Money, it is said, does not buy happiness. In the world of venture capital investing, it turns out money alone doesn’t buy success either.
That’s the view of technology and gaming industry veteran and venture capitalist V. Paul Lee, who is applying his vast know-how and global connections to help high-tech companies and Canada’s VC industry grow.
Lee’s work in the tech sector dates back nearly 30 years, when he joined his former school mate turned business partner Don Mattrick at Distinctive Software, a gaming company that in 1991 was acquired by California-based Electronic Arts. Over the next two decades Lee and Mattrick grew Electronic Arts into a multi-billion-dollar powerhouse that helped EA transform the world of gaming.
Today, Lee heads Vanedge Capital, a Canadian venture capital firm that leverages a business model proven by Silicon Valley’s most successful VCs to help tech companies and their backers win in the hotly competitive tech sector. In addition to a number of private and corporate investors including EA, EDC is among Vanedge’s top fund participants.
Of the ten Canadian companies in which Vanedge has invested an average of $1 million to $5 million over the past several years, four firms were sold in the last year and a half, netting on average between three to five times return on initial investment “over a couple of years,” says Lee.
Gains like these by Vanedge and other forward-thinking VCs are helping fuel the growth of a healthier Canadian tech sector and VC industry. According to a recent article in The Globe and Mail Canadian venture capital investing hit a 10-year high in 2015, driven mainly by tech sector gains.
Citing figures from the Canadian Venture Capital & Private Equity Association, The Globe article reported that funding for entrepreneurs “comprised 536 deals totalling $2.25-billion in 2015.”
Lee says the results reflect a successful Silicon Valley VC style that matches capital investments with in-depth domain, entrepreneurial, and operating expertise as well as the insights and industry connections that go with that experience.
Historically, Canada’s venture capital industry was led largely by government- and economic development-based initiatives.
“They created jobs, but they didn’t create a VC industry, because the financial returns were poor. They couldn’t attract outside money,” says Lee.
Adding to the issue, he says early Canadian VCs often applied a financial engineering model to tech investing. “This approach might work well for more established companies, but it is not as successful in the VC world, especially in early stage investing, which is where most of Canada’s tech companies need support.”
Today, savvy Canadian VCs and the companies they work with don’t just look for dollars.
“VCs bring operating experience, market intelligence, the strong networks a firm needs to sell its products at scale, plus a deep understanding of a company’s competitors and, ultimately, its potential buyers.”
Fundamentally, says Lee, a firm’s management must embrace a commitment to focus on what the company does best. “Tell me why you are going to win? What is the one thing you can (and are going to) do better than anyone else?”
For Vanedge Capital, its investors, and the companies it works with, the formula is paying off.
Among the firm’s recent wins is Wurldtech Security, a company that within two years of Vanedge’s involvement was acquired by GE and has since become a cornerstone of GE’s industrial Internet services division.
Wurldtech’s relationship with Vanedge, and its subsequent leap to the big leagues, was spawned back in 2012, after details emerged of the cyber attack that destroyed Iran’s nuclear plant made headlines and exposed the vulnerability of plant operating systems to hackers. For Lee and his colleagues, the incident reinforced the firm’s interest in the fast-growing cyber security sector and, in particular, industrial control systems, which were moving from physical switches to online controls.
Recognizing potential in Wurldtech, which at the time was a Vancouver-based IT security consulting company, Vanedge invested and helped Wurldtech transform itself into a world-class product company.
“We reinforced their core strengths by helping them hire a marketing person, a product manager and head of engineering to help bring sharper focus on the market opportunities.”
Within two years, Wurldtech was a bona fide leader in its specialty area.
That got the attention of GE, a leader in industrial control systems and security. “Best of breed companies want best in breed solutions,” says Lee. “GE was looking for the best company to add to its sales distribution system. They wanted to capture and own this market. They looked at Wurldtech. And they bought it.”
Metafor Software is another example.
After noting market trends linking machine learning to security, Vanedge took an interest in Metafor, a small Vancouver company, which at the time was focused on early R&D in artificial and machine intelligence.
Convinced that anomaly detection could be a tremendous opportunity for Metafor, Vanedge engaged Metafor founder Toufic Boubez, a tech entrepreneur who had previously grown two successful firms.
“In the past, cyber security was about building a firewall around IT infrastructure. The idea was you could keep the bad guys out,” explains Lee. “The reality is we are past that stage. People are getting in. They are in your network doing bad things. If we assume that people are already in, then how can we identify anomalies in how users are behaving to see who is doing things that they should not be doing?”
Boubez agreed to focus Metafor on finding answers to that question by looking at time series data, and Vanedge invested.
“Further along, we also helped bring in a top-notch head of product sales and a Silicon Valley CEO in the cyber security space to take Metafor to the next level,” adds Lee. “Those guys used their connections in the space. The rest is history.”
Fewer than 24 months after Vanedge had led a round of seed funding, Metafor was acquired by San Francisco-based big data firm Splunk, which – thanks to its acquisition –is now building a machine learning centre of excellence in Vancouver.
Lee cautions that in a successful VC model the fundamentals of human dynamics and relationships are integral to bottom-line success.
He says companies seeking venture capital support should ask themselves: “Am I going after a venture investor who understands my domain, or do I have to educate them? What value will the VC bring; what is the VC’s ability to impact outcome? Can I work with them, and do we share a common vision for the company?”
“You can have a great VC who is an expert, who has great connections, but if you can’t work with them then you will find yourself in acrimony. And that rarely ends well.”
Similarly, says Lee, a VC will generally want a company to grow and dominate a certain arena. “If the management really just wants to do well enough to maintain a great lifestyle, that doesn’t usually work well either.”
Five questions with Vanedge Capital founder Paul Lee
What was your first export sale?
It was with Distinctive Software back in the late ‘80s. I can’t remember the deal, but we were one hundred per cent export oriented from the start. We sold the company to Electronic Arts in 1991 when they were 240 people and less than $100 million in sales. But they always looked for global dominance, and that was great learning.
How did that first export opportunity arise?
Canada is a small market next to the largest market in the world. There was a publisher who Don (Mattrick) had met at a trade show and they needed more products. Don pitched them on a racing game called Test Drive modeled on the drive from Vancouver to Whistler and got them to invest in its development. That game turned out to be a great hit.
When it comes to exports, what do you know now that you wish you had known then?
It’s still a people business, even if it’s technology. People tend to buy from people they know and trust first. It is important to have the best product, but it is also important to have a warm introduction and friendly relations to really have that business succeed well.
How has the trading world changed since you started in business?
The percentage of SMEs in Canada that focus on export markets is very low. The problem is that it has become even more important today than it ever has to focus on global markets. Without them you will be hard to scale the business to any significant degree. Moreover, with how quickly technology is developing, if you aren’t looking globally, you may not see your competition and the changes in the marketplace before it is too late. If the management team doesn’t want to do that, they won’t ever be truly successful.
What is the #1 thing new SMEs need to know about export and trade?
At the end of the day people do business with people they like. Don’t assume that all you need is the best product. You have to get out there and meet people, get to know them and how you can solve their needs – and develop products that will show those people you will have a solution for them the next day and every day after that. In the end, it is not who is ahead today, but who is running the fastest and able to navigate the obstacles. That’s who is going to win.