Four ways to beat the long odds of venture capital

Canadian start-ups looking to lure venture capital typically face long odds. Of those jockeying for investment, at most two per cent actually get cash injections, according to Canada’s Venture Capital and Private Equity Association (CVCA). And, the Canadian investment market has been in a slump since the so-called tech wreck of 2001, which has seen fundraising slide even as the number of requests for financing has soared.

According to Industry Canada, overall VC investment in Canada reached almost $1.47-billion in 2012, a slight drop from the previous year, but deal making was on the rebound in the first half of 2013.

Richard Rémillard, CVCA’s executive director, pointed to other bright spots for start-ups including the IPO market heating up, along with mergers and acquisitions. He also pointed to the federal government’s “venture capital action plan,” which pledged a $400-million injection while a matching program now in the works with an aim of attracting close to $1-billion from the private sector.

Still, it’s little wonder so many Canadian start-ups look south of the border for a financial boost. Overall VC investment in the United States reached $26.5-billion (U.S.) last year, according to the annual MoneyTree Report. And, foreign VCs (mostly those based in the U.S.) are responsible for up to 30 per cent of deals with Canadian startups.
There also appears to be a link between attracting U.S. investment and eventually being acquired, according to MaRS, a Toronto-based innovation centre dedicated to building growth companies. Its recent report titled Borderless Investments found that U.S. venture capitalists invested in 57 per cent of the 23 Canadian technology companies that were acquired in 2012.

Lars Leckie, managing director at San Francisco-based investment firm Hummer Winblad Venture Partners, said Canadian entrepreneurs are currently enjoying a “renaissance” period with U.S. VCs. He is co-chair of The C100, which launched three years ago as a non-profit organization that promotes Canadian companies in Silicon Valley offering things such as mentoring and introductions. Since then, about $700-million (U.S.) has been pumped into its companies – two-thirds from U.S.-based investors, Mr. Leckie said.
“The money going into young Canadian tech start-ups is at an all-time high,” he added. “It’s absolutely fabulous.”

Still, wooing U.S. capital is a highly competitive business.

“Of the 600 serious inquiries, a venture capital firm will take a look at 10 per cent of them, and ultimately invest in 1 to 2 per cent of them,” said Stephen Hurwitz, a partner with Boston-based law firm Choate, Hall & Stewart LLP, which specializes in Canada-U.S. border transactions. “… Everyone’s looking for the next Microsoft, the next Google, the next Intel.”

While there’s no formula for tapping into U.S. financing, the experts offer some tips for making a more successful case. “Some live and die by data,” said Mr. Rémillard of the VCs. “For others it’s more artistic.”

Management:
Investors like to see a proven management team with a track record, not a first-time entrepreneur with a single bright idea. They want to see a detailed business plan and financials from good managers, strategic planners and operations people. “Does the team have what it takes to build a really big company?” Mr. Rémillard said. “The line is bet on the jockey, not on the horse.”

Technology:
Has the company created a revolutionary technology? Does it own the technology or is it still in development? Investors also want to know if it has intellectual property protections, such as patents. “They love to see technology that is disruptive and creates a new market,” said Mr. Hurwitz.

Markets:
Does the company address an existing market, a growing one or is it creating a new opportunity? What are the projections for growth? U.S. venture capitalists want to see at least a half-billion dollar market, if not $1-billion market before they’ll invest, according to Mr. Hurwitz. In this high-risk world, Mr. Leckie wants to see a “world-class company” and business leaders who “dream big, execute bigger.”

Target:
Focus the U.S. pitch to American VCs that like investing in Canada, have a reputation for it, have some sort of Canadian connection, are located nearby and have a deep knowledge of your industry.

“Chances are that if an established VC has not previously invested in a Canadian company, they are not likely to do so in the near future,” according to the MaRS report, which identifies the top U.S. investors in Canadian tech companies. Mr. Leckie disagrees, adding that recent Canadian success stories such as the acquisitions of Radian6 and Q1 Labs are luring all kinds of investors north.

Location:
While a local presence may depend on the business, according to Mr. Leckie, other experts suggest grabbing a toehold in the U.S. market. That doesn’t mean you need to move your R&D facility to the U.S., but investors like to see a significant marketing or product presence there, Mr. Hurwitz said.