Chris Arsenault's Blog

Comments on the Visa idea to stimulate the startup industry in Canada

Chris Arsenault — Sun, 13 Dec 2009 19:40:49 +0000

Lately, I’ve been reading allot about different ideas and initiatives to stimulate the startup industry as well as re-energizing the venture capital/angel investing industry in Canada. Paul Kedrosky and Brad Feld came out with a pretty intense article in the wall Street Journal a week or so ago titled: Startup Visas Can Jump-Start the Economy

“One good idea to make this process easier is to create a new visa for entrepreneurs, something that is increasingly being called by venture capitalists, entrepreneurs, and angel investors a “start-up visa.” It might work like this: If immigrant entrepreneurs want to start a company in the U.S. and are able to raise a moderate amount of money (perhaps as little as $125,000) from an accredited U.S.-based venture capital firm or qualified U.S.-based angel investors, we should let them start a company here. It could be a couple of founders with an idea—that’s it. We would give visas to the founders and welcome them in to our country.”

In a nutshell, they believe that by attracting foreign entrepreneurs to the US, immigrants aren’t taking jobs away from Americans, they are helping create more job openings and drive innovation.

Danny Robinson of Bootup Labs published a similar idea, titled: Startup Visa Canada where a VC firm would “sponsor” an entrepreneur in order to accelerate the immigration process and enable the launch of new innovative companies here in Canada. This is how is could he says it could work for us:

1. VC Firms and Investors apply to become “Sponsors”

2. Founders apply to Immigration Canada along with an accepted Term Sheet from the pre-approved VC Firm

3. A temporary work visa is approved for the founders with certain conditions:

1. They incorporate a Canadian company within X days of Landing in Canada and become employees of that company.

2. They close on the financing.

3. They cannot work for another company.

4. They can apply for a more permanent status after a “probationary period” of some amount of time.

While it may not be necessary to create a new visa category, the Canadian government could broaden the existing Entrepreneur Program to allow VC financing to replace the net worth and experience requirements. I think that this is a great initiative. Synergies are drive innovation, but most importantly I think that the need for a dynamic open environment to let innovations flow is critical to our economy. Though I think the visa opportunity/issue is more of a US concern than a Canadian one (to get a working permit in the US is nightmare), I support the initiative and think it can only help build a stronger web of knowledge, of entrepreneurs and investor base. I don’t think it will reduce any available funding for strong Canadian start-up initiatives nor will it take away jobs, on the contrary, this type of initiative should energize our economy boost innovation and help get ideas and research to markets at a faster pace.

Montreal Start Up (MSU) and other partners are also well advanced in putting in place an initiative to attract talent, entrepreneurs and ideas to Montreal. Creating links between industries, sharing knowledge, enabling people to have the capacity to go to market with their innovative ideas. Again, in an ever-changing extremely competitive technology enabled global market, we need to play more offensive and drive change than ever before.

Good job guys!

The Startup Visa Canada initiative is only one of many initiatives required to boost our economy, from the grounds up that is. I applaud and invite more entrepreneurs to take action instead of remaining passive commentators.

· Just How Pressing Is the Immigrant Entrepreneur Issue? - Suzanne Dingwall

Getting over the crisis! Chris Arsenault interviews Tom Barrack of Colony Capital

Chris Arsenault — Wed, 19 Aug 2009 19:09:41 +0000

First posted on CVCA Capital Rants blog by Chris Arsenault

Thomas J. Barrack, Jr., Founder, Chairman, and Chief Executive Officer of Colony Capital, LLC, is interviewed by Chris Arsenault (iNovia Capital Managing Partner and CVCA board member) for the CVCA Private Capital Privé magazine – Summer 2009 edition

First, you survive the crisis, then you take advantage of the opportunities afforded by the confusion, advises CVCA keynote speaker Thomas J. Barrack,Jr.

At this year’s CVCA Annual Conference, held in Calgary in late May, we had the pleasure to have with us, as a keynote speaker, Thomas J. Barrack Jr., Founder, Chairman and CEO of Colony Capital, LLC. Barrack’s keynote speech was of utmost interest and very enjoyable, in part because he presented the audience with his views on both sides of the harsh reality of today’s private equity buyout market, outlining the key challenges as well as some great opportunities.

Like many other private equity buyout firms across North America, Barrack’s firm, Colony Capital, is having a tough time adjusting to all the changes caused by what is considered to be the worst market ever for the U.S. investment community.

Even though Colony Capital has only one transaction of importance in Canada, the 2006 acquisition of Fairmont Hotels & Resorts Inc., Barrack believes Canada will be one of the big winners coming out of this global crisis. This is being driven by the country’s stronger banking system, smaller and better performing buyout funds, and fundamentally sound assets across numerous line of business. They weren’t as badly impacted by the sub-prime crisis due to the fact that they weren’t overly leveraged with debt.

“We need to fix the trust issues between fund managers, investors, lenders and the markets. High leveraging multiples must be part of our past” Thomas J. Barrack Jr., Colony Capital, LLC

Barrack recently took the time to expand on some of his views with Private Capital in an interview with Chris Arsenault, managing partner at iNovia Capital and a member of the CVCA board.

Chris Arsenault: What are your current views on the state of the private equity industry in general?

Thomas J. Barrack: Let me summarize a few of my instinctive views into two categories, short term and long term.

Short term: debt is the new equity (rescue, restructuring and acquisition of all forms of distressed debt); alternative energy subsidized platforms will be the flavour of the year; real estate will continue to get clobbered; private equity will perform poorly for another two years.

Long term: oil is the new gold; alternative energy projects will reduce oil supply and increase cost; real estate will be the asset of choice; technology will play a bigger role in communications and will impact the real estate model and travel; private equity will outperform other asset classes and VC and technology funds will be at the top of the list.

Arsenault: Do you see more challenges or more opportunities for private equity players?

Barrack: Colony Capital has a few billion in dry powder, and we are being asked: “Don’t go to fast, don’t be too opportunistic.” The reasoning behind such comments is understandable and is being felt across the whole private equity community. The major investors in private equity funds are banks, pension funds and endowment funds, and their contributions are directly impacted by the lack of distribution by private equity funds. They need distributions in order to make their contributions but they got a double hit, first by a slowdown in distributions AND simultaneously by a 50 per cent asset value loss.

The super funds are the ones that are suffering the most though, they lost more money in the last two years then they had made over the last 10 years. The fee dilemma created by these funds also didn’t help as some firms were leveraging their fees to a point where it killed the model of sticking to finite capital for fees and infinite capital for investments.

We are seeing great opportunities, sound businesses being deleveraged, and true value that can be built through time. We are going back to more realistic growth objectives and we expect to do very well in the mid to long term. In the short term we have to focus on the challenges from an inches and feet perspective, not miles. We need to fix the trust issues between fund managers, investors, lenders and the markets. High leveraging multiples must be part of our past.

Arsenault: How are private equity buyout funds, such as Colony Capital, reacting to the new paradigms?

Barrack: This crisis will pass like all other crises. The key is two-fold: First you need to survive; second, you need to take advantage of the opportunities created by confusion. Experience will show a lot of its value in the coming 18 to 24 months. Inflation will return exponentially within two to three years. Private equity & real estate will directly benefit from the short-term deleveraging and the long-term inflation.

Arsenault: What does your experience tell you?

Barrack: That we need to return to principled leadership by making decent and informed decisions based on true value for the long term. No short-term value creation thinking. Even though the short term will continue to be unpredictable, the medium to long term are totally predictable. We entered into an era of broken confidence, adrift in a sea of unfulfilled expectations. New equity owners will take the reins of very valuable operating companies, acquire assets on a lower cost base and start deleveraging. And with these new teams being incented with long-term value creation goals, investor returns will be restored, and with lower leverage ratios, confidence and trust will be restored. But first, you need to survive!

Arsenault: How much deleveraging needs to occur?

Barrack: $6.9 trillion. So we will still have pretty shaky grounds in the short term. In the long run, the winners will also include those able to convert debt into equity.

Arsenault: How about your views on Canada?

Barrack: Canada can be a strong beneficiary of what is happening. The U.S. is in its worst shape ever. While here in Canada, the banks are solid, we haven’t seen any hyper leveraging; no super funds were put in place. And in these times unique skills are required, different tools are needed, and Canada is better equipped to delicately take advantage of the opportunities created by the numerous short-term stimulus packages.

Arsenault: Any other points you would like to share?

Barrack: The private equity model is changing and the focus will be going back to slower, more realistic growth and building stronger companies. A clearer understanding of the fundamentals – honesty, integrity and force of character – will show. I think many older fund managers will take this opportunity to retire, giving more room to younger more energetic managers to step in. And hopefully they will do things right and slow and understand they need to bring the confidence back, the circle of trust.

This global crisis is a savior for some, as it basically gave all fund managers a free “Get out of Jail” pass for returns!

“In these times unique skills are required, different tools are needed, and Canada is better equipped to delicately take advantage of the opportunities created by the numerous short-term stimulus packages” Thomas J. Barrack Jr., Colony Capital, LLC

Download your full copy of the CVCA Private Capital Privé magazine – Summer 2009 edition

Now it’s our time baby! Chris Arsenault interviews Tim Draper of Draper Fisher Jurvetson

Chris Arsenault — Thu, 06 Aug 2009 12:30:58 +0000

By Chris Arsenault, Interview with Timothy C. Draper, Founder and Managing Director, Draper Fisher Jurvetson, for the CVCA Private Capital Privé magazine – Summer 2009 edition

The outspoken and energetic Silicon Valley investor icon Tim Draper storms the stage at the 2009 CVCA Annual Conference.

The theme of this year’s CVCA Annual Conference was “Embrace our Energy.” Well, keynote speaker Tim Draper did just that. He had more energy than any other venture capitalist in the room that evening – his eyes were sparkling and he saw opportunity everywhere.

When asked about the current state of the venture capital industry, Draper, who is Founder and Managing Director at Draper Fisher Jurvetson, focused on two core issues. First: we need to break down the borders and enable free trade, he said, and second, we need a new private stock market. While Draper offered no solutions on achieving free trade, he continues to actively advocate for borderless markets. He regularly takes time out of his busy schedule to speak with government officials, the private equity industry, politicians and industry leaders to convince them the world will be a better place if we dropped our commercial borders.

On the second issue, Draper expects to be able to launch a new private equity exchange market. Oh yeah, and Draper also sings! He not only sings, he wrote the lyrics to the “The Riskmaster” and gave CVCA attendees a taste of his singing skills right there and then. Good thing we had the lyrics on the screen to sing along!

“While some people are panicking, or even worse clinging to the past, I think that crisis creates opportunity. And that’s a VC’s job, to identify the opportunities” Tim Draper, DFJ

Chris Arsenault: What makes these times so exiting for you?

Tim Draper: Timing is now! The current crisis is creating huge liquidity problems. The venture backed IPO market is inexistent and it’s tough for entrepreneurs, venture capitalists, limited partners and future entrepreneurs. While some people are panicking, or even worse clinging to the past, I think that crisis creates opportunity. And that’s a VC’s job to identify the opportunities.

Arsenault: You said earlier that our time was now, why is that?

Draper: I’m talking about the cycle of high returns for venture capital funds versus private equity funds. It’s a cycle. One goes up while the other goes down. The last cycle was owned by the private equity guys, from 2000 to 2008, and they had an amazing run. Until last year that is. We just now embarked on the venture capital cycle and will be coming out of the recession. That means good business for us. It’s the best time ever to invest venture capital money: we are going through a recession/depression, there are low company valuations, liquidity solutions are near, there’s less competition for VCs and entrepreneurs, and new technologies will be game changers.

Arsenault: How does your experience guide you through these times?

Draper: My father and my grandfather pioneered venture capital in Silicon Valley and I’ve been in the business for over 25 years. Some of the greatest companies in the world have started in recessions or depressions, such as GE, IBM, HP, Adobe, Skype and Johnson & Johnson. And now is the best time to invest in start-ups because existing companies are reeling, smart people are out of a job, new technologies are going to change the way we work and play, and there are fewer start-up competitors.

Entrepreneurs are now more enabled by technology than ever before. Entrepreneurs don’t require as much cash either. So we need to support these entrepreneurs, but we now get a larger stake in the company because of the more reasonable valuations. I do fear that there will be less VCs out there though. I also think that the markets will come back. They are slowly creeping back, but we need a new platform for liquidity.

Arsenault: So tell us more about XChange.

Draper: Awesome. This is the greatest thing to happen in the liquidity markets in a long time. XChange is a new springboard to an IPO. Companies can post their profile, raise money, control access and communicate with shareholders. Investors can peruse, connect with companies, buy and sell shares. The technology behind the platform answers today’s communications needs.

My company Draper Fisher Jurvetson is a substantial investor behind XChange. We need more liquidity. Liquidity is what drives deals. The current markets don’t offer solutions for companies under $250 million. This platform will enable companies to remain private while providing liquidity to investors. It will allow entrepreneurs to raise cash for their ventures while enabling investors to get their money out short of an IPO. Investors will need to be qualified trading institutions. Big names will be backing this new platform. We expect to launch in September.

Arsenault: What do you see in Canada?

Draper: Well first, the XChange platform won’t be available in Canada, at least not at initially, but it would be great to find a partner to do so. The Canadian government should drop the borders and have real free trade with the U.S. Lower friction to do business is needed. Aren’t we are both socialist countries now?

We want to bring our DFJ network to Canada and do more deals here. Canada has a history of great technologies – RIM, Sierra Wireless, OpenText, Sharepoint – great universities, a strong entrepreneurial community and a better perspective from outside Silicon Valley, more creative.

This is our time now!

“There are no better times to be a VC. It’s our time now, PE is down and VC is up!” Tim Draper, DFJ

The Changing Face of the Canadian VC industry

Chris Arsenault — Mon, 25 May 2009 18:14:22 +0000

By Chris Arsenault Managing Partner & COO, iNovia Capital

http://twitter.com/chrisarsenault

New yet familiar faces are marching into the Canadian VC landscape with different approaches towards supporting tech entrepreneurs in their endeavour to change the world. At last’s year CVCA annual conference, the theme was utmost appropriate: The Face(s) of Change! Only one year has gone by, yet so much has already changed, new and familiar faces are showing leadership and paving the way for an industry revival.

Today’s BDC announcement of a $75M commitment towards the newly created Tandem Expansion Fund (link to press release), is yet another example of how the Canadian venture capital landscape is being reshaped from an entrepreneurial angle. The managers behind this $300M later stage fund are experienced operators, with investment backgrounds and core entrepreneurial values. Interesting enough are the powerhouses that will provide global networks behind this new fund: Charles Sirois (Telesystem Ltd) and Brent Belzberg (Torquest). I know Charles Sirois and the Telesystem Ltd group pretty well, having worked for Charles for a few years in the past and for having co-invested with his other VC funds (note: Telesystem is a small investor in iNovia Capital’s second fund). I have much respect for Charles, not only because he founded and managed companies, some he built from scratch and lead them to several hundreds of millions and even billions in value, but rather because Charles has been a fervent and active supporter of entrepreneurship, understanding what drives entrepreneurs and accepting that they have the right to try, to fail, adjust, and succeed.

What does Tandem means to me?

It means that many great Canadian companies and strong tech entrepreneurs having built their businesses up to the point where a substantial amount of capital is needed to either help them consolidate a market segment, or to simply support their growth, won’t be obliged to only look south for a strong financial partner. For iNovia Capital, it means that in some cases we will have a later stage co-investor able to lead those few $10-20M rounds required to further fuel the growth of our most successful companies.

The Tandem Expansion announcement comes on the tail of Quebec based Cycle Capital – who has recently launched its cleantech investment activities with the addition of new partner/recurring VC fund managerBernhardt Zeisig; Western Canada’s warming up to the recent formation of an interactive entertainment venture capital fund called Vanedge – the team are all gaming industry veterans from Electronic Arts and Dreamworks Interactive – Paul Lee, Glenn Entis, Owen G. Mahoney and Jason Chein; Celtic House’spreparation for their new fund IV fund raising activities with the addition of entrepreneur and VC experience Pierre-André Meunier; and Steven Hnatiuk and his team out in British Columbia at Yaletown Venture Partnerswho announced not too long ago the first closing of a second early stage cleantech & IT fund.

Interesting enough, many new VC faces are in fact venture capital knowledgeable operators and entrepreneurs. Others, like Bud Kirchner of Kirchner and Company are not only showing leadership, they are taking ownership! The Kirchner and Company team havebeen extremely active and involved on both sides of the equation: as a VC, by partnering up with existing fund managers to raise funds and actively oversee direct investments such as with Avrio Ventures where Bud joined as a Partner; then, by being one of the most active investment bankers doing M&A and divestitures in Canada, sometimes representing the buy-side and other times assisting the sell-side; and finally, as a key partner to secondary fund managers, acquiring and managing the exit process for a broad range of portfolio companies (rumour is that they recently came to an agreement with Coller capital for the management of the old portfolio of Innovatech Montreal which was sold to to Coller in a secondary transaction a few years ago).

The following chart outlines what Kirchner & Company say makes them different. Funny thing is that it doesn’t sound any different, right? Wrong. Its different because Kirchner and Company, like many new entrants in the VC ecosystem, are building their business on new paradigms, where the people in the team are less alike, more complementary and more driven by entrepreneurial fuel. Just take a look at Kirchner’s recent additions to the team: Barry Gekiere (ex-Ventures West), Les Lyall (ex-Growthworks), Claude Vachet (ex-Multiple Capital), Andy Agrawal (entrepreneur), Chris Butlin (entrepreneur), Mike Cooke (entrepreneur)… and I can keep going. Doesn’t this start to sound way more like a next generation VC fund than the typical investment banking firm?

It will be interesting to see how these new and returning faces in the venture capital landscape will affect the type of VC transactions we were once used to seeing.

My recent post about our industry being at a turning point is more and more appropriate. With the recent announcement of Teralys Capital, a $700M + Fund of fund, managed by Jacques Bernier, an entrepreneur turned VC who then turned Fund of Funds Manager for the largest Quebec based labour sponsored fund (Fond de solidarité FTQ), and who now manages Canada’s largest Fund of funds, it seems like we are witnessing change within change.

For Tandem Expansion as well as for Teralys Capital, our governments (both federal and provincial) are playing key roles of being “enablers”. By participating as pure investors, by expecting full return of capital in addition to reasonable returns, at the same rate and on the same terms as their private co-investors, our governments are setting a new tone: where they aren’t providing any bailout, any grants, any loans; they aren’t selecting or politically influencing the type of companies these funds should invest in; they aren’t trying to save any specific industry by giving tax credits for job creation; they are enabling sophisticated fund managers to attract important amount of capital into their funds (as we all know size does matter) as well as providing the level of commitment necessary to attract foreign co-investors into investing in promising Canadian tech companies. Anyway we look at it, having the means to invest and to support our entrepreneurs, directly creates high paying jobs, clusters of expertise and put Canada on the map (just think of what would of happened to these industries without venture capital: Quebec’s gaming and media production industries; British Columbia’s Biotech industries; Ontario’s semiconductor and telecom industries; Toronto’s software industries, Montreal’s aerospace industry, and I can go on and on). Our governments are doings the right things, now it’s up to our fund managers to do things right!

What is next?

As the Canadian Venture capital industry matures, we will witness higher returns, recurring entrepreneurs and an increase in local success stories. More high growth companies will not be obliged to be acquired by a foreign entity in order to provide exit opportunities to its stakeholders and with the recognition that this class of investment (venture capital), although considered high Risk, will prove to generate High Rewards. That should be enough to attract more Canadian pension funds, banks, insurance companies and private institutions, with allocations of a fraction of their capital towards Canadian venture capital funds.

Thoughts and comments welcomed.

P.S. for the latest and greatest industry headlines, follow the CVCA on Twitter at: http://twitter.com/CVCACanada

A turning point for VC fund raising in Canada?

Chris Arsenault — Mon, 27 Apr 2009 22:52:40 +0000

By Chris Arsenault, Managing Partner & COO at iNovia Capital

Definitely, this is great news for the Canadian VC industry and for tech entrepreneurs alike. Today, Teralys Capital was born, with at its helm Mr. Jacques Bernier (an experienced entrepreneur, executive and investor), and with $700 million in capital (as a first closing), making it the largest Fund of Funds of its kind in Canada.

The Caisse de dépôt et placement du Québec (CDP), the Fonds de solidarité FTQ (the Fond), and the Québec government (via Investissement Québec), announced the creation of Teralys Capital, a new Quebec based Canadian Fund of Funds, which will invest in private venture capital funds (VC Funds) that in turn will invest in technology companies in sectors that include Infotech, Cleantech and Life Sciences. CDP announcement here (link).

The Caisse de dépôt et placement du Québec and the Fonds de solidarité each contributed $250 million and Investissement Québec contributed $200 million to Teralys Capital, all as part of the Fund’s first closing. Mr. Bernier expect to raise an additional $125 million from other institutional and private investors, bringing the first fund size up to $825 million.

The Government versus the role of the VC Fund in funding entrepreneurs.

I don’t believe in having our governments involved in every aspect of our businesses and especially not calling the shots on who should receive funding and who shouldn’t. And I don’t believe in bailouts per say. I believe in intelligent investments that can generate strong returns by enabling and by levering, knowledge, networks and expertise.

We live in a very competitive technology driven environment that requires our best entrepreneurs to not only have the best ideas, the best innovations but also the best business models and a unique competitive edge that is, more often than less, far from obvious to the venture capital firm looking to invest. Canada needs a strong community of privately driven VC Funds with industry expertise and broad networks of partners and co-investors to provide the insight and support our Canadian entrepreneurs need to succeed. These VC Funds need capital (just like entrepreneurs do) and today’s announcement will somewhat facilitate, for the few, their fund raising efforts and will hopefully create more awareness and interest towards this investment class.

Over the last 12 months, many provincial governments (British Columbia, Alberta, Ontario) and even some cities (Ottawa) announced their intent to actively support the Canadian venture capital industry by playing a direct or indirect role as an investor or co-investor in existing and upcoming VC Funds. It was refreshing to start hearing about their concrete investment commitments into VC Funds, and not just read about it in the budgets! You can read more about the positive impact of these initiatives in an article ported on the Montreal Tech Watch blog (link).

But today’s joint announcement from the CDP, the Fond and the Government of Québec I believe is setting new standards in Canada by all means. And I think they are calling it right!

·   First, they put together a substantial amount of cash for this type of activity to be effective;

·   second they named an experienced management team, making the fund privately managed in its self, that can lead the investment process without the direct involvement of the government (and I expect this to be the first of many Funds to come under Teralys Capital’s management);

·   And finally, they acted fast (within 2 months from the Government of Québec 2009 budget).

So with this announcement, we can expect Teralys Capital to announce its first commitments into VC funds within the two quarters. This is great, but let’s not forget that these VC Funds managers will likely be required to attract further capital from other Fund of Funds, Pension Funds, Institutional and Private investors before themselves start investing into tech companies. Therefore, we should see the first few $ in the hands of promising technology companies and entrepreneurs by this time next year.

Now, we haven’t seen any traction from the Federal Government front yet, nor do we see enough traction for this class of investment from Canadian and Foreign institutional investors. The CVCA also welcomed the Quebec Fund of Fund initiative today, but highlighted the situation our industry in their press release (link), stating: The Canadian venture capital industry has endured several years of declining fundraising. Thus, the industry raised $1,718 billion in 2005 and only $1,028 billion in 2008, a precipitous drop of 41%. So allot still needs to be done.

Yet, I applaud today’s announcement and welcome the path of action taken by the Government of Québec, by not trying to substitute itself for a VC Fund manager, but instead, by acting quickly, partnering up and leveraging the expertise and knowledge of industry leaders in order to have a more substantial impact.

Other related posts:

$5 billion to end up in the hands of Canadian entrepreneurs, nothing less!

CVCA’s Comprehensive Study on The Impact of Venture Capital in Canada on Economy, Jobs and Innovation

CVCA English press release Communiqué en Français ci-joint

Caisse de dépôt et placement du Québec press release

Download now or preview on posterous

Quebec Fund of Funds April 27 2009-fre.pdf (42 KB)

Download now or preview on posterous

Fond de Fond du Quebec – francais.pdf (42 KB)

Time’s they are changing… at the cross road of yet another evolution!

Chris Arsenault — Tue, 21 Apr 2009 10:35:29 +0000

Yep! Times are changing, like it or not, they are changing, and it’s all for the good! I’ve been reading allot lately, about the lack of funding for entrepreneurs, the poor VC returns, the lack of VC funding, the lack of recurring entrepreneurs, the “broken VC model”, what to do & what not to do from deep experts and deep commentators alike, even the incubator model has resurfaced again!

Yet, while all that is being said, what I really like to see is what is being done. People taking action. I love leadership, in every form it takes, right or wrong, I highly respect leadership. So, without re-writing what has already been said over the last few weeks, I thought I would share with you a few interesting post I’ve read, which provides views of our industry from different angles, from players within our industry (but from both sides of the table), with unique comments which are representative of the times we live in, times that are changing… And yes, even though we have witnessed two positive tech-IPO’s (Language software Rosetta Stone and online college Bridgepoint Education) it’s not bringing us back to the heydays. Entrepreneurs are realizing that not all great Companies are made for the VC high growth model and not all VC’s are made for funding entrepreneurs… don’t miss the comments, sometimes even more revealing than the post itself.

First angle, some hard facts:

Venture Capital Investing Hits 11-Year Low

The Wall Street Journal, produced by the editors of Dow Jones VentureWire

Venture capital investment plunged 50% in the first quarter from a year ago, signalling what could be a fundamental shift in the industry’s size and direction.Venture-backed companies raised $3.9 billion in the first quarter of this year down from $7.78 billion in the first period of 2008, according to VentureSource, an industry tracker owned by VentureWire publisher Dow Jones & Co. It was the lowest quarterly investment since 1998. The total fell significantly below the $5.95 billion invested in the fourth quarter of last year when the collapse of Lehman Brothers Holdings Inc. and other economic shocks took their toll on the venture business.

For the whole story please go to The Wall Street Journal http://bit.ly/BTLLW

Second angle, the entrepreneur turned investor:

Reid Hoffman: My Rule of Three for Investing

Reid is the founder and CEO of Linked-in and an investor in over 60 web ventures including Digg, Facebook, Flickr, Friendster, FunnyOrDie, Ning, Last.fm, Six Apart and Technorati.

As a serial investor, I’ve enjoyed backing some good Web 2.0 companies, and it’s helped me develop a shortlist of criteria to cut the wheat from the chaff. After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally know if I will. Many entrepreneurs are product-focused, which leads them to pitch the brilliance of the product. Others are money-minded, so they can over think the business plan. But neither of these approaches answer the first few questions I want to know as an investor:

For the whole story please go to Techcrunch at: http://bit.ly/EhYWK

Third angle, the entrepreneur:

Incubators, accelerators, and ignition

by David Crow

I am still curious about startup incubators. Mostly because I think that they do a great job focusing attention and driving buzz around the startup activities in a community. ReadWriteWeb has a great summary of seed fund incubators. Maybe we don’t need an incubator. But LaunchBox and DreamIt have been successful in building the local communitiesin Washington, DC and Philadelphia respectively. And there are local entrepreneurs heading to Y Combinator, there is a need and a desire for the benefits these programs bring for the entrepreneurs and the community.

For the whole story please go to StartupNorth.ca at: http://bit.ly/11dZMb

Fourth angle, from the top tier VC:

Venture Capital Under Attack

The Wall Street Journal, by Adam Grosser, a general partner with Menlo Park, Calif.-based venture capital firm Foundation Capital

As a venture capitalist, my job is to find great ideas and turn them into great companies. The journey to find these ideas has taken me from inventors’ basements, to obscure research labs, to, in one case, a smoky Milwaukee bowling alley renowned for its fried Twinkies. With a lot of hard work and a little luck that journey ends on the floor of a stock exchange, witnessing a company you helped build go public. It’s a helluva ride.

For the whole story please go to The Wall Street Journal http://bit.ly/HXVS0

And finally, the fifth angle, the evolutionary VC point of view:

A VC Revolution In The Making

PEHub, Georges van Hoegaerden is the Managing Director at The Venture Company

Venture Capital is broken in some fundamental way. So much so that PCG predicts a revolution and a complete redesign of the Venture Capital model, with CalPERS nodding in agreement. CalPERS has gone from a yearly review of their asset allocation to quarterly and is currently debating new hybrid asset allocation models. That means less dependency on VC, and more on other vehicles. At the same time it is looking to reduce its relationships to only the top quartile VCs and getting out of the mid and bottom tier ones altogether. Annex funds, created to fill the void of fleeing late stage investors, are not found to be interesting as the majority of the funds currently in the pipeline will not produce positive returns anyway.

For the whole story please go to PEHub http://bit.ly/MamWo

So, after reading the above angles on the current state of affairs of the VC industry and tech-entrepreneurs world, what do you think? Is the VC model broken, dead?… or is it just evolving… just like any other business!

Good times lay ahead, and yes those times they are changing, great entrepreneurs and great VC’s alike are building the next generation of tech companies and venture capital funds, new approaches, new models… I feel we are at the cross road of yet another evolution!

OUR INDUSTRY IS ALIVE AND KICKIN’ – So lead, follow or get out of the way!

Chris Arsenault — Tue, 07 Apr 2009 22:43:58 +0000

First posted for the CVCA Capital Rants blog

By Chris Arsenault, Managing Partner & COO at iNovia Capital

Within 3 days I probably saw more Tweets and Blogs about the Canadian Venture Capital Ecosystem and Canadian Entrepreneurship than I’ve seen in any given month! Rants, Raves, Criticism and Support, some comments were without any dept while others provided insight. Over the last few weeks, we started hearing about the different provincial government initiatives to support, as investors, the venture capital industry, thus addressing in part the lack of equity financing for existing and new promising technology companies across Canada. Following the CVCA publication earlier this year of a Comprehensive Study on The Impact of Venture Capital in Canada on Economy, Jobs and Innovation (link), many provincial governments jumped on the bag wagon and were announcing fund commitments, new fund creations and/or new budget allocations to VC in order to show their support and help in addressing this crying need for more venture capital funding for Canadian businesses.

Even though we still haven’t resolved the fundamental issue of having private capital flow to entrepreneurs with high growth businesses via more LP commitments towards privately managed venture capital funds, I was pleased to read about the initiatives, the interest and comments from the various players of our ecosystem. The level of comments I received (online and directly via email) from my recent post about the indirect benefits of the recent Quebec government commitments towards venture capital (first posted on Montreal Tech Watch) $5 billion to end up in the hands of Canadian entrepreneurs, nothing less! told me one thing: Yes, people care, people want change, people are showing leadership, support and interest. I’m not saying that everybody agreed with what they understood was going on and how the challenges are being addressed, many had their own views on the Canadian funding issues and had very different opinions, and that’s a good thing, I respect that, as long as those who are voicing their opinions can show leadership by causing action and are participating in the debate by building our industry, not purposely demolishing it.

I suggest you checkout the following blogs for more views and angles, some are more positive than others, yet they all offer additional insight, such as Suzanne Dingwall: Ont. Gov’t As A VC: In with a Whimper, Not a Bang; Mark McQueen’s OVCF dips toe in Ontario waters with “commitment” to Georgian Partners; and entrepreneur start-up CFO Mark MacLeod’S Unfair Advantage only to name a few.

The article from The Canadian Press, and interview with Edmee Metivier, the Business Development Bank executive vice president of financing, gave a glimpsed of the importance of the continued support needed for our Canadian technology ecosystem and the role some government agencies (such as the BDC) play ‘Lost generation’ of technology threatens Canada: official; The techvibe Canada’s Venture Capital industry is bad?blog posted comments and perspective from Brian Sharwood. Which in itself was interesting because it was a pure entrepreneurs’ view on the VC industry and start-up related government economic development agencies, questioning the way the system works from his angle.

But then… then… came the infamous WSJ article with as interviewee: Mark Skapinker. Ouch! That one hurt. Why? Because the message that came across was wrong, the burning Canadian flag was an insult, and it created a false generalized impression that we, as Canadian Entrepreneurs and VCs had failed. No the Canadian Venture Capital Community is not dead nor broken, it’s evolving and that’s a good thing! The Canadian Venture Capital Community, like in any other country, needs to adapt to its own national realities while at the same time face global competition. And secondly, we do have great new and recurring entrepreneurs, that have proven time after time that we can built great companies (even though we end up selling most of them to foreigner). Can Canada afford to have more proven and successful Canadian Tech CEO’s and Entrepreneurs? Of course, 10 times more, easy! Do Canadian Venture Capital Fund have enough financial resources to fund all the great deals out there? No, and we need to convince more institutions to allocate funds to VC & PE and we need toshow then hard results and strong IRRS!

For those of you who missed some of the action, here are the few must read links related to the infamous article:

1. The Wall Street Journal article itself: O Canada VC, We Stand On Guard For Thee

2. The reaction, among others of Mark McQueen: Skapinker gives his homeland the Bronx Cheer

3. The clarification blog by Mark Skapinker: Say it like you see it – and get kicked in the ass

4. The Rick Segal reaction: Owww! I hate getting hit from behind

5. The clarifying-clarification of Mark McQueen: Skapinker gives his homeland the Bronx Cheer part 2

I personally think that we can wish and want, complain and comment as much as we want. But the only way to build a successful business, a successful fund, to build a strong ecosystem, to innovate in an ever-changing environment, is by showing leadership. No one person, nor firm nor government will make any true difference “alone”. We can’t expect everybody to agree on “how” our ecosystem should be built or how our industry should thrive. But we can agree to respect the leadership of others, to work towards building a strong ecosystem and support those who take initiative in paving the way towards solidifying our Entrepreneurship and Venture Capital base.

Call to action! If someone doesn’t agree on how things are being done, then instead of complaining, show leadership and take action. Everybody, in its own capacity, can provide leadership, do his/her part, or at the least, support the leadership it believes is right.

I look forward to read more about what SHOULD be done, yet I sincerely expect to witness more of what WILL be done.

Chris

Calling movers & shakers! Inviting active VC’s, repeat CEO’s, passionate entrepreneurs and VC & PE industry leaders to year’s Annual CVCA Conference

Chris Arsenault — Mon, 06 Apr 2009 22:13:29 +0000

If you attend ONE private capital conference this year, this is the one you should attend - CVCA’s Annual Conference is the premier networking and professional development event for Canada’s venture capital and private equity industry and repeatedly attracts over 400 industry professionals and influencers from across the country, the U.S. and around the world.

I highly recommend that you attend CVCA’s Annual Conference as it is the premier networking and professional development event for Canada’s private capital industry and repeatedly attracts over 400 industry professionals and influencers from across the country, the U.S. and around the world.

High profile speakers include Thomas Barrack, Founder, Chairman and Chief Executive Officer of Colony Capital, LLC, Tim Draper, Founder and Managing Director of Draper Fisher Jurvetson, Leo de Bever, Chief Executive Officer of Alberta Investment Management Corp. Marc Beauchamp, President & Managing Partner at NOVACAP, Michael Nobrega, President and CEO of OMERS and Mark Wiseman, Senior Vice President, Private Investments, Canada Pension Plan Investment.

CVCA’s Conference attendees return year after year for the invaluable benefits of networking, with key industry leaders and for the topical issues presented and discussed at the various organized presentation. Participants and sponsors include the following:

Private Equity Investors
Venture Capitalists
Entrepreneurs and repeat CEOs
Institutional & Corporate Investors
Investment Bankers/Intermediaries
Government and Academia

You may visit the conference web site for the full agenda and on-line registration.

www.cvca.ca/news/events/2009AnnualConference.aspx

Please also find a copy of the full length brochure in .pdf format.

Sincerely,

Chris Arsenault

Editor of the CVCA Capital Rants Blog

Board member of the CVCA – Canada’s Venture Capital & Private Equity Association

Managing Partner & COO – iNovia Capital Inc.

Twitter: http://twitter.com/chrisarsenault

Download now or preview on posterous

2009 Conference Brochure Final at April 2 2009.pdf (7446 KB)

Réseau Capital sharing the study on the impact of Venture Capital on the Canadian Economy (en français et en anglais)

Chris Arsenault — Thu, 02 Apr 2009 13:55:07 +0000

Here is a copy of the letter sent out by Réseau Capital to all its Members, which below links to download either a French or English version of the report.

Best, Chris

Text en français au bas

***

Letter sent out April 1t, 2009

To all members of Réseau Capital,

We are pleased to attach the study on the impact of Venture Capital on the Canadian Economy sponsored by the Canadian Venture Capital Association (CVCA) and BDC. Aimed at a wide audience, it explains how venture capital works, reviews the major impact studies conducted in the United States and measures its impact on Canadian employment, growth, innovation and exports. Going beyond such quantitative impacts, it also illustrates by way of case studies the “snowball effect” of venture capital, whereby one success spurs the birth and growth of a new generation of technological enterprises. Finally, it highlights the risks to the entire ecosystem of the industry’s shrinking ability to attract more investment at this time.

Québec and Réseau Capital were active participants in this initiative, funded jointly by the Ministère du Développement économique, de l’Innovation et de l’Exportation, the other provinces and Industry Canada. Summit Capital provided additional funding that led to four success stories in Québec: Axcan Pharma, BioChem Pharma, Positron Fiber Systems and Taleo. Annie Thabet, Charles Cazabon and Hubert Manseau were on the steering committee for the study, which was presented at the Réseau Capital convention in February and served as the basis of discussions between Réseau Capital and Raymond Bachand, Minister of Economic Development, Innovation and Export Trade, when the Québec budget was being prepared. It is a fine example of partnership between Réseau Capital and the CVCA, which we intend to maintain.

Janie C. Béïque François Chaurette

Co-President Co-President

Réseau Capital Réseau Capital

___________________________________________________________

À tous les membres de Réseau Capital,

Vous trouverez ci-joint l’étude sur la contribution du capital de risque à l’économie canadienne commanditée par l’ACCR et la BDC. Destinée à un large public, elle explique comment fonctionne le capital de risque, passe en revue les grandes études d’impact qui ont été conduites aux États-Unis, mesure l’impact sur l’emploi, la croissance, l’innovation et les exportations au Canada et, au-delà de ces effets quantitatifs, illustre par des histoires à succès « l’effet boule de neige » du capital de risque par lequel un succès alimente la naissance et la croissance d’une nouvelle génération d’entreprises technologique. Elle met également en lumière les risques que fait courir à l’ensemble de l’écosystème la contraction de la levée de fonds à laquelle fait actuellement face l’industrie.

Le Québec et Réseau Capital ont pris une part active à cette entreprise. Le MDEIE l’a financée aux côtés des autres provinces et d’Industrie Canada. Sommet Capital a ajouté un financement supplémentaire qui a permis de porter à quatre le nombre d’histoires à succès du Québec : Axcan Pharma, Biochem Pharma, Positron Fiber Systems et Taleo. Annie Thabet, Charles Cazabon et Hubert Manseau ont fait partie du Comité directeur de l’étude. Enfin, l’étude a été présentée au Congrès de Réseau Capital en février et elle a servi à supporter les discussions que Réseau Capital a pu avoir avec le Ministre Raymond Bachand lors de la préparation du budget. C’est là un bel exemple de partenariat entre Réseau Capital et l’ACCR que nous entendons poursuivre.

Janie C. Béïque François Chaurette

Coprésidente Coprésident

Réseau Capital Réseau Capital

Réseau capital http://www.reseaucapital.com

CVCA http://www.cvca.ca

Download now or preview on posterous

CVCA Impact Study FRENCH March 2009.pdf (531 KB)

Download now or preview on posterous

CVCA Impact Study ENGLISH March 2009.pdf (496 KB)

$5 billion to end up in the hands of Canadian entrepreneurs, nothing less!

Chris Arsenault — Wed, 01 Apr 2009 14:33:11 +0000

First Posted in Montreal TechWatch MARCH 31ST, 2009

Follow Montreal Tech Watch: http://twitter.com/mtw

The recent Quebec provincial budget included a range of announcements that represent the most significant set of commitments ever done by any provincial government (or to my knowledge state government) to support entrepreneurship. To help shed some light on the announcement and what it means for Canadian entrepreneurs, I asked my partner at iNovia Capital, Chris Arsenault to write a guest post for MontrealTechWatch – Austin Hill.

Disclosure: I’m on the board of Reseau Capital, Anges Quebec andMontrealStartup some of whom stand to benefit from this issue and I was involved in consultations with the government in the establishment of these programs.

$5 billion to end up in the hands of Canadian entrepreneurs, as a result of Québec’s support of Venture Capital initiatives nothing less!

by Chris Arsenault

Now that the dust is starting to settle down around the recent Québec government budget announcements, the high tech community is wondering what concrete actions will come out of what is believed to be the most important “commitments” ever done by any provincial government to date towards fully supporting the build-out of the entrepreneur’s ecosystem.

I feel confident that the recent Quebec initiatives (link to budget) will ignite a flurry of positive impacts that will solidify Quebec’s entrepreneurship foundation, and that we will see numerous successful companies be launched, existing companies be financed which otherwise would not exist or would not be able to further their development because of today’s economic downturn, yet many of these companies will prove to become tomorrow’s industry leaders.

Here are some highlights from the budget:

$825M for the creation of a privately managed fund-of-funds - to invest in a certain number of VC funds;
$500M for a privately managed later stage fund – to invest in existing high growth companies;
$125M for the creation of 3 privately managed seed funds - covering all sectors;
$60M for existing FIER regional funds – as additional matching capital with private investors;
And a 10-year provincial tax holiday for new ventures that commercialize research from a Quebec university or research centre.

So, what is so great with the above initiatives? Other than the obvious large amount of dollars that will be flowing towards entrepreneurs old and new?

What is great, is the way all of the above is being delivered! First, it’s important to the that over the last year, Minister Bachand conducted many market and industry assessments, done by qualified individuals and the results were then compared to existing initiatives found elsewhere in the world. Many, if not most of the ecosystem key players (venture capital firms, fund of funds, private equity firms, angels, angels groups, Réseau Capital, CVCA, successful entrepreneurs, incubators, coaching and mentoring service firms, tech transfer offices… and so on) were asked to share their comments and recommend solutions. Finally, and most importantly, the above listed budget highlighted initiatives are being executed in partnership with the private sector and with the financial support of the existing Quebec government affiliated institutions with industry expertise such as the Fond de solidarité FTQ (FsFTQ), the Caisse de depot et de placement du Québec (CDP) and Investissement Québec.

It’s the case for any successful business, it’s ALWAYS about leverage! Successful entrepreneurs know that leveraging others’ contacts, dollars, knowledge, customer relationships and so on, is the only way to create an uncompetitive advantage beyond the obvious and it often proves to be the true marker of success, especially for start-ups.

The above $1.5B doesn’t come from the Québec government alone, only a fraction of it is, the difference of capital is being provided by the FsFTQ, CDP, SGF, Investissement Québec and … by private local and foreign investors that believe and understand our complex ecosystem. Better yet, once the large majority of the above funds get invested into promising new and existing high technology companies, we will witness an even larger financial leverage as these funds will “likely” be matched by other venture capital co-investors and other type of financing. As an example, on average, for every dollar iNovia Capital invest into a company, 7 additional dollars find its way into these same companies either simultaneously or in follow-on financing rounds.

For Fund of funds, the leverage is even more important. By way of logic, an investment or commitment into a VC fund by a Fund of funds only represents a fraction of the size of the fund, as an example of the $112.5M commitments into iNovia Capital’s second Venture Capital fund approximately 40% are commitments from FIER Partenaire, FsFTQ and CDP all together, the difference is made up of individuals and institutions across Canada, from the US and Europe. Furthermore, once the VC funds start investing their capital into promising companies, again, they attract additional funds from co-investors and follow-on investors. Now that’s leverage!

In my opinion, geographical investment limitations will directly impact the “leverage” by reducing the potential amount of capital being attracted into any deal (be it into companies or funds). Building out relationships and networks of co-investors, entrepreneurs and service providers is key to the success and long term viability of any ecosystem. Hopefully, we will see some of the above Quebec initiatives cross some borders, provincially and into what is still today our largest market: the USA.

How fast will all of this be put in place? When will entrepreneurs be able to start knocking at Venture Capital doors and actually know that they have money to invest?

Well, hopefully faster than the time it took the Ontario government, which in the case of their Fund of fund (Ontario Venture Capital Fund) who last week announced its first VC fund commitment, took almost a year before doing deals.

Maybe I’m being overly optimist. But it wouldn’t surprise me if we heard about concrete actions from $825M Fund of fund as well as the identity of the then private manager of the $500M later stage fund by late May, which is when the CVCA holds its annual conference, which this year will be held in Calgary. Why? First, because the Fund of fund must be launched in priority if the Government expect to have timely economic impact (all commitments by a Fund of fund requires further additional commitments by other investors into the selected VC fund manager – that’s a long process alone). Second, the later stage fund has been on the drawing board for over 2 years already, some large Canadian institutions have already announced their intention to commit large amount of funding to such a fund. I even noticed some Tweets on Tweeter, Linkedin and Plaxo about much progress pertaining to the launch of a $500M Canadian later stage fund. Can’t be too many new $500M size funds, one maybe two, so I’m simply adding 1 +1and I get to the conclusion that we should soon hear about how later stage companies will have access to new funds…

What about the $60M of additional commitments to the FIER Regional funds?

Well, these regional FIER funds already exist, already have portfolio companies in need of additional capital and already have deal flow (targeted new investments), so my guest here is that we should see action very soon as well.

And finally, the $125M for three new seed funds. I’m being told that a selection committee is being put in place, that the committee will review proposals by whoever wants to provide the matching funds and has a viable business plan outlining “how” these funds will be put at work. And, that the committee will likely select the three best proposals by year end (could be faster). Existing seed fund managers as well as new entrants can propose their plans. Note that any proposal must at least provide a 1 for 2 in matching dollars. I’m pretty experienced in seed investing and my concerns here are many. Such as, the size of each of these seed funds and their true capability to follow-on in the future financing rounds of their then portfolio companies. Not an easy model. The size also has a direct impact on the level of available management fees a Seed fund manager can get in order to cover for its fees in finding and supporting its portfolio companies.

Another danger is that by seed funding too many start-ups we end up breaking the ecosystem and flooding it with too much noise and too many companies that won’t be able to attract further follow-on financing and won’t succeed. But, as a society, we do need to provide capital to entrepreneurs that have the ability to grasp what needs to be done to launch a successful and fundable company.

So don’t get me wrong, I think we NEED a few more seed funds in Quebec. Seed funds take-on different level of risks than early or later stage VC funds, and they provide a different level of value-add to promising entrepreneurs. But I also believe that no private dollars should be directly financing technology or research! Private funds should only be financing innovation when within the hands of committed, new and recurring, entrepreneurs.

Furthermore, linking these seed funds with existing and new early and later stage funds is critical for the success of the companies receiving seed funding. Through better networking, collaboration and soundboard with later stage funds, Seed funds directly reduce their own risk of choosing the wrong investment opportunities. Seed fund should never look at a deal alone, it can close a deal alone, but it should always be looking into opportunities in conjunction with other investors and partners, in order to initiate relationships early on. Within the High Technology & Venture Capital ecosystem, we find many parties playing critical roles such as: tech transfer offices, seed funds, coaching and incubators, early stage funds, later stage funds, buyout & PE, bankers…(and it’s important not to “wear” too many hats). Failing to feed the ecosystem adequately is a big problem, and I’ve witnessed it many times in the past, either we see players trying to hold multiple roles and do more than what is expected from them and thus, they put themselves into direct conflict of interest with other players; or better yet, some Seed funds worked alone, by fear I guess of not getting the best deal possible and potentially losing out on a huge return and thus, tried to limit the exposure of their deal flow to other parties in order to close the deal by themselves and to then only open up the gate of collaboration once the company is in desperate need of cash!

Angels are key. I like having Angel investors implicated at the seed stage, they provide tremendous value such as industry expertise, contacts and coaching. I hope Angels will find their way into these proposals.

What does the new funding from the Quebec government mean for Montreal & Quebec entrepreneurs & ecosystem? The answer is allot, but most importantly it’s about leverage!

If you are on Twitter come and say hello and share your thought (under 140 characters J) http://twitter.com/chrisarsenault

Chris Arsenault
Managing Partner & COO
iNovia Capital Inc.

P.S. All of this is really good news for entrepreneurs. For more about how this trickle down to start-ups, check out Raymond Luk of Flow Ventures recent blog (link).