Startups

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8 Mar 2016

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Go East Young Startup!

“The journey of a thousand miles begins with one step.”

“千里之行，始於足下”

Laozi c.580 BCE

Building on 19th Century US westward expansion (“Go West Young Man”), much of the current innovation in technology has been West Coast focused, particularly in California’s Silicon Valley, which has for more than 50 years been an intellectual epicentre of the technology world.

Source: Wall Street Pit

Over my long tenure in the vanguard of technology trends, I have witnessed a tectonic shift in this comfortable, yet outdated, world order. Today the best and brightest innovators and entrepreneurs must also look east, especially to China, to fully embrace global reality of the 21st Century.

Many of you might be wondering about the slowing growth rates in China? Like many aspects of China, there are many perplexing contradictions that are beyond the scope of this post. It is certainly true that Chinese infrastructure investments and some manufacturing has been overbuilt. Not so in the technology industry. The difference is that there is a huge gap as  the Chinese population increasingly moves to middle class status and the country needs to solve some huge issues (e.g. environmental issues around air quality). As a result, ICT, Green Technology, Life Sciences and other knowledge-based businesses continue to provide huge upside opportunities.

There is no question that China is a complex and difficult market to access. Knowing this, how can Canadian entrepreneurs master the new globalization landscape? Read on …

In 2015, my assistance was requested from an innovative group of investors and social entrepreneurs to pilot a new program, called CAMP (short for China Angel Mentorship Program) aimed at forging new international linkages tied to the momentum of startups. By identifying some of the best Canadian startup entrepreneurs, investing in them and helping them to engage with China, this program has the opportunity to drive a whole new generation of engagement between China and Canada, in the fast moving world of startups, technology and innovation.

CAMP is created and led by Liu Zhishuo (Peter Liu), Wang Tong (Tony Wang), Liu Yingna (Angela Liu), Zhang Yi Chin and Yang Jun (Alan Yang), all very savvy strategists and investors who aspire to “cross-border ecosystem building” between China and Canada. They work in Canada through CCAA (China Canada Angels Alliance) which made 23 investments in 2015 and in China through River Capital which made 50 investments in 2015. Since, as a westerner, you may not know these leaders (pictured below in Beijing), I will provide some background and context.

  • Peter and Angela Liu at CAMP Beijing 2015
  • Angela Liu. Tony Wang & Qi Lin at CAMP 2015 Beijing

I was asked to help this core group from CCAA to help find a pivotal group of Canadian mentors, who were able to assist CCAA to shape the CAMP program and ensure that the most qualified cadre of startups were selected to fill the 2015 cohort. Many of us, including Aron Solomon, Peter Evans, Benton Leong, Chris Flood and yours truly were in Beijing to also assist in the work that was much more focused on the Chinese mentor group, many of whom are indicated at this link.

Now let’s turn to the CAMP framework. As a uniquely conceived variant of the classical “startup accelerator”, CAMP involves CCAA, along with the Canadian mentors, selecting the 10 best Canadian startups (initially restricted to Ontario) who are uniquely engaged with:

  • an up to $200,000 equity investment
  • a detailed orientation session in Canada to build the groundwork for the best China experience
  • matchmaking with one or more mentors in China, who are chosen specifically for each company based on market and need.
  • an intensive 2 week immersion in Beijing, including many company visits, one-on-one meetings and a demo day in front of top Chinese investors
  • an 18 month post Beijing engagement with the chosen mentor to provide targeted assistance while the company grows and expands.

Because this was a first iteration, many companies had no idea of what to expect. Many were a bit sceptical, but being true entrepreneurs, they took the plunge. I can say that each and every startup from the first 2015 cohort of CAMP found the immersive experience in Beijing to be an exhaustingly intensive experience, but one that was profound and life-changing. The level of access to high level networks (“guanxi”) was extraordinary. That, coupled with the strategic insight of the CAMP organizers, and matched mentors, elevated the experience in Beijing.

Based on the inaugural CAMP, the organizers are committed to making the second cohort in 2016 even better. That call for the best startups will open up in the coming weeks. Until then, you might ask: why should you pay attention to CAMP and what sets it apart?

Access and Understanding: First of all, although China is a huge and growing market, it is very difficult for most companies, not the least a young startup, to properly engage with it. It is a complex market, fraught with pitfalls and unknown territory, from language, customs and even different regulation. CAMP provides personal connections (guanxi) through the mentors, and a degree of wisdom not likely to be available anywhere else. No company should consider China without a strong relationship with a trusted guide and mentor.

Canada-China Engagement: I firmly believe that CAMP has the potential to open up very senior intergovernmental engagement between China and Canada, but through the lens of building the new economy via innovative startups. Yet, startups have not historically been a major focus for governments at the national, provincial or regional level. I firmly believe that CAMP  has sown the seeds that may increase bi-literal impact.

Huge Market Gaps: The unprecedented growth and transformation of China over the last quarter century has created huge demand and huge needs. Much has been written about that. But, less obvious, is that there are many companies in China looking for unique international opportunities. It is as challenging for them to engage outside China as it is for a Canadian company to understand China.

Growth Hacking: Perhaps the number one reason that startups go to California is to tap into the “growth hacking” expertise, an area in which Silicon Valley continues to be a world-beating innovator. Less well known in the west is that a new generation of Chinese tech firms, particularly in B2C and mobile, has taken growth hacking skills and strategies into hyperdrive. Surprising as it might seem, these may well make Silicon Valley growth vectors look tame by comparison. Every CAMP participant will have a unique opportunity to tap into this expertise.

Whether you are a startup with world-beating ambition or an tech ecosystem leader looking for future opportunities, stay tuned for the launch of the CAMP website, which will be accompanied by a call to find the 10 best startups Canada has to offer.

Randall (郝狼盾)Looking east and savouring the journey..

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acquisitions

8 Feb 2015

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Top 25 Waterloo Technology Acquisitions – Wisdom from the Data

The acquisition of MKS by PTC in 2011, caused me to reflect a bit on what good acquisitions might look like and what they might teach us about building (sometimes elusive) long term shareholder value. As a result, over the last 6 months, I’ve progressively assembled a collection on the most significant acquisitions in the Waterloo area. To my knowledge, such information has hitherto never been collected. We all love to speculate, but it is more productive to ground that speculation with facts.

The following table is intended to summarize value creation through the lens of several key benchmarks.

Rank Company Acquiror Acquisition Price [4]
(UIS$ millions)		 Date Acquired Date Founded Company Age
(years)		 Employees LTM Sales
($US Million)		 NOTES Price/Sales Revenue/Emp CAGR $/Employee
1 Pixstream Cisco 369 December 21, 2000 1996 4 196 5.4 2 68.3 27 551 47.2 1.88
2 Dalsa Teledyne Technologies 341 February 14, 2011 1980 31 1000 200 3 1.7 200 000 0.85 0.34
3 MKS PTC – Parametric 304 May 31, 2011 May 1, 1984 27 360 75   4.1 208 333 0.96 0.84
4 Mitra Imaging AGFA Healthcare 252 January 3, 2002 1990 12 400 50   5 125 000 3.38 0.63
5 Bluegill Checkfree 250 April 28, 2000 1996 4 150 20 5 12.5 133 333 68.57 1.67
6 Unitron Phonak 91 November 22, 2000 1965 35 300 62.6 6 1.5 208 667 0.67 0.30
7 SlipStream RIM 91 June 1, 2006 2000 6 120 13 7 7 108 333 14.33 0.76
8 Tsavo Media Cyberplex 75 June 10, 2010 2001? 9 120 110 8 0.7 916 667 6.83 0.63
9 WATCOM Powersoft 74 February 11, 1994 1981 13 100 8 9 9.3 80 000 2.4 0.74
10 LivePage Janna Systems 68 September 20, 1999 1990? 9 12 1 10 68 83 333 3.64 5.67
11 EMJ Synnex Canada 64 July 14, 2004 1979 25 350 303 12 0.2 865 714 1.18 0.18
12 Dspfactory AMI Semiconductor 51 September 9, 2004 1998 6 75 16   3.2 213 333 14.87 0.68
13 MapleSoft Cybernet Systems 49.8 September 1, 2009 April 30, 1988 21 50 12 13 4.1 240 000 1.17 1.00
14 PrinterOn Samsung 40 September 2, 2014 2000 14 50 10   4 200 000 2.15 0.80
15 SS Technologies Woodhead Industries 35 July 31, 1998 1991 7 75 50 14 0.7 666 667 11.6 0.47
16 Reqwireless Google 32 2001 June 23, 1905 4 15 1   32 66 667 30 2.13
17 TribeHR NetSuite 30 October 22, 2013 2009 4 24 4.5 18 6.7 187 500 45 1.25
18 GBG HighJump Software 26 November 1, 2006 1991 15 200 22 11 1.2 110 000 2.09 0.13
19 PostRank Google 25 June 3, 2011 March 1, 2007 4 20 0   n/m n/m n/m 1.25
20 Kaparel (Pixstream) Rittal 21 December 10, 2000 1996 4 30 7.1 17 3 236 667 50.62 0.7
21 VideoLocus LSI Logic 20 November 14, 2002 May 1, 2001 2 17 0   n/m n/m n/m 1.18
22 RapidMind Intel 19 August 19, 2009 2004 5 25 3   6.3 120 000 18 0.76
23 BufferBox Google 17.5 December 30, 2012 2011 2 10 0   n/m n/m n/m 1.75
24 Software Metrics Equitrac 8 February 1, 2000 September 1, 1992 8 35 3 16 n/m n/m n/m 0.23
25 Volker Craig NABU 5.9 1981 1973 8 45 5.9   1 131 827 6 0.47
TOTAL     2364     11.16 3779 982.5   11.5 259 998 15.8 0.62

NOTES:

  1. Sources: public records, internet, personal recollections and interviews with 25 key ecosystem participants. In the interests of data utility, I welcome any revisions or comments regarding accuracy or completeness.
  2. All data are “normalized” into US Dollars, using an exchange rate current on the date of the acquisition. The use of US$ reflects the fact that most technology companies are really valued in US$ and hence that makes comparisons, both across the data and to other jurisdictions, more meaningful.
  3. The sample set is limited to my sense of what a technology company is – your mileage may vary.
  4. Acquisition PRICE includes cash, stock and post deal incentives, including earn outs.
  5. Several companies were re-acquired after the first acquisition (e.g. WatCom and LivePage). These follow on transactions are not reflected in this data.
  6. Some companies spun out several acquisitions, such as Kaparel which was sold out of Pixstream or SS Technologies, originally spun out of Sutherland Shultz.
  7. AGE represents the time in years from founding to the (first) acquisition.
  8. EMPLOYEES is the world wide count.
  9. SALES, given the high growth nature of many of these businesses, levels generally reflect the run rate at acquisition, rather than purely using an LTM (“Last Twelve Months”) measure.

CONCLUSIONS

The above data suggests a lot of trends and insights. It contains a wealth of insights, and also the individual narratives of each of these companies is, in itself, worthy of more discussion and analysis. In aggregate, however, the data suggest some key ideas to me:

  1. Acquisition prices are a great proxy for long term shareholder value, precisely because leading global technology companies provide an informed, third party valuation that likely has way more science than most earlier stage technology company valuation.
  2. Building larger companies takes time. The myth of the “quick flip” startup is (mostly) just that.
  3. As I discuss in my next post, building major technology companies is hard. We don’t (yet) seem to have “cracked the code” on this and need to learn how to build more over time.
  4. The aggregate scale of these companies, at the time of their acquisition, is materially significant to our region – almost 4 000 employees and almost $1 billion in revenue.
  5. Companies take much longer to build than most would expect. While the range in ages from 2 to 35 years is quite diverse, the average age of 11.2 years shows the time, resources and hard work to build real businesses.
  6. Acquisitions are good for our economy. Many people consider acquisitions to be a bad thing, but for those companies that were already at reasonable scale, most have continued to grow post acquisition. In addition to the wealth generated and its spinoffs, the acquirors bring new ideas and often jobs to our region. This is yet another reason why building larger technology companies is so important.

I am hoping that this data collection regarding acquisitions, and my initial take on conclusions, might stimulate further discussion around the notion of building significant value in businesses.

Please feel free to comment, or even contact me, with insights, questions and corrections.

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3 Oct 2014

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Canadian Angel of the Year Award

Angel of the Year Award: Yuri Navarro, Jérôme Nycz, Randall Howard, Michelle Scarborough

At the NACO Summit in Québec City, it was truly humbling to receive the Canadian Angel of the Year Award. I see this partly as a calling to be an ambassador to continue to help raise the Angel bar in Canada in the coming years. I wish to thank all those kind colleagues who, unbeknownst to me, wrote letters of nomination. Also, this is all based on the remarkable people at GTAN and in the Waterloo and Canadian ecosystem generally.

In response to the award, and recognizing the opportunity to build on current success, I shared the following observations and future challenges at the closing Keynote on Friday 3 October, 2014.

“TODAY’S CRITICAL MASS CAN POWER A QUANTUM LEAP”

Closing Keynote NACO Summit, Québec City Friday 2 October, 2014

Bonjours, mesdames et messieurs. Good morning, ladies and Gentlemen.

I hope that Yuri was aware of what he was unleashing by inviting me to share perspectives and future challenges of Angel investing in Canada! Not unlike a startup running on “fumes”, Canada’s angel sector reminds me of the quip from cartoonist Bill Hoest: “I just need enough money to tide me over until I need more”. I’ll start by looking back to help us paint a future directional context.

As Angel investors, we’ve watched a powerful people-driven engine, coming from nowhere, to become a key enabler of Canada’s future prosperity. As Angels, we fuel innovation companies with our capital and mentorship, ultimately creating some of the highest value jobs for 21st century Canada. What’s not to like about that?

Let’s turn the clock back about 5 years. In 2009, the global economy endured the infamous credit crunch, perhaps the worst economic correction since the Great Depression. I observed this to be the final nail in the coffin for a large number of Canadian venture capital firms, for years struggling to generate viable returns. The seeming extinction of venture capital A-rounds and the bleak landscape for young, emerging companies, compelled me, as a seasoned tech investor, to get involved with the founders at Golden Triangle AngelNet (GTAN) in Waterloo-Guelph-Wellington-Stratford area. In a pattern surely repeated across Canada, Angel Groups from a slow start quietly and persistently worked to fill the funding gap through a labour-intensive “syndication” of Angel capital, with other groups and with government co-investment. In Ontario, this meant repurposing MaRS IAF from its origins as a VC on-ramp to co-investment in Angel rounds, lobbying that ultimately led to the Feddev “Investing in Business Innovation” (IBI) program, and BDC convertible notes.

A typical syndication for a top tier investee company might entail half a million dollars of Angel money being spun into $1.5 million or more. I used to describe this approach as providing “half the money of a VC A round for 10 times the effort”. At the time, I imagined this to be a strategy for a short term “bridge” of Canada’s innovation ecosystem to a more sustainable future. How did this market correction turn out for Canadian Angels?

NACO stats show a remarkable growth in total Angel investment. Between 2012 and 2013 alone, Canadian Angel group direct investments grew a stellar 120% from $40 million to $89 million. Of course, this doesn’t capture the aforementioned co-investment leverage that Angel investors attract nor does it cover investments outside of NACO members. All of us rightfully deserve to be proud of such collective impact.

But is it enough? Both from my own international investing and available statistics, it would appear that Canada’s Angel ecosystem is ahead of Europe on the maturity curve. I would estimate Canada has a 3-5 year head start on Europe. On the other hand, our American friends are definitely well ahead in maturity, deal dollars and information gathering. Angel Capital Association (ACA) data shows almost $25 billion of total US angel investment in 2013. To be at this level, on a per capita GDP basis, Canada would need about $2.8 billion of annual Angel investment. Even counting all the leverage, Canadian angel investment needs to grow 5 to 10 times over the coming years just to achieve parity with the US.

In Waterloo, home of Perimeter Institute, we tend to love Quantum Mechanics metaphors. Thus, propelling today’s critical mass through a quantum leap is a mission all of us need to work on collectively and individually, whether as angels, angel groups, NACO, governments, venture capitalists, sponsors, in fact, each and every ecosystem participant.

So, I will conclude by identifying just five of the gaps that we collectively need to fill:

  1. Scaling: Recently, my friend Steve Currie, VP Strategy at Communitech, observed “Canada is great at starting companies, but not so good at growing them beyond the 5 year horizon.” This means less job creation but also smaller exits. In a study of 183 recent high tech exits versus 2300 comparable US exits, the average US valuation was US$384 million versus US$100 million for the Canadian companies. I don’t know about you, but I find it simply tragic to leave so much value on the table. Angels have a huge role both in mentoring management skills around scaling, but also pivotal to financing that scaling. And, bigger exits, will in a virtuous circle, drive more Angel investment.
  2. Giving Back: We need more of our successful serial entrepreneurs to become (super) angels and continue to start new ventures. In the Silicon Valley, Paypal alone had 14 serial entrepreneurs like Peter Thiel and Max Levchin whose experience and wealth helped build legends like LinkedIn, YouTube, Tesla, Kiva and Yelp. While we do have a few super angels, we have yet to spawn someone like Ron Conway whose 600 investments include Google, Facebook and Twitter. Canada needs more titans like Mike Volker and Jim Estill.
  3. Deal Discipline: Great companies grow and scale partly because of external motivations. In the 1990’s the hottest companies all wanted to do an IPO and that involved a playbook of enhanced management, systems and processes that also helped the companies scale into better organizations. VCs also played a part, but today, this role often falls onto Angel investors, hence requiring a more “institutional” approach versus becoming just another retail asset class.
  4. Co-investment: Government funding has been critical to our success and it is key that funding increasingly backs Angel choices rather than governments having to choose winners. That said, there is plenty of room for more. For example, our Feddev IBI program in Ontario provides a 50% match while the almost identical “Double Equity” program in Austria does a 100% match to angels. And, the Angel Tax Credit, so common internationally, in parts of the US and in BC, would provide a much-needed boost to overall Angel resources.
  5. Operational Innovation: Currently, most angel groups run as nonprofits using largely committed volunteer deal structuring and with little automation of the process. A big reason for this is Securities Regulations, especially in Ontario, that put a chill on innovations that might trigger an expensive regulatory burden. While there is some hope that the proposed Equity Crowd Funding rules might provide the clarity for such innovations, there is also the risk that this is a force that further pushes deals into a retail mode when what we need instead is more institutional discipline.

With these key points in mind, and assuming the right environment, I have no doubt that greater innovation in business models will fuel growth of a larger and more sustainable Canadian angel landscape. All of us can play our part. To dial up our game, will be an aggressive, yet I believe achievable challenge. And, we need even better measurement so we can regularly monitor, and report back to ecosystem participants, our progress.

The road forward isn’t just about traditional business. Because Angel investors’ motivations uniquely straddle the ever-blurring boundary between “passion capital” and Wall Street-style finance, Angel investing will increasingly be a great exemplar of Social Innovation. To me, the culture of collegiality and sharing resembles my experiences in nation-building around charitable foundations.

The last five years have witnessed an unprecedented expansion of Canadian Angel investing and we are poised for even more remarkable growth in the next five. In the words of the incomparable Alan Turing,

“We can only see a short distance ahead, but we can see plenty there that needs to be done”.

Now, let’s get to work …

 

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29 Oct 2012

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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.

 

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big-fish-small-fish-300x221-1

4 Aug 2012

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Have Lean Startups Helped Us Scale Larger Technology Companies?

Building larger technology companies is critical for our future economic well being, yet somehow we seem to pay more attention to the seed and startup phase. This post and a subsequent missive, Wisdom from Recent Waterloo Technology Acquisitions, aim to analyze some recipes for building technology businesses to scale first from the perspective of recent companies and then specifically through the lens of local acquisitions. This pair of posts will be based on extensive data, but the findings are intended to start discussion rather than be the last word.

The importance of building new, innovative, and large, companies can’t be underestimated regionally, provincially and nationally. Here in Waterloo, with perhaps 10 000 jobs at a single behemoth, Research in Motion, the notion of job creation is particularly topical simply to lessen our dependency on such a large company.

My sense is that, of late, most of the focus centres around making startups: small, energetic and entrepreneurial software, web and mobile companies, some simply building a mobile application. And, even with the current notion of Lean Startups or our Venture 2.0 approach, there is no question that building such early stage companies is probably an order of magnitude cheaper than it was back in the 1990’s While undoubtedly a good thing for all concerned – founders, investors and consumers all have so much more choice – has this led to a corresponding increase in new major businesses in the technology sector?

I see this as more of a discussion than a simple answer, and thus to start, I include the following table of my sense of how the numbers have changed over time. The following table provides some idea of how company formation has trended over the last 25 years, through the lens of scale rather than acquisitions:

[table “” not found /]

NOTES ON DATA:

  1. Sources: public records, internet, personal recollections and interviews with 20 key ecosystem participants.
  2. The definition of “big” is purposely somewhat arbitrary (and perhaps vague). I am using a threshold of 50 employees or $10 million in revenues, which is probably more indicative of these startups becoming mid-sized businesses.

INITIAL INSIGHTS:

This data, while helpful, can never provide a complete answer. However, it can guide the conversation around what I see to be an important economic mission for our region and country – that is, building more significant technology businesses. I’m sure there are no easy answers, but in shaping policy, it is important to base decisions on informed debate and research.

To that end, I would offer the following thoughts:

  1. The current plethora of “lean startups” does not (necessarily) represent a clear path to growing those startups into larger businesses.
  2. I suspect that, in some ways, multiplying small startups can retard the growth of larger companies. That said, the data are insufficient to prove cause and effect.
  3. At the ecosystem level, we need to focus resource allocation beyond simple startup creation to include building more long term, and larger, technology businesses. Instead of spreading talent and other resources thinly, key gaps in senior management talent (especially marketing) and access to capital (B rounds and beyond) need to be resolved.
  4. Even in day to day discussion, the narrative must shift so that entrepreneurism isn’t just about startups, to make company building cool again.

Canada holds many smart, creative and hardworking entrepreneurs who will undoubtedly rise to the challenge of building our next generation economy. Meanwhile, I’d welcome comments, suggestions and feedback on how we can build dozens or more, instead of a handful, of larger technology companies in our region.

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20120613-Round13Capital800-1

14 Jun 2012

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Who Will Revive Canadian Venture Capital (Part I)

Today was a banner day for announcements involving a reset of the technology funding ecosystem in Canada.

For a long time, the slow demise of Canadian Venture Capital has concerned me deeply, putting us at an international disadvantage in regards to funding and building our next generation of innovative businesses. You may recall my 2009 post Who Killed Canadian Venture Capital? A Peculiarly Canadian Implosion? which recounts the extinction of almost all of the A round investors working in Ontario.

Since then, many of us have worked to bridge the gap by building Angel Networks, including Golden Triangle AngelNet (GTAN), where I chair the Selection process and using extreme syndication and leverage to replace a portion of the missing A rounds.

Today, the launch of Round 13 Capital revealed a new model for venture finance centred around a strong Founder Board whose members are also  LPs, each with a “meaningful” investment in the fund.  My decision to get involved was based both on this strongly aligned wealth of operating wisdom coupled with the clear strength of the core team.

The launch was widely covered by a range of tech savvy media, including:

To illustrate the both the differentiation of Round 13 and show the depth of founder experience, Bruce Croxon, indicated that the founders board has, measured by aggregate exit value, built over $2.5 billion of wealth in Canada. It is this kind of vision and operational experience that directly addresses the second of my three points that Canadian Venture Capital needs to solve.

It is exciting to be involved with the unfolding next generation funding ecosystem for technology companies of the future. Time will tell the ultimate outcome,  but I’m certainly bullish on Round 13.

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3 Apr 2012

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Social Innovation – Can Social Sector Learn from Tech Startups?

It is notable that much of the recent trend towards Social Innovation has come from people who began their careers in technology startups, in Silicon Valley or other technology clusters. Some notable examples include:

Bill Gates, partly at the instigation of Warren Buffet who added his personal fortune to that of Gates, left Microsoft, the company he built, to dedicate his life to innovative solutions to large world issues such as global health and world literacy through the Bill and Melinda Gates Foundation

Started by Paul Brainerd, Seattle-based Social Venture Partners International  is innovating at the intersection of technology and venture capital, with Venture Philanthropy. Paul sold Aldus Corporation (an innovator in desktop publishing applications, including Pagemaker) to Adobe  in the mid 1990s.  In his mid-40’s at the time of the Adobe acquisition, he was young enough to seek a significant and active social purpose in his life.

Jeffrey Skoll, a Canadian-born billionaire living in Los Angeles and an early employee of eBay, has numerous activities aimed at Social Innovation including Skoll Foundation, Skoll World Forum on Social Entrepreneurship and Skoll Award for Social Entrepreneurship. Most of his initiatives are aimed at empowering the individual Social Entrepreneurs  who are fuelling a new generation of Social Innovation.

Waterloo’s own Mike Lazaridis aims to transform our understanding of the universe itself by investing hundreds of millions of dollars into Perimeter Institute for Theoretical Physicsn  and Institute for Quantum Computing, effectively innovating a new mechanism of education and discovery. Notable is that this area of investment is one that may well take years, possibly decades, to show what breakthroughs, if any, are discovered.

Whether or not always attributtable to this connection with technology entrepreneurs, increasingly Social Sector organizations are starting to become much more like the entrepreneurial startups so familiar in the world of high technology. I’ve personally witnessed some of this change, and would like to suggest, that while there remain big differences, the parallels are strengthening over time. The following concepts represent just a small sampling of the key areas of similarity:

1. Founders Versus Artists

Stories are legion of smart, brash (and even mercurial) technology company founders who transform a business sector through the sheer strength of their wills. Many of these founders are “control freaks” and might find employment in conventional jobs a difficult proposition. Venture capital and angel investors have learned to be wary of such founders, citing numerous examples of founderitis – in which uncoachable founders, in a case of “my way or the highway” would rather maintain control than bend to ideas from often more experienced mentors, board members and investors.

Such personalities also exist in the Social Sector. For example, many arts organizations are founded by bright and innovative artistic directors. And yet, many of these same organizations come unravelled by the same mercurial nature that prevents the organization from being properly governed and accountable to funders (investors). With my background on both sides of this divide, the parallels are hauntingly striking.

Since such founders strengths can also be their undoing (or that of their organization), a conscious Board level assessment of such situations is always wise.

2. Running on Empty

Notwithstanding the media coverage of a few lucky technology startups such as Facebook or Google, most technology startups run of little or no significant funding. Many seek to change the world with very small amounts of capital, sometimes no more than several million dollars. The recent trend towards building such small capitalization organizations is called the Lean Startup movement. The challenges inherent in their undercapitalization is often the top complaint of such startups. However, Sergy Brin, the Google co-founder has insightfully observed that “constraints breed creativity” to describe how an underfunded state has led to the discovery of innovative ways to build companies and deliver their products.

Likewise, from my experience the vast majority of charities and nonprofits complain about being undercapitalized, and the reality is that most are. It is a fact of life in the social sector. Only now are we starting to see the emergence of social ventures, which by stealing a page from underfunded technology startups are exploring new business models and ways to deliver social change, often leveraging IT or a different process to vastly reduce costs of program delivery.

3. Technology Changes Everything

We’ve seen the emergence of a world where all information is stored in digital form and people are connected, even while mobile, the role of the web and technology can’t be underestimated. Technology-based startups, because they are small and start from scratch, often approach traditional problems in very non-traditional ways. Revenue and funding models change, as do fundamental ways to organize a business or social enterprise. Social media allows ideas to spread in a viral fashion. We have already seen how organizations like Avaaz can mobilize hundreds of thousands or even millions of supporters globally for both local and international issues of social injustices and poverty. This is a direct analogue to how many people now rely on Twitter or Facebook, rather than a printed newspaper, for much of their news and information.

4. Mission Creep – or the path forward

Technology startups have come to learn that success depends on laser sharp focus, attention to detail and execution of a “pure play” strategy (ie. only do one thing well). Thatparticular discipline has time and time again proven to be effective in a sector where technology change is moving rapidly and most startups are generally considered to be underfunded.

Likewise, Social Enterprises must adopt similar approaches to deal with underfunding and change. Even in today’s more fluid and fast-changing environment, to avoid deadly Mission Creep, Board and management must have developed a complete Theory of Change roadmap to enable Manage to Outcomes.

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5 Jan 2012

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Post-acquisition Reflections on MKS

First of all, I would like to congratulate Phil Deck, Michael Harris and the entire team for finding both a fabulous new home for MKS, but also one which represents a significant strategic financial transaction, valuing MKS at just over 4 times estimated FY2011 sales.

Many people have asked for my perspective. In short, I continue to view the acquisition as favourable to customers, employees, Waterloo and its shareholders. To delve further, this article, written from my own perspective, gives both background and some lasting observations and universal lessons from MKS.

Over the last decade, MKS largely sat out the wave of consolidations in Applications Lifecycle Management (ALM, that builds on the earlier category of Software Configuration Management), for example:

  • IBM acquiring Rational Software for $2.1 billion on 6 December, 2002,
  • Mercury Interactive acquiring Kintana for $225 million on 10 December, 2003,
  • Serena Software acquiring Merant on 3 March, 2004 for $380 million, followed by
  • Silver Lake Partners, a private equity firm, acquiring Serena Software for $1.2 billion on 11 November, 2005,
  • IBM acquiring Telelogic (which had earlier bought MKS competitor Continuus Software) for $745 million during April 2008

The aforementioned almost $5 billion acquisition binge represented a huge shift in the ALM market dynamics. By 2011, a new driver for acquisitions had emerged. As engineered products start to contain more software value than traditional hardware, customers requirements in the Product Lifecycle Management space started to converge with the Application Lifecycle Management space. This blending and merging of categories, fuelled by the trend to software being the dominant product differentiator, led to the acquisition of MKS by PTC and may portend more activity as these spaces continue to consolidate. Because PTC is moving into a new, but adjacent market category, that means that the domain expertise from the MKS product teams will be critical to PTC‘s long term success.

Could MKS have remained independent? My sense is, in the longer term, no. In the 1990s, a company could IPO on the NASDAQ at around $20 million revenues. Today, that number is over $100 million, and MKS at acquisition had about $75 million revenues. Perhaps further acquisitions might have accelerated getting to scale, but without a NASDAQ public currency that would have been difficult. Therefore, that’s a key reason why the PTC acquisition is such a home run win for MKS.

MKS built great value as a significant global software business over its 27 years of pre-acquisition existence. I’m very pleased that, unlike some early stage start up acquisitions, this likely means that PTC will continue to see Waterloo as a base for further expansion based around the solid product R&D team. In that sense, it’s great news for the region’s economy and something I’m very happy to see.

I wanted to reflect on a few themes that I’ve seen play out over MKS‘ long history – both lessons learned and some principles that might help some of the current crop of start ups grow into global businesses headquartered in Waterloo.

PIVOTS

MKS definitely was a company that had the proverbial “9 lives”. Using the au courant start up lingo, these were critical “pivots”. The number of pivots arises partly because MKS was a multi-product company and even more so because MKS was a first generation of software company in Canada, before clear rules to build such a knowledge based business had been formulated. Achieving company growth means many battles fought (and not all successfully) to win the war of business success. I’ve also come to learn that timing can trump even the most gifted product strategy work or execution attempts. As a result, ultimate success can be seasoned by many failures along the way to that success.

The following summarizes some of those 9 lives inside MKS:

  1. The original name of MKS Inc. was Mortice Kern Systems Inc. – not taken, as often supposed from an aging and curmudgeonly New York accountant, but rather inspired by two typesetting terms that connote a sort of Zen in the ancient arta of hot lead typesetting. The pre-incorporation business plan for MKS to be the first to develop and commercialize the then state of the art, full page desktop publishing. When the US technique seeking venture capital to fund this exposed that venture capital hadn’t yet begun in Canada, the company moved on to a bootstrap mode (which is oddly similar to the state of many startups and financing today).
  2. As mentioned, to have the resources to develop products, we put out a shingle to do contract development work for such major companies as Imperial Oil, Westinghouse, Ontario Ministry of Education and Commodore. Using a portion of the millions of revenues this generated, and with learnings from development and cross-development on the naked IBM PC and MS-DOS, we started to create our first product.
  3. MKS Toolkit was, as mentioned, directly inspired by a gap in the market, and by 1985 was shipping its first products. MKS Toolkit thrives, in morphed form, to this day, and more important has spawned many of the later product directions over the next 25 years.
  4. InterOpen emerged from my recognition that POSIX (and later x/OPEN) was being cast as  Federal Information Processing Standards (FIPS, from National Institute of Standards and Technology) that meant that all existing, non-UNIX systems (we called them proprietary back then) must adopt POSIX compliant interfaces and tools. InterOpen ultimately, over many years, generated $50 million or more of OEM licensing revenues for MKS. InterOpen technology instrumental in IBM Open Edition MVS, HP MPE/ix, DEC VAX/VMS, Fujitsu SureSystem and many others.
  5. By 1988, we had taken an add-0n to MKS Toolkit, and named it MKS RCS which was the first generation software management system product, built around revision (version) control for software development projects.
  6. In 1992, another tool arising from MKS Toolkit (uucp), along with an innovation proposal from Dale Gass, led to the creation of MKS Internet Anywhere. Prior to Windows 95, with no TCP/IP stack or internet functionality, this was a consumer-grade suite bundling everything from browser, FTP, email client with the necessary stack for the market. With the battle by Microsoft to kill Netscape still in the future, this division along with a dozen including some of our most talented staff, was sold off to Open Text Corporation in 1994.
  7. By 1993, MKS had re-built from scratch the original MKS RCS into its first enterprise-grade product – a suite now branded as MKS Source Integrity. From then on, this was the highest growth key focus for the company, although it took some time to be profitable, being cross-subsidized by the high margin successes of MKS Toolkit and InterOpen.
  8. By 1995, another key MKS employee, David Rowley, drove the creation of MKS Web Integrity, which I believe to be the first ever enterprise web content management system. Although licensed into the Netscape SuiteSpot Server, along with Informix datablades and Verity search technology, perhaps the focus (and Venture Capital financing) of a pure play strategy might have given it more ammunition against early competitors like Interwoven and Vignette.
  9. Eventually, the need to clearly position the enterprise software management products as the sole focus of the company, and to distance from some confusion with the tools and developer-based MKS Toolkit product line, an attempt was made to separate and brand as Vertical Sky. Whether or not this might have worked at a different time, the Dot Com meltdown of 2000 meant that it was impossible to raise investment to finance such a roll out. Ultimately, Phil Deck and the new management did continue the separation and promotion of MKS Source Integrity to full enterprise grade, but without the added costs of the Vertical Sky rebranding.

Although there were many more than the above sample 9 lives, I think that the twists and turns to build a real business are a critical lesson for today’s companies. At Verdexus we today ascribe to the pure play strategy for startups (less capital required, more focus and easier to explain to investors). Nonetheless, there is much to be said for building a strong base around multiple product innovation.

WORLD CLASS TEAM

While the players have changed over the years, MKS has been blessed by an amazing group of employees, and not just in senior management. For example, at the time of our proposed NASDAQ IPO in early 1997, the investment bankers from Hambrecht & Quist in San Francisco mentioned, upon meeting our senior team, that this was amongst the strongest they have ever seen. Part of this came from hiring both from US and Canada (See GLOBAL APPROACH below) and that includes non-Canadian executives such as Tobi Moriarty, Mike Day, Holger Schmeidefeldt and Frank Schröder. We really did take to heart the maxim that great leadership came from a strong team, as I discussed in “The Power of Two (Or Three)“.

A positive environment led to better gender balance and better results. For example, in 1996 the senior management team of 7, included 3 women. Such a balance, sadly rare even today, led to enhanced results and sense of opportunity across the entire staff.

(l->r) Ralph Deiterding, Eric Palmer, Ruth Songhurst, [TSX VP], Randall Howard, Tobi Moriarty, Mike Day, David Rowley

I am most pleased by the many talented employees at MKS, from co-op students onwards, who have gone on to incredible heights of achievement. I am continually discovering another company that has been built by talent that got its first state of the software business at MKS. I think one approach that has real merit, was the notion to bring top global talent into the business, in part for the mentoring effect this has on other employees. Considering the Waterloo ecosystem in the 1990s, this was particularly helpful in building previously thin functional areas such as marketing and product management.

MKS Team (circa 1992) – Old Post Office, Waterloo

Finally, given recent media attention to weak and/or non-independent boards, I was pleased to have a board that was both global and always able to hold management accountable. As CEO, I can remember many uncomfortable moments when I, or other management team members, were seriously challenged, and that is exactly how it should be.

GLOBAL APPROACH

Perhaps because I had my first software start up experience in the US (building Coherent), it only seemed natural to focus on the entire North American market, and ignore conventional advice to start with the local region, province or country. Even in the very earliest days of MKS Toolkit, when products were shipped by mail and advertised in physical magazines, we realized that every promotional dollar went much farther in the US versus just focusing on Canada. The led to perhaps the first customer of MKS Toolkit being AT&T Bell Labs, which I believe contributed to MKS becoming known across North America in developer circles. The use of 800 toll free numbers across US and Canada, coupled with email, allowed us to work and act like a US company. To me, it always felt similar to the Israeli model for tech companies.

By the 1990s, although we had distributors in Europe (and a small few in Asia), we decided invest heavily in the European market, first from a beachhead in Germany and then the UK. By 2000, Europe represented about 35% of the company’s revenues which later proved a strong hedge to the US-centric meltdown that started in 2000.

CAPITAL

Although MKS pre-dated Canadian venture capital, it did access the capital markets through various vehicles, such as the Special Warrant and IPO, that were common in the 1990s. During my tenure, about $40 million was raised, and I believe that the whole lifecycle raise was in excess of $50 million. During the 1990s, this was the normal cost to build a major entrprise software company to full scale. Today, while our Venture 2.0 methodology and the Lean Startup approach lessens the capital requirements, I still believe that, over the longer term, building a significant business takes much more capital than people realize.

One consequence of this, coupled with the more limited capital available in Canada (at least Ontario), is the tendency of technology companies to exit early – when they are partly built start ups rather than full businesses. In a way, this means that acquiring companies are really only getting a product and development team in a form of outsourced innovation. The downside of this model would seem to me to be the creation and maintenance of far fewer jobs in our region. I would love to see a rigorous study of this effect. In fact, my next post will explore the stage and timing of significant Waterloo region technology company acquisitions.

GROWTH BY ACQUISITIONS

Although MKS never had the NASDAQ public currency, being  public on the TSX enabled the 7 acquisitions I was involved in. I would say that acquiring companies was a real learning curve. On balance, we managed to increase our acquisition capabilities over time, but always the results took longer than expected. For example, the acquisition of the AS/400 business from Silvon brought MKS many of today’s largest customers (e.g. HSBC), but the anticipated synergies took 2-3 years or more rather than the predicted 18 months to materialize.

The bigger issue, beyond building M&A expertise, is that today it is harder for companies to go public and have market liquidity for acquisitions than in the 1990s. I’m not sure if 21st century capital markets will ever return to a state where that is again possible.

FUN AND CAMARADERIE

Last, but definitely not least, most days whether travelling to engage the world or back in the office, people had a lot of fun while building a great business. The right mix of “work hard, play hard” can lead to a better overall experience that, in so many ways, enhances overall performance. And, we had some pretty great parties, whether at product launches in California or Europe or simply back home celebrating key milestones for MKS.

 

SUMMARY

The above observations represent but a small taste of my thoughts regarding the recent MKS acquisition. My hope is that the Waterloo tech ecosystem will witness many more companies being able to transcend the start up phase to become globally leading businesses. The future of our country and region depends on it.

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10 Apr 2010

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FourSquare – Re-writing the Rules While Killer Application Remains Elusive

“Nature is by and large to be found out of doors, a location where, it cannot be argued, there are never enough comfortable chairs.”
– Fran Lebowitz

 

I’m a believer that Location Based Services (LBS), coupled with the latest smartphones, will evolve a number of indispensible, and unexpected, killer applications.

That said, it’s pretty clear that those mission critical applications remain to be found. Essentially, the whole LBS opportunity, is a social experiment that early adopters are collaboratively helping to clarify.

It was with those thoughts in mind when I decided to start using some of the popular LBS social media applications, or should I say social games? These included FourSquare, Yelp and Gowalla.

Let me put this in context of other social media applications with which I’ve experimented. Back in 2007, I decided to try microblogging service Twitter, that was then in its infancy, I had low expectations. In fact, I expected to hate it, but mentally committed to give it a two week trial just for the purposes of self education. Over 3 years later, I’m still using it, love it and have found many applications which Twitter excels at – personal clipping service, early information and a sense of what my universe of followees is up to are among them.

FourSquare, although popular, hasn’t (yet) passed my personal usefulness test. And, I suspect most others still consider it more a game than a mission critical application. While there is an element of fun, it seems to be the sort of thing you could easily drop without much loss.

In that context, it surprises me that FourSquare recently pushed a new version (1.7.1) to my iPhone that checked my actual proximity to locations Since then, almost half of my check ins fail to pass this new proximity test, even though I was physically at the location in question. Below, I have re-posted my support request that gives more background.

But, suffice it to say, an application change that, on the surface, seemed sensible, made the application way less attractive to me. That’s doubly deadly in a space which is still finding it’s spot. I’m interested in comments on both the major issue (startups alienating early adopters) and even the specific issue.

I’m surprised the FourSquare has re-written the rules of an emerging LBS service without any notification. I am referring, of course, to the latest upgrade on my iPhone on which checkins deemed too distant from the intended location (by an undocumented and new algorithm) are suddenly deemed ineligible to accumulated points or badges. Because it is so fundamental, I’ve also decided to re-blog this as well, because  it illustrates how the law of unintended consequenes can have a huge impact on a young service’s future prospect. Translation: this wasn’t a well thought out change in so many ways.

Why do I saw this? Here are just a few reasons:
1. For those of us who live in rural areas where cellular tower infrastructure is typically much more widely spaced (and often in the 850MHz band vs. the 1900 MHz band for broader coverage at lower densities), the inherent accuracy of locations reported by mobile devices is much lower. For example, at locations near to me, it is not uncommon to have the phone’s margin of error be as much as 4500 m to 6000 m. Although FourSquare doesn’t divulge their required closeness, I think it may be something like 500 m. With that in mind, it is almost by definition that most rural “check ins” will be, starting this week, flagged as ineligible. And, that’s the behaviour I’m seeing. Of course, in many instances GPS lowers this error, but it is surprising how many locations don’t have great GPS reception, such as indoors or in an automobile.
2. By changing the rules of the game on the fly, FourSquare has penalized those checking into locations that weren’t located that accurately in the first place – whether because of the reasons in #1 or because people weren’t told they had to define the location within a certain minimum delta of the actual location. For example, I suspect that people actually defined the location as they were walking toward the actual location, knowing that FourSquare didn’t care where the real actual location physically was. I find this behaviour in about 30-50% of the check ins I’m doing since the change.

FourSquare was an experiment for me, but given these new rules which appear to not have been well thought out for large swathes of geography, I’m considering shutting down my personal FourSquare use.. For something that still provides no direct utility, I really don’t want to have to go back to re-enter all locations information from scratch.

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5 Feb 2010

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Ignite Passion before Money

This week I had the pleasure to be the luncheon speaker during the Ignite Entrepreneurship course put on by Guelph Partnership for Innovation,  aimed at University of Guelph graduate students from various technical fields including biology, life sciences, materials, agribusiness, etc.

It’s always a thrill to get into a room with 40 or so energetic and bright grad students who are considering going into business. And, kudos to GPI for hosting this.