Dog Yogurt or Why angel invest in Toronto

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[Editor’s Note: This is a guest post by Chris Maeda LinkedIn . Full disclosure, Chris as he mentions in the article, was an investor in Influitive, a company I co-founded. Chris is the CEO of Brick Street Software and an active angel investor. He’s looking for deal flow and we will be hosting a series of Founders & Funders in Toronto, Halifax, Vancouver and a few other cities to connect those that start high tech, high potential growth companies with those that fund them. Subscribe to Founders & Funder$ notification list for updates. If you’re looking to connect with Chris, my advice, is to reach out to him on AngelList, but hey, it worked for me and I’m a sucker for patterns.]

I’ve been an angel investor in Toronto since 2011.  Towards the end of the days, I traded my SOMA loft for a New Hampshire cottage, partly as a by-product of some public company M&A transactions.  I began investing with a New Hampshire angel group in the mid-aughts.  I like living in NH, but the deal flow you see there is quirky.  There weren’t very many software deals, and New Hampshire has a lot of trees and cows, so the angel group ended up looking at non-software deals, like online wood pellet distributors and dog yogurt manufacturers.  When I was hearing the dog yogurt pitch, I had a what-the-hell-am-I-doing-here moment of clarity and quit the angel group.

Then two things happened.  First, my company, Brick Street Software, decided to set up a customer support center in Toronto so I started coming to Toronto for business on a regular basis.  Second, Influitive was advertising a round on AngelList.  I met the Influitive founders (Mark Organ and David Crow) and, after verifying that they were not planning to enter the dairy products business [Ed. Note: I have a dairy allergy so I’m kind of anti-dairy], I invested in their pre-venture rounds and joined their board.  I recently invested in a second Toronto company and am working on a third.  I’m starting to see patterns for why Toronto is great place to invest.

  1. Activity, talent pool, and competition:
    As I tell my American friends, Toronto is the New York and Los Angeles of Canada.  So almost everything that happens, happens in Toronto.  I’m sure I just ticked off a bunch of people outside of the GTA, but this is reality when viewed from the US.  The software talent pool is pretty good; there are lots of startups but everyone complains about a shortage of capital.  So this forces Canadian entrepreneurs to have a bootstrap mentality and means that valuations are not outrageous.  The seed funding bubble has come to Canada but its not as gassy as the US.
  2. Lots of public money and assistance:
    the US does not have SR&ED credits, IRAP grants, refundable HST, or the network of publicly-funded innovation centers that you find in Ontario.  A Toronto company that I’ve invested in has probably raised as much money in grants as it has from investors.  This means the Canadian government is reducing my dilution and (hopefully) goosing my investment returns.  Thanks, guys.
  3. Corporate customers are nearby:
    Many of the large corporate buyers are headquartered in Toronto.  I rode along on a sales call to a large Canadian company.  I usually have to get on an airplane for something like this; in Toronto I can take a cab.   I can even take transit if I’m not in a hurry.
  4. Better for international business:
    There are a number of little things that make Canada a good place for an international business hub.  For a variety of reasons, Canadian employees are less expensive than Americans, and the NAFTA treaty makes it easy for Canadian companies to expand into the US with minimal US headcount.  You can have bank accounts in foreign currencies (e.g. US Dollars and Euros). Finally, and perhaps most importantly, the Canadian market is so small that startups have to plan for international expansion from day 1.

The scarcest resource: successful companies

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I feel like I keep having the same two conversations: either about “the lack of venture funding in Canada” or “how we build a better startup ecosystem”.

Often the conversations happen, one right after the other. The lack of venture funding is about how Canadian VCs don’t get their business because they can’t raise money. And that VCs in Silicon Valley are funding companies in the same space as theirs. Therefore Canadian VCs are conservative and because others in a similar space are getting funding in Silicon Valley/New York/Boston, they are able to raise money there too. This is proof that the ecosystem in Canada is weak. And further evidence that even with the new $400MM in funding for venture funds, that because of the conservatism in VC the ecosystem will continue to remain weaker than the ecosystems elsewhere.

<sigh type=”le” />

I am reminded of the comment that I wrote on Mark Evans blog.

“I have a weird role, because I work for a VC now, but I have always believed that it is by building better founders that we will save ourselves.

A healthy ecosystem is one where you are building successful companies. These companies make money. They have growing customer bases and revenues. Because if you aren’t building successful companies you can’t do the other things.

Successful companies are run by successful people/founders.

Successful companies hire people and put them in roles enabling them to succeed.

Successful companies need lawyers, accountants, agencies, design firms, etc.

And successful companies eventually realize they could grow faster if they didn’t have to amass the profits from operations to do bigger, bolder, crazier things that allow them to be more successful.

This is where investment comes in. The opportunity to grow more successful.

It’s not about giving money to starving entrepreneurs because we have an entrepreneur shortage. We have a successful company shortage. We have an abundance of entrepreneurs. The question is how as an entrepreneur I do the things to demonstrate I understand the risks related to building a successful company. And at different points through out my corporate development, there might be a reason to raise money to go for something bigger.

There are a ton of resources to learn what successful companies at different stages look like. Check out I’ve tried along with @jevon @jonasbrandon to share my opinion, as an unsuccessful entrepeneur, what I’ve seen the successful entrepeneurs and companies do.

You need to build something that is worthy of investment. Go bigger. Go further. Demonstrate that you can build a successful company. And mitigate the risks of growth. But only when you demonstrated you know what a successful path is, should you think about raising money to grow.

The risks change at different stages of investing. It’s riskier the earlier you go, i.e., the are more risks and each risk might be unknown. But overall it’s about building a successful company.” – David Crow

Successful companies…

“If we want more entrepreneurs, how about we teach them to be, you know, entrepreneurial: self-reliant, innovative, customer-focused, not a bunch of browners trotting off to Ottawa for a pat on the head?” – Andrew Coyne, March 21, 2013 in National Post

I am still boggled at the number of entrepreneurs that tell me that “Canadian VCs just don’t get what we’re working on”.  It’s your responsibility to clearly and effectively communicate why your company is successful given the current stage of corporate development. And if you think that it is easier to communicate this to foreign investors, then you should front the $600 and buy a plane ticket, and head to Boston, NYC or Silicon Valley and go through the exercise there. Raising money is hard. I think it gets harder the further away from the money you are, and the earlier in corporate development.

Being a successful company takes more than just saying “we’re the next Facebook”. You need to understand your stage of corporate development and the risks in getting your business to the next stage. Event better if you can communicate this effectively (eloquently) to people that might want to make an investment. But just saying “we’re the Facebook of <x>” doesn’t mean the company is fundable.

We have a successful company shortage

Successful companies are the scarcest resource in the ecosystem.

What’s common when we talk about one Microsoft, one Yahoo, one eBay, one Amazon, one Google, one Facebook, one Twitter is that there is “one”. It’s the prowess to build great products, great teams, great marketing, happy customers that make for lasting companies. It’s is not the opinion that makes these companies great. It’s market cap, revenues, platform penetration, customers, users, etc.

Here is a game: How many billion dollar Canadian technology companies can you name without saying RIM or Nortel?

“It is the increasingly important responsibility (of management) to create the capital that alone can finance tomorrow’s jobs. In a modern economy the main source of capital formation is business profits.” Peter F. Drucker, 1968 (from Drucker in Practice)

Traction, in all it’s shapes and sizes, is very hard to argue with. There are strong treatises ranging from Dave McClure’s AARRR: Pirate Metrics for Startups to Ben Yoskovitz & Alistair Croll’s recently released Lean Analytics. But it is hard to argue with companies demonstrating traction, assuming that you are knocking down the right milestones to raise a round. But this is all key to understanding, for many companies you don’t raise money because you can raise money, you raise money so you can go faster, go bigger, go further than what you would on profits alone. (Not sure what metrics you should be presenting, check out Ben & Alistair’s metrics for different types of companies at different stages of corporate development).

Lean Analytics at Different Stages by Alistair Croll and Ben Yoskovitz

(Image originally published by Eric Ries on Startup Lessons Learned).

So rather than focusing on whether or not the people involved have the skills, experience or track record to be in the positions they are in. It’s better as entrepreneurs that we focus our energies on knocking it out of the park. Stop focusing on the politics of the ecosystem and start trying to demonstrate real success metrics for your company. Ultimately, it’s not a beauty contest  nor is it about favouritism or cronyism or nepotism. It’s about demonstrating that you can build something successful.

You want to build a stronger ecosystem

If you want to make Toronto and Canada a stronger ecosystem, the go build something successful. Don’t worry about the pundits, the bloggers, the opinions. Worry about your existing customers, your potential customers, your market, your competitors, your employees, your bottom line, etc.

Since I already said it: You need to build something that is worthy of investment. Go bigger. Go further. Demonstrate that you can build a successful company. And mitigate the risks of growth. But only when you demonstrated you know what a successful path is, should you think about raising money to grow.

It’s not like it’s rocket science

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Toronto Space Apps Challenge, April 19-21, 2013

Oh wait, it is!

NASA and the European Space Agency are hosting a hackathon in 75 cities around the world. It includes Canadian events in Toronto and Winnipeg.

“The International Space Apps Challenge is a technology development event during which citizens from around the world work together to solve challenges relevant to improving life on Earth and life in space.”

The Toronto event is focusing on 24 of the challenges provided by NASA (the full list of challenges is 50 large). The challenges provide a diverse set of skills and participation. Skills include software, hardware, strategy, and design. There are a number of challenges that include the interpretation of economic data and others that involve air traffic control.

With the amazing photos that Commander Hadfield is publishing on Twitter. Hopefully there is a renewed interest in the Canadian space industry. (We did build the Canadarm…) And the commericalization of space exploration with the X PRIZE and SpaceX Dragon spacecraft. It’s an amazing chance to participate in a grassroots exploration of space technologies and data.

List of Challenges in Toronto Space Apps Challenge

ESA 3D Printing Contest
Create an open source 3D model of space hardware that can be generated by a 3D printer.
My Space Cal
Combine the past and future time schedules of satellites into a common calendar that the world can easily access.
Wish You Were Here
Develop a compelling representation of weather on Mars.
Tour of the Moon
Enable humans worldwide to take an interactive tour of the Moon.
The Blue Marble
Rethink space-based Earth imagery and make it more accessible to a broad audience of space enthusiasts.
Solar Flare
Visualize invisible (to the human eye) phenomena that can affect so many vital terrestrial activities.
Seeing Water From Space
Create a visualization of Chile water resources, showing how they have changed over time relative to changes in climate.
SCISTARTER Citizen Science
Help humans understand and analyze microbial communities and compare with microbes on the International Space Station.
Renewable Energy Explorer
Create an app that integrates wind, solar, and geothermal energy data to show where combining them would have the greatest potential.
Incentives Tied to Utility Rates
Help consumers find relevant incentives, tax rebates, and savings for their energy efficiency and renewable energy efforts.
Earth Day Challenge
Explore the history of Earth Day using environmental data since 1970.
Aligning the Stars
Match and align the stars in Aurora imagery taken by Astronauts on the International Space Station.
“Catch a Meteor” Tracker
Create an app that would allow observers of a meteor shower to trace the location, color and size of the shooting star.
Database of Near Earth Objects
Create a platform to enables citizen astronomers to register, submit findings, and help rank the findings of other citizen astronomers.
CubeSats for Asteroid Exploration
Create a CubeSat design for a mission to astroids near Earth.
Deployable Greenhouse
Develop a deployable greenhouse that could be used on a space mission to the Moon or Mars.
Hitch a Ride to Mars
Design a CubeSat for an upcoming Mars mission.
My Virtual Mentor
Expand the online presence for the NASA GIRLS program to mobile and/or tablet platforms.
“No Delays” Air Traffic Management
Create a visualization that increases understanding of the problems of our current air traffic control system.
Space Station Benefits to Humanity
Develop a tool to improve the understanding of the incredible benefits that International Space Station is delivering back to Earth.
Spot the Station
Extend the functionality of the Spot the Station site that allows you to share your sightings of the International Space Station with others.
Syncing NASA’s Open Source Projects
Create an application that mirrors changes to NASA’s github presence.
NASA’s Impact on the Economy
Share the story of NASA’s economic impact in a new and compelling way.
Adopt-a-Spacecraft: Voyager 1
Humanize the Voyager mission through the creation of a data visualization, app, or even a physical object.

It’s an amazing time to be interested in space exploration. Plan on exploring at the ROM on April 19-21, 2013.