T-Net British Columbia: Home

Member Login | Employer Login 


Tech News Tech Events Tech Careers Tech Directory Tech Stocks
T-Net 100 T-Net Members Feedback Advertising About T-Net





The Perfect Investor
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
December 7, 1998


By Brent Holliday
Greenstone Venture Partners

"I have spoke with the tongue of angels
I have held the hand of a devil
It was warm in the night
I was cold as a stone
But I still haven't found what I'm looking for "
- U2, I Still Haven't Found What I'm Looking For

Here's the premise: You are an entrepreneur. You have worked like a dog for months on end. You haven't slept. You have your credit cards maxed (all 15 of them). Your significant other is a) leaving you b) trying to get you to see a shrink or c) sleeves rolled up and right beside you. You have incredible faith in the possibility that what you are doing, what you left your comfy job for, will succeed. You have just launched the product on a shoestring budget. Now, more than ever before, you need money. And the smarmy, know-it-all, pin-striped, shiny-shoed MBA sitting across from you is holding the gold. If they ask one more question about your distribution strategy, you will stick a pen in their eye. But, you remain outwardly calm and try to pry the money from their manicured hands. Sound familiar?

If you have ever tried to raise money for a new venture, you have been in this situation or one similar to it. As we all know it is tough to raise money for early stage companies. Why? Simple economics. There are a few with the money and many who need it. Michael Wolff (entrepreneur and author of "Burn Rate") described raising capital as a "beauty contest" where the rules for success are defined by perception, not reality. There are many cynics that are much less polite about financiers and their methods of picking investment opportunities. My personal favourite is from Scott Adams of Dilbert fame. He was asked what the best job in the Silicon Valley would be. He said, "That's easy, I'd want to be a VC. Besides the fact that it sounds great at parties, I could be wrong 9 times out of 10 and still be a success. A hamster with Alzheimer's could be a VC."

VCs are like lawyers. We are the butt of many jokes. The VC comic strip is my favourite location of VC humour. It's easy to see why people are cynical about us. We reject 98% of the people we talk to. I've heard that suicide rates are extremely high amongst dentists. The theory is that they have negative energy emanating from everyone that they see in a day's work and this makes them despondent. I don't think a similar study has been done amongst VCs. But I am familiar with negative energy...

For what it's worth, VCs (at least the ones that I know) find little joy in saying NO all the time. In fact, most VCs have euphemisms for NO, in order to not have to say the word directly. Have you ever heard "We are interested, but call me back when someone else is leading the deal."?

And then there is the image that we really detest. The one where we invest only to make sure that your company stumbles a bit, so we can invoke all of our nasty clauses and take over your company, leaving you out in the cold. Hmmmm. Sounds like Fox Mulder got venture capital once. That is actually quite a compliment when you think about it. We are so smart that we can predict when a company will stumble and why. Then we can make the company fly as soon as we oust the founders. We must be really good in order to screw the entrepreneur so well. (You think I am making this up? If you were at Ace Tech - Early Stage last week, you would have heard this straight from the keynote speaker, a prominent Vancouver technology ex-CEO). The source of these stories is, you guessed it, from ex-CEOs who were ousted by their boards or otherwise given a rough ride when things got tough for their companies. Sour grapes leading to more jokes. Again, for what it's worth, do you think that we look forward to confrontations with under performing management? I sure don't. But it's part of the job and our job is to make sure the Company succeeds. Last point on this digression. VCs must have thick skin. I actually enjoy some of the more clever insults and jokes. So please don't pity me. It's embarrassing.

It has been well documented how venture backed companies perform better than others. This is most likely because VCs are trained to pick companies more likely to succeed. And "pick" is the key word. We have the luxury of choosing amongst many opportunities. What if you, the entrepreneur, could have your pick of investors? What if the roles were reversed and the VCs had to grovel at your feet (insert any image that gratuitously derides VCs here)? What would you look for? What would the ideal investor do for you? Some might say that the best investor is the one that gives you the money, no strings attached, and never forces you to pay them back. Well, let's try and keep at least one foot planted in reality.

The real question here is what value can be added to your firm along with the necessary injection of cash. Value can be added by an investor in numerous ways. Here is a handy checklist to go through when considering possible equity financiers (in no particular order of importance):

- Has direct industry experience
- Has been a senior manager in a start-up
- Has an enormous international network of contacts
- Has deep pockets (we're talking millions) to keep investing in you
- Can identify and locate talent for recruitment
- Can locate further funding sources easily and is well connected to investment bankers
- Has invested in runaway successes before (the all-important "track record")
- Has integrity and knows what they don't know
- Has the time to devote to your venture
- Passes the Toledo test (you know, could you spend a weekend stuck in Toledo with them and not stick a pen in your own eye)

If you meet an investor that has all of these qualities, do whatever you can to get them on your Board. This investor may be a VC, but it could just as easily be an angel investor. Indeed, this would be the perfect investor. I was careful not to rank these investor criteria. I would place significant weight on the last one, however. Investing and growing a company is a partnership. If you can't stand being in the person's presence then all of the other criteria don't amount to much value.

If the "beauty contest" is reversed and the entrepreneur is choosing an investor from a pool of possibilities, then it is vital that the entrepreneur evaluate the choices on the value criteria laid out above. We, the VCs and angels, should be selling as much as you. Unfortunately, this mistake is made far too often. Early stage CEOs don't spend enough time (probably because they don't have it) researching the backgrounds and track records of the investor.

In BC, there are less choices for equity investment than in Ontario. This makes it hard for the entrepreneur to choose. California is awash with investors compared to here. But it is very difficult to get investors to look too far from their home base. It takes them away from their networks and results in less time spent on the venture. Besides, it isn't like there aren't any opportunities to invest down there, at least for the investors that have most of the criteria laid out above.

Venture capital investing and investors have changed over the years. It used to be much more un-structured and the investors were cowboys that went largely on hunches. Nowadays, the cowboys are wearing suits and looking remarkably like bankers. Venture investing is now big business. There was $1.2 billion invested in Canadian technology companies in 1997. My image of the MBA that deserves a pen in the eye is a self-deprecating stereotype. Ha. Ha. Well, the joke will be on me when more venture capital becomes available in BC if I don't convince you, the next successful entrepreneur, that I have most of those value-added capabilities. So, rest easy. I'm working on it.



Random Thoughts

- Ace Tech Early Stage was quite successful. It attracted 85 nascent technology CEOs and they learned much more than "VCs in Vancouver are incompetent." I hope they make it bigger and better next year, because the early stage CEO needs all the coaching and mentoring they can get from the veterans that set up and ran this event. And that is exactly the point. As the tech community grows here, we need less knife throwing and more collective action. Yes, you sensed it. I am disappointed that some of these veterans pilloried us. I refuse to air dirty laundry. It won't help. Just remember that there are always two sides to every story. Next year, save your snivelling and focus on the positives.

- An excellent article appears in the November-December Harvard Business Review on "How Venture Capital Works". It will add a lot to this article in helping you understand VC motivations.

- I now get to use the by-line: Something Ventured, quoted by leading publications in Canada like the Globe and Mail. I had a section of my article on the VC Road Trip lifted and inserted into the Globe two Mondays ago. They didn't ask, but they did give a reference to the URL. I received a few inquiries from people in Ontario about the subject. Cool, huh? OK. I'm done the self-congratulatory tone.

- Internet Insanity Revisited: Well, wouldn't you know that 2 days after I finish my article on the Icarus-like Internet stocks, AOL decides to buy Netscape in the most important acquisition to date in this new industry. This deal makes sense for a lot of reasons. Even the "rear view mirror" types acknowledged that this was a deal that they liked. Finally, something their spreadsheets could crunch that didn't get a "divide by zero" error.

Of all of the pundits that summarized the deal, once again I tip my hat to Mark Anderson for pointing out something that no one else did. Most of the reviewers puzzled over the small point that AOL would keep using the Microsoft Internet Explorer for its 14 million users until the end of 1999. Mark surmised that the real reason that AOL made the statement was that if they converted to Netscape (instantly tilting the browser market share way in the favour of Netscape) then the DOJ's anti-trust case against Microsoft is hurt badly. Why? Bill, Steve and company start jumping up and down pointing to the browser market as proof that they are not a monopoly. AOL does have a contract with Microsoft, but don't you think that Microsoft would rip it up in a Seattle second?

So, this week in Internet la-la land, we have the Canadian companies Bid.com and Gaming Lottery Corp. Bid.com has received a lot of press as the Canadian e-Bay, an on-line auctioneer. Once again, look at the key metrics. E-Bay is actually trading at a lower price to sales than Bid.com. And e-Bay is profitable, Bid.com is nowhere near. Bid.com is the latest of what is best described as the "greater fool theory" of investing. It isn't a new concept. Have you ever heard of Amway or any multi-level marketing type scam? The theory is that as long as there is a greater fool than you out there, you will make money. The risk is that you will be the last fool. Speaking of utter fools, Gaming Lottery lost 2/3 of its market value yesterday after a short 7 minute TV appearance by their CFO. They just listed on the NASDAQ on Monday and coincidentally launched their on-line casino the same day. The CFO was absolutely roasted by the CNBC guys, getting him to admit that U.S. people cannot gamble on-line by law and that someone invested for 10,000,000 shares at $0.40 about 3 months prior to their NASDAQ listing, which shot from $7 to $25 on the first day. The real kicker was that the CFO was forced to admit on international TV that he, himself, had just unloaded 1 million shares this week. Seems the VSE doesn't have the market cornered on these types of companies.



Response From Last Week's Column:

Brent - This week's piece in T-Net was quite excellent, as usual. Keep up the good work.

Further to your screed, I thought you might enjoy this item. I'm not sure we can simply nail the day-traders for this situation ....

Judy Bishop

- Thanks Judy. The article is from thestreet.com and for copyright reasons I include a link. It's called the Internet Suckers Index and it is indeed a good read. Of course you need a membership to read it. But they do allow a 30 day trial.

Hi Brent, We met once on a helicopter back from the Island (you were with Multiactive).

I get the T-Net email and have often been intrigued by the subject of your sections. However, prior to this evening, I had never read it (I seldom visit the web site).

I thouroughly enjoyed your article. It is nice to read from somebody who gets it! Your article will be filed.

Kudos,
B.J. Broitman

- Don't tell Terry I was on the helicopter! Thanks for the encouragement. Nice to know that the BC Tel Interactive guys are on top of things.

 

What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

Something Ventured Archive

Online Venture Capital Guide