Wednesday, December 2, 2009

Venture Capital Perspectives in the Canadian Market

I spent over three years in the venture capital industry after being a lead partner at Accenture overseeing their change management practice for NE (North America) and it was one of the best career experiences one could hope for.

Learning the ropes of corporate finance and the challenges that an early stage entrepreneur goes through to secure equity financing - yet alone attempting to learn all the new buzz langugage such as: tranches, downrounds, warrants, accelerators, etc. was a terrific experience in expanding my knowledge of innovation and growth.

However with this new found knowledge... what is very worrisome as a Canadian is that...

In spite of the wonderful trajectory into the VC sector, the health of VC investing is devastatingly low in Canada. VC Financing in the third quarter of 2009 fell over 50% from the previous year to just $191 million. In fact, total VC investments could fall below the $1B mark this year for the first year since 1995 - the year Netscape went public and the internet gold rush unfolded.

The majority of Labour Sponsored funds in Canada also have had disappointing returns to their investors or limited partners, as many in 2009 put their funds to work in alternative sources of growth. For those that moved heavily into gold and metals - they made the right decision as gold is now trading at $1200 and some predict will hit $1500 an ounce in 2010.

So in tough times and depleting capital sources, some key takeways messages to help early stage CEOs are summarized in this next section.

For early stage entrepreneurs that need that appointment with a VC the best way still for them to have a pitch is to have a referral made by a trusted source. Whether this is a lawyer, an accountant, experienced enterpreneur, banker.... having credible advisors is critical to support the challenging climb that early stage CEO's must embrace with tenacity. The market for scarce capital has never been more challenging.

One of the most critical success factors is demonstrating scalability with confidence to investors especially when the odds of success are more challenging.

Something I have seen since my early days as a VC that still continues to impact CEO's is their naivity in valuation and being insistent in overvaluing their company when negotiating with potential investors.

To really understand what your company is really worth - you have to start with the principle that investors want five to ten times their money back in five years. So being able to be incredibly clear on the profitability model with a five year outlook and demonstrating payback credibility is a key hurdle to achieve.

For entrepreneurs, their smartest growth strategy is to find smart investors and lure them in due to their ability to create market growth value and have them drive results to achieve their return on investment.

These are just a few of the insights I learned in a relatively short time in this field, one day I may return to the venture capital market, but for now in Canada, helping CEO"s grow and innovate their corporate business models is where my personal energies are spent and those of my company.

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