not having reached the proper banker/operator mix. There are other factors, including the small population and large geography unique to Canada, but all can be and should be overcome with the proper model.

We already have a few outliers in our funding ecosystem. Being optimistic and entrepreneurial, I’m convinced that many talented individuals will find ways to, little by little, to invent and rebuild a healthy network of startup financing alternatives. As I’ve argued in other blog posts, there is a role for governments. However, that role isn’t to pick winners or to enter the VC business directly, rather it is to be a catalyst to the process by streamlining (securities) regulation and taxation.

As a stakeholder in the success of knowledge-based startups, what do you think?

Please share your comments.

15 Feb 2009

Getting Creative – “Yes We Can” or “Mind the Gap”?

In today’s challenging economic times, it is extra important for governments, academics and individuals to plan our future economic prosperity. Thus, it is timely that Richard Florida and Roger Martin from the Martin Prosperity Institute, Rotman School of Management, University of Toronto this month published Ontario in the Creative Age, which provides a detailed future-oriented policy blueprint.

It sets a policy agenda to help us unleash our full potential in the Twenty-first Century where economic success is increasingly coming from creatively-oriented enterprise versus our traditional strength in routine physical and routine service occupations. The report is backed by research which highlights both our existing strengths and weaknesses including those in education, income and even the gap in our creative/routine job mix compared to our peers. Starting from the base of today, the agenda suggests four main focus areas to drive future prosperity:

“Harness the creative potential of Ontarians”, including businesses’ role in changing job mix, education and even marketing of our capabilities,
“Broaden our talent base”, focused on significant increases to our post secondary educational levels and broadening managerial capabilities,
“Establish new social safety nets”, including early childhood development, better utilization our key immigrant resource and retraining of older workers from declining occupational groups, and
“Build province-wide geographic advantage” which strengthens connections (physical and otherwise) within and beyond the mega-region spanning Waterloo-Toronto-Ottawa-Hamilton-Niagara-Rochester.

Having read this paper, it is encouraging to see such a forward thinking analysis that will certainly drive future governmental, business and economic decision and policy making. With that in mind, and being of an optimistic “yes we can” mentality, I was, however, struck by how very little attention was paid to the biggest gap of all — Funding this agenda.

Without proper funding, our ability to transform our economy in these wise and necessary ways, will go unfulfilled. I’ve written about this “funding gap” numerous times and from different perspectives:

as part of my series on government policy aimed at preparing us for the Digital Age: Digital Policy #3: Startup Investment and Taxes
our recent Federal Budget was chock full of stimulus measures, but seemed totally blind to the creative transformation. For example, I discussed potential green technology initiatives in A Bright Green Federal Budgetary Stimulus Opportunity
much social enterprise, particularly that most creative sector – the Arts, is hurting badly: Another One Bites the Dust – and You Thought Business Was in Crisis Mode

I’m certainly not alone in this concern. Many others in positions of thought leadership have raised the issue of funding of investment, some with very specific policy proposals and others just highlighting the gap:

Avvey Peters from Waterloo’s Communitech blogged about Magic Words: Economic Stimulus right before the Canada’s Januaray federal budget, and her post contains some very specific policy measures.
Dr. Ilse Treurnicht, CEO of MaRS Discovery District, a leading Ontario driver of research and commercialization, provided a well-researched analysis of the major institutional and venture funding gaps of Canada compared to other jurisdictions in their latest newsletter.
Alec Saunders, CEO of one of Canada’s most promising web/mobile startups, Iotum, addressed the tech startup funding gap in the context of the proposed federal stimulus in his blog post Tech in Canada: Can We Do More Than Play Hockey? Also, a number of international discussions of technology competitiveness have been hosted on their innovative Calliflower service.
Peter Childs, an Ottawa social media strategist and tech luminary, has laid out a framework Tech in Canada: Peter Child’s Framework for Stimulus

Make no mistake, having surveyed funding sources for startups and social enterprise, Ontario (and Canada) significantly lags most regions in the US and Western Europe — our primary OECD comparables. The reasons for this are numerous and will be discussed in a separate posting, but this funding gap is our extra hurdle before we can be successful in driving the Florida/Martin challenge to transform Ontario to a creative economy.

And to be clear, this transition to the creative economy needs to be driven by the competitive, market economy. That implies that it will not the primary role of governments to provide the major funding for our transformation. Fundamentally, governments should not be picking winners and losers, but simply equiping market forces to go to work. And, given our long history and culture of relying on governments for answers, it is important to clarify that point. With the right framework in place, businesses and individuals will compete to drive the path to our future.

Thus, as their primary task, it is imperative that our federal and provincial governments develop a strong and co-ordinated policy framework, dealing with taxation, security regulation, and the like, to encourage the private sector to make such investments. And, in our current times of economic stimulus, the extra icing on the cake should be to channel some of those near term stimulus dollars toward growing the creative sector that is so essential to our future economic prosperity.

25 Jan 2009

A Bright Green Federal Budgetary Stimulus Opportunity

“Efficiency is doing better what is already being done.” – Peter F. Drucker

Is there a green lining in the inevitable mountains of cash being channelled into economic stimulus?

The sequence of September’s ho hum election followed by the almost incongruous state of denial about both environmental issues and the state of our economy by Canada’s Stephen Harper Government, renders the proroguing of Parliament and his rapid policy about face almost exciting to watch. As a result, Tuesday’s budget should prove a lot more interesting than the six months that preceded it.

My post from last year, Finding Negawatts Right on your Doorstep, gave background to show how the EcoEnergy program could significantly reduce our collective residential Greenhouse Gas (GHG) emissions, while simultaneously improving our housing stock and lowering operating costs. As noted, even with the current modest levels of uptake, this is an area where relatively small investments by our Federal and Provincial governments are starting to pay off.

Proper Economic Stimulus Can Lead To …

In the context of Canada’s 2009 Federal Budget, there will certainly be significant funds allocated to economic stimulus, almost certainly with the traditional focus on infrastructure projects. As I discussed in my recent post, Playing the Lottery after the Meltdown, I generally favour a laissez faire approach to government. But, considering our current economic situation, signficant stimulus will be essential.

I strongly urge the government to consider channelling some of these fund to two areas:

bright green investments such as reducing the collective carbon footprint of our homes, as I discuss below.
in addition, some package of stimulus focused on our future competitiveness by jump starting the knowledge economy, especially startups.

In the Negawatts posting, I didn’t elaborate enough on the relative merits of different approaches to offsetting our carbon consumption (or indeed all Greenhouse Gases). I would draw a parallel to the 3 Green R’s of Reduce, Reuse & Recycle which form a hierarchy in dealing with the solid waste issue, with Reduce (ie. not creating the waste in the first place) being much preferred to Recycle (reducing the impact of waste already consumed). Similarly to this, there are also choices around offsetting our carbon footprint.

Most carbon offsets involve tree planting in some distant, usually tropical, country. While this gives maximum impact, it does nothing for our local output of carbon (GHGs). While planting trees locally is useful, typically the ROI is lower than in warmer climes, if only because trees grow more slowly in Canada. The best approaches would involve a direct reduction of our local carbon use, instead of a mere offset. And that is exactly what residential programs like EcoEnergy home labelling and retrofit achieve.

Therefore, the timing is right to channel the relatively small amount, as compared to the enormous size of the entire stimulus package, needed to transform our residential housing stock. And, the resulting Negawatts we will generate in return, will be a lasting efficiency we can enjoys for decades to come.

Significant Carbon Reduction

21 Aug 2008

ARISE Fair Sun …

The reference to Romeo and Juliet was apt when last week I had the pleasure to meet with Ian MacLellan, of ARISE Technologies (TSX:APV)

The Founder of ARISE, Ian is now Vice Chairman and Chief Technology Officer and I met him just after a great quarterly release to the public markets.

Having worked tirelessly for close to 12 years, Ian is a living example of the qualities we recently outlined in a set of blog posts entitled “Entrepreneurial Toolkit”:

First of all, rarely have I seen someone more passionate about a business vision than Ian. His company vision, almost a mantra, is to “take solar mainstream” and that hasn’t changed since Ian first explained ARISE to me many years ago. In fact, I believe it was the founding vision way back in 1996. Indeed, even the company name itself, shortened from “Appropriate Renewable Intelligent Sustainable Energy” is a passionate embrace of Ian’s vision.

Having pioneered in the solar industry long before Green Technology was fashionable as it is today, particularly in Canada’s challenging technology funding ecosystem, meant that the company was forced to run on fumes for many of those formative years. By watching cash burn like a hawk and by being able to sell and articulate the vision clearly, Ian was led the charge to fund those early days. Indeed, Ian spent significant time in fund raising mode for many of those years. In our investment climate, this is something almost all early stage technology companies will easily relate to. I would credit Ian with more persistence in riding through a challenging funding environment than almost any other entrepreneur I can think of.

As an early ARISE advisor and investor, it was instructive for me to watch Ian lead a charge which necessitated navigating through a number of key stepping stones to attain their current status as an advanced solar manufacturer. Now they produce both proprietary PV solar cells in Germany and refine specialized solar-grade polysilicon feedstock in Waterloo. As part of the means to an end, ARISE acted as a distributor/reseller of solar components. As well, they honed their brand and expertise by integrating solar systems into a number of, primarily residential, projects. Although this potentially diverted much energy and focus, it was necessary to generate awareness, cashflow and to be ready when the market was ready for ARISE to ramp up production of their proprietary products.

Today, having raised over $100 million in financing, which is in itself a rare feat in the cash-starved Canadian technology ecosystem, ARISE is growing at breakneck speed. They will transition from effectively a pre-revenue state to a projected over $40 million revenue from commercial solar production during 2008. Such rapid market expansion requires scaling of all aspects of the business, including significant increases to their management footprint. Unlike many founders, Ian was ahead of the curve, both in recruiting A-team talent into CEO and CFO positions, but also refining his role into a long term role where he can have the highest value to this growing Canadian success story. Other entrepreneurial founders could do well to learn from people like Ian. Although it’s sometimes hard to “check your ego at the door”, building great companies is all about great teams as imposed to superstar individuals.

Kudos to Ian and the great team at ARISE. We’ll be watching this Canadian-headquartered global success story closely.

20 May 2008

Finding Negawatts Right on your Doorstep

Big “boil the ocean” issues (with apologies for the corny metaphor) like Global Warming overwhelm many people with their scope, long time scale and difficulty to solve. Predictions that human activity, which has of late been increasingly generating Green House Gases (GHGs) which in turn accumulate in the atmosphere and, by changing the heat retention of the whole earth’s ecosystem, cause our average temperatures to warm up, are now almost universally accepted as fact rather than just scientific theory.

In response, socially responsible businesses and individuals have started to buy carbon offsets which seek to provide an alternative reduction elsewhere, equivalent to the actual carbon they the purchaser of the offset produces. While worthwhile, most offsets are, in fact, delivered via the CDM part of the Kyoto Protocol in the absence of more pervasive emissions trading schemes. CDM, short for Clean Development Mechanism, invests in programs in developing countries which reduce GHG emissions.

But, what about reducing our emissions here in Canada and the United States? I’d like to share a best kept secret, namely the Elora Centre for Environmental Excellence (ECEE), a charitable organization of which I am the Board Chair and co-founder. Without a lot of fanfare, this organization was an early innovator of home audits which were aimed at improving our residential housing stock and working to both educate and deliver greater energy efficiency for homes (as well as water and waste). Originally, we pioneered a “Green Home Visit” just for our small community of Elora, Ontario which our current Executive Director, Don Eaton had the vision develop into a nationwide home labelling system. Don’s vision was for all homes to receive simple label of energy efficiency, say on a scale of 0 (heating the outdoors) to 100 (heated only by the heat generated by the inhabitants) which would provide:

an objective standard that would drive a market for energy efficiency,
a system endorsed by realtors and contribute to the relative value of the home,
homeowners would be directly educated in energy efficiency issues on the spot during the process of home evaluation and label production,
an auditable and objective benchmark that would allow homeowners to better select contractors for upgrades (e.g. draftproofing, insulation, furnace, windows, etc.)

In the late 1990’s, Don was one of a group of experts who put this dream into reality, in the context of a Canadian federal government programme, called EnerGuide for Houses. The name “EnerGuide” was borrowed from a pre-existing and well-known Canadian government appliance labelling standard. Don Eaton became an icon of this program, by providing much of the initial training for hundreds and hundreds of Certified Energy Advisors over the years, through a national-wide environmental service organization, Green Communities Canada, of which ECEE is a founding member. Such is the level of Don’s expertise, that he’s been called to provide expert help in developing programmes in places like the UK and US.

EnerGuide for Houses grew quietly until May 2006, when the Stephen Harper government killed the program in what was clearly a partisan, and ill conceived, move. It was reinstated, as EcoAction for Houses last year, but only after the collateral damage of hundreds of trained Certified Home Evaluators being forced out of the system by the over 12 month funding chasm. But, that’s a story for another day …

To make a long story short, home efficiency from EcoEnergy programmes conducted just by ECEE (in the service area of southwestern Ontario shown on the map below) so far delivers 8 000 tonnes of GHG reduction per year over the about 16 000 homes we’ve audited. Taking into account the Canada-wide results, and remembering that the reductions are, in effect, permanent so each and every year the savings continue and fewer GHGs are emitted into our atmosphere.

Remember too that this is still an early adopter programme. Because the homeowner pays a relatively nominal sum, although mitigated by government funded homeowner rewards for energy reductions and other cross-subsidies, it is far from universal. The most advanced communities have an audit penetration of approximately 5% while many are far lower.

Studies in Canada and the US, show that residential energy is the source of just under one-quarter of our GHG production, with the rest being transportation, industry and agriculture. So, taking market penetration much higher, to 30% or 40%, would make a real difference as we see below.

It is instructive to correlate the above case study in real GHG reduction with an article in May 10, 2008 Economist, entitled The Elusive Negawatt, “If energy conservation both saves money and is good for the planet, why don’t people do more of it?” Some of the key points made in that article are:

energy efficiency is really the “fifth fuel”, after coal, gas, oil and uranium, as a practical way to satisfy growing energy demand.
this fifth fuel of reduction and efficiency, also called “negawatts“, reduces rather than produces Greenhouse Gases, and enhances wealth at the same time.
McKinsey Global Institute suggests that energy efficiency could provide half of the savings needed to for the world to keep GHGs to below 550 ppm in the atmosphere, a level suggested that would reverse or stabilize climate change.
Some studies suggest a payback of 30% for many energy efficiency programmes, which is remarkable in itself.

If energy efficiency programmes are all goodness and light why aren’t they more pervasive? How do we get the production of negawatts beyond its early adopter stage?

It’s pretty clear that we need the right combination of committed governments, utilities and private sector partners working with environmental service organizations like ECEE that are providing the “real down in the trenches” work right at the homeowners doorstep. With such a tantalizing prize beckoning, let’s not wait too long to seize it.