According to Rick Segal, the good news is that there is $750 million in deployable VC in Canada. The bad news: the deal isn’t done until the cheque clears.
The room at the McInnes Cooper law office at Purdy’s Wharf overlooking Halifax Harbour has the feel of a luxury classroom, with comfortable white-leather chairs and coffee and breakfast on the table. The reason: Venture capitalist Rick Segal of Toronto’s JLA Ventures is in town as part of his Atlantic Canada tour to promote his services.
Segal is dressed casually, as are most of the people in the room, mainly young entrepreneurial tech types. He says he likes Atlantic Canada and prefers the Halifax Stanfield International Airport to Los Angeles’s LAX Airport. An American who started in the U.S. air force, Segal worked for Aetna; wrote shareware, books, and magazine articles; and did time with Microsoft in Washington state. As a VC in Canada, he participated in the Chapters IPO. “During the tech bubble, people had an idea sketched on a napkin and they expected a $100-million pre-money valuation,” he says. “We played golf through a lot of that. The bubble almost wiped out the angel industry in Canada. There are still a lot of wounded angry people.”
Segal lists some of the VC firms in the country: Brightspark, Growthworks, Ventures West. It’s a small club. By his estimate, there is $750 million in deployable VC funding (cash) available in Canada. At JLA the partners are two tech entrepreneurs and one finance guy. “We can write code and run a business,” says Segal. “We only do IT, including new media. We don’t do ‘wetlab,’ and we don’t have to hire experts to evaluate business plans.”
JLA seems to be doing OK, closing its fourth fund last month, a designated worldwide fund, at $125 million. It has over 30 active deals, only one from an agent, and 90% are Canadian. Segal did three deals last year out of 800 proposals, but he advised 60 companies. The limited partners (investors) are banks, pension funds, and IBM. The advisory board includes James Balsillie, chair and co-CEO of RIM.
“Canada has many advantages over the U.S. for entrepreneurs,” says Segal. “VCs here tend to be accessible and pass information on to each other, though they might not admit that. That doesn’t happen in the Valley.” He likes Canadian universities and government programs such as the National Research Council’s Industrial Research Assistance Program and the SR&ED Tax Credit Program, for both their money and knowledge.
“No U.S. venture capitalist wants to go toe-to-toe with me on a term sheet in Canada because I am flexible,” he says.
“I will give terms and conditions they won’t touch. In Canada, the VCs are entrepreneur friendly. We beat U.S. VCs in the Pepsi taste test. The not-so-good news is that Canadian VCs have a hard time saying no to a plan they are not really interested in.” His advice may seem surprising: “Try to get a ‘no’ before you go.”
VCs expect a liquidity event within five years or so—a sale or merger—to get their money out. “If you don’t want that,” says Segal, “don’t take professional money.” He lists the stages of a tech start-up as seen by the entrepreneur: (1) Hmmm, this is a good idea, I’ll spend my lunch money on it; (2) lemme code this at night while keeping at least a part-time job; (3) this might have legs, I’ll spend my college fund and ask for money from friends and family; (4) I’ll quit my day job; (5) the search for angel investors; (6) venture capital.
Segal offers the following advice to tech entrepreneurs: For the VC stage, have a short business plan that can be encapsulated in a 10-minute pitch. The best approach for him is a demonstration on a laptop: “This is the problem. This is the solution. As a potential investor, can I see it and feel it?”
It will take six months to raise the capital and 18 months to prove the concept, so the start-up budget is all about expenses, not revenue. The next question is about people: Why should the VC invest in you and your team? Say you will run the company until you find someone to take it to the next level. Then explain how you will address the competition. Never give up 50% of your company in the early rounds of financing. Expect to get diluted down the road. If the management team ends up with 10% of a $100-million company, you did great.
The pain is the terms and conditions of the term sheet, which is a binding commitment to negotiate in good faith, not an obligation to close the deal. Put numbers in as late as possible. Due diligence should be done before the term-sheet stage. Entrepreneurs should do due diligence on the VCs, as well as the other way around.
Don’t give up voting control to investors taking a minority position. While the “pre-money” valuation can be complicated, the issue is simple: What is the value of the shares times the number of shares? Negotiations with a VC can be lengthy; this can be a good thing, allowing a lot of issues to come to light. Finally, manage your expectations. “No matter how promising it looks,” says Segal, “until the cheque clears, the deal isn’t done.”
