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

Something Ventured:
July 23th, 2007

By Brent Holliday
Greenstone Venture Partners

A Strangeloop Coup

If you want it here it is,
Come and get it.
Make your mind up fast.
If you want it anytime,
I can give it.
But you better hurry,
Cuz it may not last.” – Beatles, Come And Get It

There are as many ways to plan, execute and grow a start-up technology company as there are stars in the universe.  Books, seminars and the occasional verbose columnist will tell you the “best” way to grow your company, but best practices are always applied to your particular circumstance.  You have a certain product to sell a certain way and a set of talent and experience that constrains your choices.  You have a growth plan that is slow and organic or fast and furious, depending on your market opportunity.  When it comes to financing your company, you do have choices as well.  There may be a best way to raise money for your particular plan, which is why you should seek advice on how to approach it. 

Local technology company Strangeloop Networks is just announcing one of the largest Series A round financings in Canadian history.  This is news because large technology financings that aren’t biotech related are rare these days and any financings at all in Canada are reasons to celebrate given the recent slowdown in new company financing.  So, the company that brothers Jonathan and Joshua Bixby (no relation to Bill Bixby, the Incredible Hulk, by the way) started just over a year ago, raised $11.5M to attack their particular opportunity in their particular way (more on that in a minute). 

But the real news for me is that this was raised all from angels.  Canadian angels.  Like Talent Technologies of Richmond, Strangeloop has managed to raise way more than $10M (including their seed round) from individual investors.  This is no mean feat and it deserves a lot of praise.  In Talent’s case the approach was dictated largely by the market as they raised a lot of their money in the dark years of 2002 to 2004 when venture capital funds were busy hiding under their desks.  But in Strangeloop’s case, the approach was mostly by choice.

I talked to Jonathan Bixby about the financing and the company. Their approach to raising this money was focused on what they wanted from financiers, money and top drawer expertise.  They got all that they wanted from the individuals that invested, who are elite technology entrepreneurs themselves that know the market that Strangeloop is entering.  Jonathan wanted to stress to me that, “We didn’t particularly exclude VCs at all… we were able to go to our primary targets, helped by our seed investors, and get everything we need to go after our market opportunity quickly.”

The conventional thinking in early stage company financing is that individuals generally don’t have the deep pockets or the risk profile to entirely fund companies that require >$5M in total funding over the lifetime of the company.  Most angel investors prefer to pepper a bunch of companies with smaller amounts of seed capital and have that one huge success in ten that more than pays for the rest.  They rarely “follow-on” which is investment in subsequent larger rounds.  So, why did Strangeloop’s investors throw convention out the window?  Why are they taking all the risk with their own money and not sharing some of it with venture investors?  I’ll answer that after a brief history of Strangeloop…

Joshua and Jonathan founded another decent success story in Vancouver, Ironpoint Technologies, which sold in 2005 to Active, the same company that bought Class Software.  Ironpoint was a SaaS application company that allowed its customers to manage content on their own web sites without downloading any software tools.  The company was built on the Microsoft ASP platform, that more recently evolved into Microsoft .Net.  Like most technology companies, Strangeloop was born of frustration with a particular process and a “pain-relieving” idea to help others manage that frustration.  While at Ironpoint, the brothers became increasingly frustrated with the slow, clunky and limited performance of 1st generation web applications.  Even now, improvements to the underlying platforms and the ascendance of AJAX to improve the user experience still don’t deliver true “desktop-like” applications mainly because we are still dealing with a network connection.

In May of this year, Strangeloop announced their network appliance, AppScaler, that helps ameliorate issues with Microsoft based, dynamic web applications.  The company has some devices out in the field today and is looking for full commercial launch in early fall.  The reason for the large Series A round, one that must have been very dilutive to the founding team’s ownership, is to attack the market very quickly.  Jonathan says the company wants to double its staff almost immediately, grow the distribution and sales and staff up the support team.  He says that he will do most of that locally, which is really interesting in a tight labour market. If you look at the senior management team, the company seems to be drawing from two successes, Ironpoint and Abatis/Octiga Bay.  As Jonathan told me, the obvious starting point for them to get world class talent is to draw from companies that knew success, both technically and in the market.  He also said that the investors will help them find the best possible talent because of their connections and stature.  I am very interested in following up with him about finding talent for growth here in BC. It will be a great case study in hiring, methinks.

Strangeloop appears to have taken the path of “grow big or go home”. It’s their particular path for their particular opportunity.  They have sacrificed company ownership for the chance to hit the market and grab the lead.  As Jonathan said, “There is no sense waiting.  The market is real, the opportunity is there and we want to grow a very large and successful BC based company.”  Music to my ears as I have talked previously that success breeds success and only big opportunities like Strangeloop will attract big capital to this province.  Which brings me back to the interesting news about this capital raise… their big capital did not come from the typical sources.  What does it take to get individual investors to take this big of a bite?

Before you all go out and write a business plan to raise $10M from individuals, remember this about Strangeloop’s uniqueness… their management team was proven.  The only way to achieve this type of a financing is to have a team of managers that have been there, done that.  You also have to be very lucky and find individuals wealthy enough to write million dollar cheques and be prepared to lose it all.  That is a very small crowd, I assure you.

Consider the path of financing chosen by two Calgary based companies that were/are in the network appliance space, not very different from Strangeloop.  Jasomi Networks raised their capital from founders and individuals based on their proven team.  But they got their VoIP technology to market (in 2001), successfully sold in the millions of revenue and were profitable on a total cash raise of $6M.  Total.  Jasomi took a bare bones approach (partly because of the brutal environment) and left more of the company in the hands of the founders.  They sold successfully to DiTech Communications in 2005 for around $30M.  Their individual investors did not/could not write the cheques that Strangeloop’s investors have.  And it worked out for them.  They achieved a nice return in a tough market.  If Strangeloop sells for $30M, it won’t have been a success. They are on a different trajectory altogether.

Wedge Networks in Calgary is doing a similar path to Jasomi.  Once again, no VC investors, all individuals.  They have a security appliance that is already selling into the market.  They have raised less than $5M total, most from technology related individuals.  They have enough cash to execute their current plan and might end up with a decent exit if they execute.  The key for Wedge getting their money was the addition of a new CEO with previous success.  But their market opportunity may not require a $10M funding, like Strangeloop.

Three different Canadian appliance companies, similar in their funding source, but different in their funding approach.  Each could have gone to VCs to fund, but did not.  They had individuals ready to back them giving them a choice, which is an enviable place to be.  Jasomi. Strangeloop.  Wedge.  Sounds like a new golf club… or a salad at Glowbal.  Anyway, it will be interesting to track them and compare their stories in a few years.  Congrats to the team at Strangeloop and good luck.


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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