Who and what are venture capital firms, multinationals and Asian buyers investing in these days, in information and communications technology (ICT)? A cross-section of these firms shared their views at EDC’s first-ever C200 Forum, bringing together some 200 of Canada’s promising ICT firms and more than 20 international investors. EDC partners with several of these equity and venture capital funds, such as EnerTech, Panorama Capital and Relay Ventures, to help emerging growth companies in Canada – providing both capital and access to other global investors.
Canadian technology startups must adopt a “go global” mindset if they want to be successful. So says Scott MacDonald, co-founder of the investment firm McRock Capital, which focuses on investing in industrial data analytics-driven firms.
Given this country’s relatively small population, “if you’re starting a business in Canada, you have to build it differently,” he says. In MacDonald’s experience, almost all Canadian tech firms that have been successful have had international customers as their first clients. “You need to think about going global instantly. It’s fundamental to Canadian entrepreneurs to make it priority number one.”
Many investment and venture capital (VC) firm representatives urge tech startups to concentrate on building platforms for smartphones, tablet computers and for cloud computing. (The cloud refers to a network of remote servers that allow people to store data on the Internet rather than on their own or work computers.)
Bright forecast with a lot of cloud
There is a tremendous increase in companies that are using the cloud to conduct business, notes Wally Hunter, managing director of EnerTech, a $450 million fund that focuses on early to mid-stage companies in the energy sector. He says the cloud has helped lower costs dramatically to acquire and install data analytics, and this is leading to new opportunities for startups.
As well, people who work in sectors from oil and gas to healthcare are increasingly using their tablets to access data from the cloud. That means a rethink of technology architecture is needed, says Mike Satterfield, co-partner of Yaletown Venture Partners, a $100 million fund focusing on IT and cleantech in the energy industry. “Any rethink provides an incredible opportunity for nimble startups.”
Alex Baker, principal at Relay Ventures, a $150 million mobile-focused fund, says future success in the mobile sector will lie in pushing traditionally web-based applications to handheld devices.
MacDonald sees yet another trend: in the past, young entrepreneurs would have created commercial web-based applications, but now they also take their innovations into traditional industries. As an example, MacDonald’s firm invested in a company that uses a fibre optic monitoring system to provide real-time information when leaks occur in municipal water supplies.
When it comes to seeking capital from investment firms, startups have to pitch to different investors before hitting the right one. “If they’re saying at the first meeting, ‘I don’t get it and what’s your exit strategy?’ that’s no good. If you’re not finding investors who understand what you’re doing, find investors who do,” says Chris Albinson, co-founder of Silicon Valley-based Founders Circle Capital and Panorama Capital.
And don’t think all Canadian VCs are risk averse and that you’ve got to head to California to obtain funding, MacDonald says. “It’s often a matter of finding the right person.”
EDC’s C200 International Trade and Investment Forum was organized with DFAIT, Industry Canada and BDC, and held in late 2012 during the 18th World Congress on Information Technology in Montreal – the first time this annual global event came to Canada.
Three Tips to Get Funding
Start Early: Given that it can take 10 to 15 years to build a company of any real substance, entrepreneurs who are seeking funding should start looking as soon as possible, says OMERS’ Smyth.
Know the Influencer: Do your homework when dealing with middle managers – the real decision-makers at large corporations, says Mathew George, vice-president of Telus Ventures, the venture investment arm of Telus. “If you can’t convince them you have a solution to their problems, they’re not going to support you.”
Be Pushy: Don’t give up on a corporation the first time it turns you down on a business opportunity, George says. “I see a lot of talented entrepreneurs who come in only once and then get frustrated. I always think if they had just come back a second or third time, I would have made the extra effort to try to push their case.”
Multinationals: Growing Interest in Fresh ICT
Corporations are more interested than ever in investing in new technology firms, while tech firms are more open about taking that money. That’s the view of Stephen Socolof, managing partner of New Jersey-based corporate spinout specialist New Venture Partners.
VCs and entrepreneurs used to believe corporations would get in the way of their early business development, Socolof says. But that view is falling by the wayside. In recent years there has been tremendous growth in corporate VCs and consolidation among traditional VC firms. “It’s a lot more difficult to access markets now than it was 10 years ago, when people were more open to entrepreneurial startups.”
As well, most investments made by corporate VCs are not made with the view that they’re a step towards an acquisition, Socolof says, although an acquisition might occur as the relationship evolves.
Canadian firms ripe for investment
As an added plus, Canada has a “massive” supply of high quality technology companies with very little available capital that are ripe for investment, notes Derek Smyth, managing director of $200 million OMERS Ventures. It’s part of the OMERS pension plan and focuses on technology investing in Canada.
Smyth says OMERS Ventures spent the first half of 2012 identifying Canada’s best tech firms and then pursued them. “Half the companies we’ve invested in weren’t looking for capital. We just knocked on the door.”
Many corporate investment firms say they are not just looking for entrepreneurs with great technology. Solid management teams are also an important part of the investment decision. “We’re investing in the people and the belief that they can take it over the finish line,” says Paul Howarth, R&D and innovation development manager at Cisco Canada. As a result, technology is not the number one criterion. “We’re always looking at the people first.”
That philosophy can leave many startups out of the running for corporate VC funding in the early stages, says Hervé Gagnon, who has a startup of his own. Gagnon is principal of Ottawa-based Illimar, which has developed a web-based application that helps companies implement corporate governance programs.
Entrepreneurs often start with an idea and only build a solid management team when their concept is more advanced, says Gagnon, who hopes to do business with EDC once his firm reaches that level.
Access Asia: Show Up, Partner Up, Be Patient
There has never been more interest than nowadays in technology partnerships between North American technology firms and Asia. But Canadian tech companies venturing into Asia must be patient and do their homework.
“Asia is reaching out more than ever to find the best-in-class technologies, ranging from cleantech to digital media,” says Greg McElheran, EDC lead investment manager, Fund Investments. He says EDC has a portfolio of fund partners in India, China and Southeast Asia that can help open doors to Canadian companies with strong value propositions for these markets.
While the Chinese economy may be slowing down in the short term, long-term growth is likely as the country gradually shifts from a labour-intensive, low-cost-driven economy to a more technology-driven market. That’s the view of Raymond Yang, co-founder and managing director of West Summit Capital, a VC fund that focuses on North America and China technology linkages, specifically in ICT and cleantech.
As an added plus, Yang expects China’s new regime to be more open and pro-business than its predecessor.
Yang notes China has been historically weak in software development, which provides excellent opportunities for North American software providers. “Chinese people like to buy something tangible” and software does not fit that equation.
Double-digit growth in Korea
Meanwhile, Korea’s smart phone and semi-conductor industries are seeing explosive annual growth rates of more than 20 per cent, says Bill Byun, general partner at 7 Capital, a VC firm that focuses on computer hardware and tech linkages between North America and Korea.
China has been historically weak in software development, opening up excellent opportunities for Canadian software providers.
If you can connect with a Korean conglomerate like Samsung, the world becomes your market, he says. However, Byun warns Korean corporations are extremely aggressive and committed to deadlines; if you can’t make deadlines, “they will shut you out.”
Korean firms are also willing to do business with small but promising North American startups, as long as they are better, faster and cheaper than their Asian counterparts. Says Byun: “If you have originality that sets you apart, they’re interested in partnering up with you.”
Canadian companies looking to build networks and customers in Asia need trustworthy and knowledgeable partners with strong contacts, Yang says. He suggests one way of achieving that step in China is through partnership with a Chinese-Canadian with a Western education.
And trying to find a local joint venture partner almost immediately “is like marrying someone without dating,” says Yang, who counsels patience in seeking Chinese partners.
Byun adds it’s not a good strategy for Canadian tech firms to depend on VC funds to help them manoeuver in Asia. Venture partners do, however, usually have experience in doing business with particular customers and can open some doors there.
If all else fails when it comes to cracking the Asian market, adopt the Woody Allen axiom that 80 per cent of success is just showing up, Byun says. “Just being in Asia and understanding what the customer is looking for will lead to success.”