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It Ain't Easy Money
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
Jan 21st

By Brent Holliday

"Look at them yo-yos
That's the way you do it,
Get your money for nothing..."
- Dire Straits, Money For Nothing

I've seen the look. The forced hint of a smile, the eyes giving away more than intended and the small throbbing vein in the vicinity of the temple. I've just said that the opportunity is not big enough, or the market not growing fast enough or the company not built enough. And now I'm getting the look. Thank God we live in Canada, because I'm sure that access to a handgun would be a very bad thing for me right now. One of two things happens next. The same ground will be covered again, leading towards an infinite loop of persuasion and rejection. Or the conversation reaches escape velocity and the entrepreneur bolts up, curtly shakes hands and then leaves with a tiny dark cloud appearing over their heads.

I'm a VC and that's what I do a few hundred times a year. That's the down side of the job, lest you think I'm some kind of Machievellan weirdo thriving off others pain. For the uninitiated, a quick review of the math: In order to support enormous risk of investing early, said VC needs to have the possibility of boffo returns on their money (>100% per year, if you want a number). Across a portfolio of companies, the returns will be somewhat less because some fail. Therefore, a VC needs to be picky. Which leads to the scene described above...

This column is not about the ones we pick and it is not about the reasons we choose not to pick. I want to talk about the fantastic business opportunities that do not get funded and what the options are for the entrepreneur that doesn't get what they want on the first try.

My timing for this coincides nicely with the sudden propensity for the media in Canada to skewer the VC community here and talk about the perceived nirvana of capital raising for tech companies in the US (see more in Random Thoughts below). Let me say with 110% certainty that the one unassailable fact in money raising for early stage companies is that no one gets the money from who they want on the first try, anywhere. And anyone that tells you that they can get it for you in a snap has never done it before. Stories abound about getting term sheets in the Valley by walking down Sand Hill Road like some street hooker, saying, "come get it, baby!" It's all urban legend. If it is really easy to get money, there has to be a catch. If it is hard, then there will most likely be some value in actually getting it.

As an entrepreneur looking for capital you have to be realistic and have a plan B. And a plan C. And a few credit cards. First rule of money raising is that it will always take twice as long as you think to actually get the money. The second rule of money raising is to never, ever burn a bridge. If you are turned away by a prospective source of money, sending them a flaming e-mail and telling them they are so stupid for not investing is generally known as entrepreneurial suicide. My personal favourite was the guy that attacked my knowledge of the business (probably valid!) and then said that he didn't need my money because he had raised it from far more valuable investors in Nevada. I wanted to send some wise crack back about which roulette wheel was more valuable than me, but I held off. When he needs more money, do you think I will pay attention?

You have to be persistent in getting the attention of people with money, but once they give you a NO or even a euphemism for NO, you need to focus your energy on the next step. Understand what the issues are with your company. Try and get meaningful feedback from your rejectors. This will help you determine what happens next. And here's a news flash for you: It may be possible that the potential investor doesn't see the opportunity that you do. Is the investor a) not used to taking as much risk as you are asking for b) too busy to pay attention c) not knowledgeable in your industry space or d) in the middle of a divorce, on Prozac and has had three straight losing investments or e) all or some of the above? While it's nice and convenient to rationalize that it is the investor's fault for not seeing your opportunity, perhaps it wasn't communicated properly. If you are rejected, take a good hard look at your business plan and presentation before going to the next meeting. Imperfect communication between entrepreneur and investor is the single biggest reason for 1) you not getting funded and 2) the investor possibly missing a great deal.

Remember the point about VCs being picky? If the opportunity is not presented well and/or the presenter is unimpressive, the company does not get money. Seems obvious. But it is amazing how many crappy business plans and un-focused rambling presentations we see. If you manage to get past the initial presentation with an investor and diligence is being done on you and the company, bend over backwards to give references, documentation and industry metrics so that the decision can be made faster. If the deal gets stale and information slows or stops flowing, it will end and valuable time will have been wasted.

Getting back to plan B and C after you have been rejected the first time, here are a few hints on how investors think. Firstly, they travel in packs. Just because one turned you down, does not mean that they are out if another that they respect greatly comes in (that's the bridge burning part). Second, just because one investor has a view of the technology marketplace different from yours, doesn't mean that all investors have the same point of view. For instance, there is almost a 50/50 division of minds in the VC community about the viability of open source software as a big business. Similarly, some investors think that on-line content is a giant cash sinkhole, while others believe that its time has come. Do your homework on investors and try and understand how they see the world. You will save a lot of time if you avoid holy wars from vast differences of opinion. Oh, and excuse me for not being open-minded in some instances. I completely reserve the right to be wrong!

If you have convinced a team of people that your idea is a great one and you still haven't raised enough money, don't give up. The real story of Glenn Ballman and Rob Ayer at Onvia.com is the 14 month time frame from when the first got rejected for money and the closing of their first $10M VC investment in Seattle. They persevered, but they also listened to feedback and changed their plan to something a little more unique. The investors then found it more compelling and backed them. But it was hell. It was 14 months of shared apartments, cancelled phones, huge credit card debt and not much sleep.

In BC, there are alternatives to VC financing that can make your company a success in some way. For you as a start-up entrepreneur, the best source of money is a customer. They don't take equity and they increase the value of your company by many times over the value of the revenue generated. If you have to build it first, there are sources depending on what industry you are in. Strategic partners or suppliers can give you cash. Angels are almost as tough as VCs to find and convince to invest, but they are out there too.

It would be nice if I could appease the rejected entrepreneur with a concrete next step to get their business off the ground. But there is no magic bullet, no identified source of money for good, but not great business opportunities and no endless supply of capital to just throw money at it and see if it works. While you may be frustrated with the process of financing your dream, rest assured that the right combination of a well presented plan and proper timing will get you where you want to go... eventually.

Random Thoughts
  • The Killing a Mosquito With A Sledgehammer award goes to the Canadian media with their vast coverage of Canadian entrepreneurs heading to the US for VC money because they can't find it here. Yes, it's true. It is a problem. But the coverage seems a little funny when the same newspaper on the same day touts the newest and biggest round of VC financing in Canadian history, by, gasp, Canadian VCs. And then the next day talks about the latest, newest, largest VC fund in Canada being launched. A politician once said that any press is good press because people will remember you. In that vein, it is excellent that technology VC is getting known, but the story is old. Time to focus on underlying issues and/or people offering solutions.

  • The Ballard Power story this week about the government claiming money owed for patents that it financed is a scary, scary story for Canada. If you missed it, it states that the federal government is claiming that it should get some of Ballard's wealth because five of its hundred or so patents were claimed after lengthy research using federal research grants. Is the story that Ballard agreed to pay royalties for its Intellectual Property (IP) commercialized after using federal money and hasn't? Possibly. Or is it some ill-informed bureaucrat deciding that the Canadian taxpayer deserves to get the money back that it invested in Ballard. Probably a bit of both. In either case, the feds just don't get it! Ballard has huge market value, but not a lot of positive cash flow these days. Paying the royalties back would be a pain today. Imagine how wealthy the taxpayer would be if they had a few thousand shares of Ballard in lieu of royalties. In a very early stage company, taking a few hundred shares instead of royalty payments would generate far more for the government. And the argument that the taxpayer should be paid back is completely flawed. How much has the government generated in tax from the employees of Ballard in the years since the grants were given? The goal should be to support early stage R&D in order to give a few more Ballards a chance to start. Payback is irrelevant. A few Ballards will more than support all of the research not commercialized. With arguments over who owns the IP and who gets repaid, no wonder people avoid the government money in many cases. They say they want to help and they make it worse...

  • I said it before and I'll say it again. Why is the government in the business of giving money to big business? Subsidization is wrong because there is no way to dole it out fairly. Over-subsidization creates mediocre industries reliant on the hand-outs like heroine addicts at the methadone clinic. The film production industry in Canada jumps to mind. But now it's the NHL. Ugh. I grew up playing hockey. I played junior and university hockey. Some years I played 365 days a year. I love hockey as a fan and as a player. The hair stands up on my neck whenever I hear, "Henderson takes a wild stab at it." I cried when Gretzky retired. But I don't think you should bail out a money-losing industry. It's the wrong tack. Don't increase their cash on hand, decrease their expenses. They should be cutting taxes across the board to level the playing field. They should offer tax incentives to owners to offset the Canadian dollar disadvantage and that's about it. One thing this fiasco does prove, is that the squeaky wheel gets the grease. We need to turn up the volume on the governments as a tech industry to get the playing field leveled in our world.

Responses From Last Week -

I had the typical three or four responses to my argument about a lack of infrastructure here in Vancouver. Some groups were only slightly offended and thought I was implying that they were inferior. Most of their comments were great advertising for them and I fear I would start an infrastructure feature war if I printed them. So, I'm not. But thanks for writing to express those views.

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).

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