Waterloo startups finding money close to home

Toronto lawyer Suzanne Dingwall Williams wrote a piece for the CVCA blog this week lamenting how often the startups she works with choose to seek investment from American VCs over their Canadian counterparts.

If that's the case, it sounds like another significant difference between the Toronto and Waterloo startup communities. In these parts, if you go much farther than Toronto to look for early stage capital you risk being accused of being exotic. It happens, but not often. Of the six seven-figure seed/early-stage deals we saw last year, I think only one involved a foreign investor. That seems to be consistent with the national statistics, which saw most foreign investment being put into later stage deals.

In the same post, Dingwall Williams also writes about the reputation of Canadian VCs being tarred by American brushes, but from a Waterloo perspective, I'd be shocked if one startup founder in ten here knows anything about Blackstone and Stephen Schwarzmann, to use the example she cites. Actually, my guess is that's true in Toronto as well. Some may be aware that VCs have been very well paid and that -- with some exceptions -- they haven't come close to delivering results consistent with that compensation. But that's made-in-Canada tar. The CVCA and others have published rates of return for Canadian VCs and the numbers don't paint a flattering portrait of the industry. There may have been an emperor-has-no-clothes epiphany on the part of LPs and entrepreneurs toward Canadian VCs but, from what I've seen, this has had more of an effect on LPs than on startup founders.

From any perspective, I don't agree with her view that startups should feel a "moral imperative" to get funding from Canadian VCs. That's straight out of "buy Canadian" campaigns that encourage you to buy products that you would otherwise avoid just because it might help keep people employed and extend the amount of time they spend making second-rate products. If that's the best pitch we can make for Canadian VCs we might as well just shut the whole industry down now. [Actually, with Canadian VCs collectively showing almost zero rates of return, from a strictly economic perspective it would have been better if we had let American VCs make those investments and put our money to more productive use. I wouldn't recommend that either. :-)]

Startup entrepreneurs should go where they can get the best deal for their companies. Fortunately, that will often be with a Canadian VC. What we do seem to be seeing, though, is that a greater percentage of startups today are companies where bootstapping or sub-VC funding are all that's needed to get a product to market, and often to get companies to a point where they are acquired (usually by American firms; at that point you don't hear many complaints about foreign ownership). Of those six deals from 2007 I referred to, only one of them involved a VC, and even that also included angels.

For that reason, there has been the disconnect between startups and VCs that Dingwall Williams refers to. But that's okay. Not all promising startups need VC funding. That was really an artifact of the boom years. As long as companies get the funding they need, I'm not going to lament that a shrinking percentage of startups are paired with a VC.

Unfortunately for the Canadian VC industry, many of its current problems are linked to matters of history that can't be rewritten with better mission statements and promotional campaigns (although, on the subject of marketing, I think Rick Segal has done an amazing job of both getting himself over and improving the reputation of the entire Canadian VC industry). But the message from startup entrepreneurs I'm hearing in Waterloo is more that they often don't see the need to work with VCs, not that they are avoiding Canadian VCs in favour of American investors.

BlackBerry fund looks to startups for innovation

With the new BlackBerry Partners Fund, RIM is putting its money and brand behind an initiative to look for innovation in the entrepreneurial world of startups, helping fund new companies that will create and develop innovative technologies and products.

RIM is Canada's largest company by market value and is now one of the 10 most valuable companies on Nasdaq—a list headed by Microsoft and Google in the top two positions. With its size and resources, it could have pursued any approach to innovation that it wanted, and it chose to put its support behind startups.

It could have allocated the money to university professors and told them to stop what they were working on and focus their efforts on coming up with a bunch of patents ... which RIM might then incorporate into its products.

Or it could have invited companies to rummage through RIM's patents—particularly any that aren't being used—to see if there was something there that they'd like to try to commercialize.

But it didn't do either, and there's a lesson there, particularly for government. While government policies and programs for high-tech startups have improved significantly over the last few years, there is still a tendency to think that "innovation" is something that primarily happens at universities and research labs, and that these institutions should be focusing on generating patents while the government helps create an infrastructure to push institutionally-created intellectual property into the business realm.

With the BlackBerry Partners Fund, RIM again shows that it understands that innovation isn't just something that is transferred to startups, it is something created by startups of all kinds.

Best Canadian business blogs ... and mine

Just wanted to thank Andrew Willis of The Globe & Mail for including this blog as one of his five picks for Canada's best business blogs. Most of my favourite blogs aren't even on the list -- I think the Wellington Financial blog is the only other one I often read (also a Willis pick) and many of the others are ones I've never heard of. I'll have to take a look to see what I'm missing.

There's a poll where readers can choose their favourites among the ones nominated by the Globe's writers. I don't imagine too many Globe readers will be voting for a site that focuses on Waterloo tech news -- and I doubt that I can clear my cookies fast enough or log on to enough proxy servers to have much impact. :-) But it was nice to be mentioned when so many deserving others weren't.

UPDATE: Now that I read things more carefully, it says "finance and investment" blogs -- which mine really isn't, although there is a monthly stock section. That explains the e-mail I got from someone wanting to interview me about my investment philosophy (That would make a gripping story: "Um, well, actually I don't invest in any of the companies I write about.")

Ontario's innovation agenda shows progress

The Ontario government released its innovation agenda last week -- outlining directions and priorities for achieving a "high and sustainable level of prosperity" for residents of the province. For the most part, these kind of documents are views from 50,000 feet and aren't particularly contentious -- not many people are going to oppose easier access to capital, building business skills, and streamlined government processes, for example.

But I was pleased to see that there's been a lot of progress made over the last couple of years. I wrote a blog post in December 2005 taking issue with the language of government "commercialization" policy at that time, and all of my key complaints were addressed in last week's document.

It shows an awareness of the primary role of markets and products -- something almost unheard of in 2005. There's no mention of "receptor capacity" or any of the other artifacts of innovation theories generated by wonks and academics that had little connection to what actually happens in business. It even recognizes graduates as a part of "knowledge transfer" from universities -- it's by far the most important part, and the government doesn't quite go so far as to say that, but it's good to see them acknowledge that universities contribute much more than intellectual property to the province's innovation system.

At the very least, the rhetoric coming from the government has improved significantly over the last two or three years. That may not sound like much, but I see it as big step.

Having said that, I'm still opposed to the government's proposal to offer income tax exemptions to companies commercializing university-created IP -- but not to other companies commercializing innovation. This may be the final relic of old school innovation theories -- that innovation is something that primarily happens in universities and labs and that university-generated innovation should be given special treatment over other innovations, regardless of the potential economic impact that each offers.

Great ideas with the potential for significant economic benefits to the province can come from anywhere. With any luck, it won't take another two or three years to overthrow the view that innovations generated outside universities and labs are less deserving of support.