A look inside the Banff Venture Forum through the eyes of two Albertan high-tech entrepreneurs
A Tale of Two Companies
by Geoffrey Morgan
chief scientist, Wedge Networks
|8:30 a.m.||Steven Gentles, president and CEO of software developer AwareBase, takes the stage at the Banff Venture Forum with a half-joking plea. “Go easy on me,” he says, “this is my first pitch.”
The BVF is the largest business-pitching forum and competition in Canada – think of it as a two-day episode of CBC’s Dragons’ Den. This year it has attracted 42 presenting companies, each of which is looking for a piece of the more than $179 million in financing available from the venture capitalists in attendance. For Gentles, it’s the first time his eight-year-old Edmonton-based company has gone looking for outside investors, and he’s looking for $1 million.
|As the Banff Venture Forum opened on a Thursday morning at the Banff Springs Hotel, Husam Kinawi and business partner Hongwen Zheng write notes as a panel of venture capitalists introduce themselves. There are investors from Toronto, San Francisco, Montreal and Seattle, all of whom came to Banff to find high-potential startup companies.
Kinawi is the chief scientist at Wedge Networks, a Calgary-based high-tech network-security firm with offices in California and China but a bit of a funding challenge. “Due to a lack of funding, we haven’t grown at the speed we would like,” he says. That’s why Kinawi and Zheng have come to Banff. “We’re looking for $5 million.” Specifically, they’re looking for an American investor, since almost a third of all venture capital financing activity in Canada comes from American funds, and the forum in Banff is the best opportunity in the country to connect.
|2:00 p.m.||Gentles says his highlight so far was Randy Smerik’s lunchtime keynote address. A lot of high-tech entrepreneurs look up to Smerik, who founded and sold four companies in a span of 20 years, including semiconductor designer Tarari, which he sold in 2007 for US $85 million. Smerik says many entrepreneurs underestimate how much control a VC will exert on his or her company, and that he’s at the BVF to “help the entrepreneurs watch out for the VCs.”
He says venture capitalists fit companies into one of four categories: those that will fail, those that will become a “lifestyle” business, those that will be sold and those that will have an initial public offering.
The breakdown helps Gentles, especially the description of a lifestyle business, which is defined as one that won’t go bankrupt but will also never be sold. Smerik says the entrepreneur will eventually hand the business over to a successor, possibly his or her children, but never get paid for the sale of the company. Gentles founded AwareBase with two partners in 2004, and the company has since grown to 80 employees, 60 of whom work in New Delhi. When the company first started, Gentles says, it was primarily an engineering consulting company but the profits from that work were used to develop the company’s main product, a software program for engineering companies. Gentles says he doesn’t see AwareBase as a lifestyle business.
“These VCs don’t want to buy into lifestyle businesses. They want to buy into a business that’s going to make them 10 times more than they invested.”
Smerik encourages company CEOs to think of themselves as “chief exit officers.” He says 90 per cent of software companies will exit the marketplace through a merger or acquisition, so it’s important to know how to structure a deal with a venture capitalist. VCs raise money from organizations like Alberta Enterprise or billionaires like Mark Cuban, who expect to earn a 20 per cent return on their investment in a venture capital fund to account for the risk they are taking on with early stage companies. But in a venture capital fund, Smerik says, eight of 10 businesses will fail to return anything to the VC or the limited partner.
In order to deliver a 20 per cent return to investors, Smerik says VCs will demand a seat on the company’s board and veto power over the company’s executive decisions that will go so far as to block sales of companies that deliver returns of anything less than 20 per cent. For entrepreneurs like Gentles, that means the company founder would need to give up control over how long they stay in business – and to whom they eventually sell their business.
|Kinawi says he attended the Banff Venture Forum because he wanted to meet “Sand Hill Road venture capitalists.” Sand Hill Road is like El Dorado to high-tech entrepreneurs. It’s a stretch of highway outside San Francisco that passes Stanford University, and is home to many top-tier American venture capital firms.
Mike Kwatinetz is a venture capitalist and founding partner of Sandhill Road’s Azure Capital Partners. His company has invested in early stage high-tech companies that have been acquired by eBay, SAP and AOL. Now, he says Azure Capital’s two biggest target markets, after the San Francisco Bay area, are New York and Canada. And he believes there’s an important advantage Canadian companies have over their American competitors. “There’s support from the government for research and development spending here,” he says. “So it’s less costly for a startup here than it is in the States, and it requires less investment due to the influx of R&D dollars from the government.” In Alberta, for example, the provincial government spent $98 million to create Alberta Innovates Technology Futures, which funds high-tech and clean-tech companies across the province.
But many Canadians in the high-tech sector don’t share Kwatinetz’s view. Steve Hnatiuk, the chair of the BVF and a Vancouver-based venture capitalist, says, “We have great entrepreneurial talent, but they have a third of the capital available to them.” He says a typical venture capital deal in Canada is around $3.5 million, compared to $10 million in the U.S. That’s why he thinks it’s so important for Canadian entrepreneurs to connect with American venture capitalists. American investors, he says, “tend to put about twice as much into a Canadian deal as Canadian investors do.”
On that, Kiwani agrees. “If this company was American,” Kinawi says, “funding would be a piece of cake.” And he’s speaking from experience. Kinawi founded a company called ActiveIQ in Minneapolis in 2001 and later sold it to Stellant Corp., which was eventually sold to software giant Oracle. Hnatiuk says there are about 50 investor groups in Banff, and about a third of those are American. That number has been rising for years. In 2011, about one third of the $1.5 billion in annual venture capital activity in Canada came from the U.S., and that trend has also been growing steadily.
|12:30 p.m.||Gentles speaks with Smerik, who is also an angel investor, and says he plans to keep in touch. He’s still not sure whether he wants to tap into venture capital in order to continue growing his business. After all, expanding from three to 80 employees in eight years isn’t bad, and he’s not sure how much control he wants to give up. “I’m going to take another pass at my business plan before I go for funding,” Gentles says. “I want to have a good solid plan of what I’m going to achieve over the next several years – and I’m looking for people that can help me determine the viability of that plan’s success.”|
|“I’ve seen five companies that I’m going to follow up with,” Kwatinetz says. But the $5 million in venture capital financing that Kinawi and Wedge Networks wanted to find doesn’t materialize. A VC from Seattle, Daniel Gallagher, mentions that he intends to follow up with a network security company in the coming weeks, and that he is surprised at the amount of talent in Alberta’s high-tech sector. But neither Gallagher nor Kwatinetz are in Banff to write cheques in the hallway.
Kinawi has met five VCs. “I was hoping to meet a lot more than that,” he says. Still, he’s hopeful that his company will be funded over the next six months. If not, he says he might go back to his shareholders to raise money or look for a “strategic alternative,” which could mean a merger.
Overheard at the Banff Venture Forum
|After listening to a pitch from Calgary’s Insight Emission, Shawn Abbott of iNovia Capital says the company “is trying to nail jelly to the wall. This seems like a small market, and I don’t want to be anywhere near it.”||9:30 a.m.|
|2:00 p.m.||“Canada is definitely top of mind for me, and I’ll continue to do more deals here,”Randy Smerik says. He founded a company called Tarari, which he sold for $85 million. He now owns, among other things, a tequila distillery.|
|Following a lacklustre clean-technology presentation, an American venture capitalist shouts out, “We’ve got $70 million to spend on carbon emissions reduction, so please talk about that.”||3:30 p.m.|
|5:00 p.m.||“We passed on [seed funding] Facebook but, in our defence, Mark [Zuckerberg] said he would never expand it past colleges,” says Chris Albinson, the managing director of California’s Panorama Capital.|
|“Venture capitalists can drink – wow.” A clutch of young entrepreneurs discuss their hangovers, after a venture capital fund bought drinks for forum delegates all night at The Rose & Crown.||8:00 a.m.|
|9:00 a.m.||“I’m just looking to get on their radar screen,” says Michael Kousaie, head of business development at the TSX Venture Exchange. He’s trying to connect with companies that might want to go public in the future.|
|Chris Dulny, the national leader of PricewaterhouseCooper’s technology practice, says that the most active buyers of Canadian high-tech companies have been other Canadian companies. So focus on courting Canadian buyers, he tells delegates, rather than Google and Twitter.||12:20 p.m.|
|1:30 p.m.||A group of venture capitalists, some from the Business Development Bank of Canada, start discussing the merits of the entrepreneurs they’ve met at the forum. Some are impressed with the talent, but one says he’s been trying to “dodge the tumbleweeds in the hallways.”|
|“You have the chance to become the Silicon Valley of energy,” says Iain Cooper, the head of Schlumberger’s venture capital program. He says he finds Calgary to be a more entrepreneurial city than Houston, and that he plans to invest in the province.||3:45 p.m.|