What you need to know about starting a startup in Atlantic Canada

Building a product and growing a startup is a different experience no matter where you live. In many ways every startup experience is completely unique and totally predictable all at the same time. The goals, struggles, opportunities and outcomes are each different and geography is one other thing that can be thrown in the mix.

Building a startup in Atlantic Canada IS different, for better and for worse, than Toronto, Austin, San Francisco or anywhere else.

IF you want to build a competitive, scalable, high-potential startup in Atlantic Canada then here are some of the most basic things I think every entrepreneur here needs to learn:

Get your butt on a plane

It is hard to understate this. Your customers aren’t here. Your partners aren’t here. Your investors might not be here. It is the nature of the place and you need to accept it.

Get on a plane and go see the people who are going to make your business, and you personally, successful. Every startup has different needs but it is best to err on the side of caution. If you are building an enterprise tech startup then you need to be in San Francisco. If you are building a media company then you had better be ready to spend time in New York. If you are selling to brands then I hope you like Atlanta and Minneapolis.

If you are fundraising then this is even more important. I’ve seen entrepreneurs lose a financing round because of a single bad phone call. It sucks but body language and a few dinner tables can make all the difference. Get out there, the world wants to meet you.

Government support doesn’t matter to the customer or your competitors

There are some really great programs available to support tech startups around here. Non-dilutive and relatively flexible IRAP, ACOA and other agencies really can be a great option. The fact is though that you are competing against world class startups who aren’t waiting for an application to get approved and who don’t need their SR&ED credits to make their next hire. Your competitors are moving at a lightening pace and you can’t afford to sit around.

You should be moving so quickly that you can hardly manage to get an application in for a project before you find yourself completing it. Government financing should be strictly secondary to acceleration capital which is going to help speed your execution.

You don’t need to compromise

Startups in Atlantic Canada should not compromise on anything. We don’t have to so we shouldn’t. We have been telling entrepreneurs not to put up with bad terms from local angel groups but the issue runs even more deeply than that. Focus on attracting the best investors and don’t put up with bad deals.

There is a tendency to confuse “we are different” with “we deserve different” here and while it’s ok to BE different we don’t deserve anything less than the best.

The talent pool is world class so you should hire world class

I have hired in a lot of talent rich places and I can say without exception that we have some phenomenal talent in Atlantic Canada. Like recruiting anywhere it can be gruelling. I got lucky: I hired Ben Yoskovitz. I didn’t hire him as a recruiter but he does it in his sleep and it has helped us scale without compromise.

Be picky and only hire those developers, designers, product owners and anyone else who you could drop in to a room in San Francisco, New York, Tokyo or Taipei and not have to worry about how awesome they will be. They are right here in your backyard to start looking and never hire less than awesome again. 

… and finally

You are expected to take on the world

We do not need more me-toos and I’m not talking about lifestyle businesses here. Choosing to live and work in Atlantic Canada is not the easy road and it was never meant to be. We have built many world class companies here and we expect no less from you and your startup.

Making a dent in the universe is not only doable, it’s what you should be striving for. We should be leading the country and globally as a place that punches far above its weight. There is no reason to hold back, because the alternative isn’t a lot of fun.

Do not compromise on the size of your vision or the ferociousness of your execution. You should be audacious in your dreams because building a startup in Atlantic Canada is not about being in Atlantic Canada it is about being FROM Atlantic Canada, and that is a big difference.

These are just a few thoughts, but many of you have built startups here and in other places. What’s your experience and what are your tips for the next generation of startups we are seeing emerge now?

If not an Angel Network, then what?

back black swan shotDavid posted a pretty in-depth piece on the First Angel Network this week. This followed an awesome discussion on TechVibes about angel groups over the weekend. The structure and funding model for First Angel Network were a pretty big surprise to me when I moved to Halifax 3 years ago.

Frankly it is pretty easy for us to write a post like David’s because the facts really speak for themselves: Millions of dollars from government sources are flowing in to finance what appears to be the exclusive personal gain of two individuals.

$3000 + 8% is just not acceptable and what makes it even worse is that the 8% does not contribute to the growth or sustainability of the angel group in any way. ACOA and other agencies are the ones paying to maintain the group while the cream is skimmed off the top.

My guess is that the First Angel Network will tell you that their model is normal and that it is on par with what is happening elsewhere. Simply put: it isn’t. It is artificially sustained, it is egregious and the model needs to be wiped out.

Shortly after David’s post went live I had a call with one of the most active angel investors in Atlantic Canada. He’s someone I admire and who always seems to be a step or two ahead of my own thinking. When he speaks I try to listen (which means I have to stop talking. . .).

He doesn’t have much love for a model which skims off the top either, but he’s pragmatic too.

His question to me was: If not First Angel Network, then how do we keep money moving?

Angel groups are not an easy thing: There are large groups of willing but relatively unsophisticated investors out there. They have to be marketed to, rounded up, fed a decent meal (usually) and encouraged to focus while a startup pitches to them for an hour or so total. Not easy and it certainly doesn’t have obvious economics for the organizer. It is a tough model no matter which way you slice it. The question is valid and it is something we need to think about a lot.

The world of tech startups is, or should be at least, different in many ways however. I believe it HAS to be different.

Sophisticated tech angel investors are accessible and they are ready to do deals almost anywhere. Value-add investors will, by definition, be accessible to the network and available to look at deals. We have a significant opportunity here in Atlantic Canada as well because we have some of the best angels in the country living and working here.

The landscape is changing for seed investing in tech and I think we need to find new models which make more sense for a typical startup today.

  1. There are many individuals investing regularly in extremely early stage opportunities in New Brunswick and Nova Scotia
  2. There is far more information available to entrepreneurs about financing structures and models than there ever has been before
  3. 10s of Thousands of investors are accesible via AngelList and other sources
  4. The ecosystem is larger than just these few provinces– we are easily connected in to what is happening in other communities.
  5. Legal and other fees should be minimal. Startups should be able to get a round closed for $5k with a max of $10 for a complicated and priced round.
  6. Early stage capital IS flowing in this part of the country from more formal funds such as OMERS, Rho, Real, Version One Ventures and others.
  7. There is a new fund coming online here which will be leading deals and syndicating with outside investors.

Alternatives will emerge once there is a void to fill and I believe that capital will still flow to great opportunities, while we may have to watch some less awesome ones whither.

There is a loose syndicate of angels emerging in this part of the country and from what I have seen they are all extremely high quality. It is a group made up of exited founders, successful investors and quality operators. THAT is who should be seeing deals and they do far more than 4 deals a year– dozens are getting done.

In the end the challenge we have is not simply to tear down the old. The challenge is to take responsibility for building something that matters in the future and that will create more startups through a better model. I believe that First Angel Network’s model needs to change to become less predatory and more focused on creating value in the ecosystem, otherwise we need a new alternative to replace it.

That is our job here and that is what will really make a difference.

Right now we have the beginnings of an alternative:

These are all founder-friendly and accessible routes to getting access to early stage capital. None of them take 8%.

It’s not perfect, but we will get there.

Atlantic Canadian Founders Deserve Better Than FAN (First Angel Network)

CC-BY-NC-ND-20 Photo by Stephen Poff
AttributionNoncommercialNo Derivative Works Some rights reserved by Stephen Poff

Recently, I have had the pleasure of travelling to the East Coast and working with founders. I have seen the amazing companies and the founders across the region. Moncton, Halifax, Saint John, St. John’s and Charlottetown (among the varied cities). There are amazing companies like LeadSift (disclosure: I work for OMERS Ventures who is an investor in LeadSift), GoInstant, Verafin, Clarity.fm, Lymbix (disclosure: I sit on the Board of Directors), Introhive, InNetwork, Compilr and others.

The region is bristling with great founders, great ideas and a lot of untapped talent. It also holds some amazing secrets like Toon Nagtegaal (LinkedIn) who runs a (also ACOA funded) program for startups that I have been lucky enough to be invited to co-teach (disclosure: this is a paid consulting gig). There are amazing people and companies across the Atlantic Region. It’s only a matter of time until there is another HUGE exit.

However, the region also is a small community that has it’s own culture and politics. Those small town politics have allowed nepotism and crony capitalism to seep in and it has allowed terrible deal structures to be put upon unsuspecting founders and companies. This pisses me off!

When we started StartupNorth we promised ourselves we would always stick up for founders and startups when it mattered. We continue to  support, educate and connect startups and founders with other founders, with capital, with new ideas and educational resources. We need to identify the BULLSHIT that is being allow to pass in Atlantic Canada as supporting entrepreneurs so that the amazing investors that are there don’t have to compete with a backwards and ill-conceived entity.

First Angel Netowrk

Who? I’m talking about First Angel Network (FAN). Why? Here is an example of the full deal they present to entrepreneurs:

  1. Startups apply to pitch the non-profit FAN which is funded and supported by ACOA and others.
    • Most of this funding goes to pay salaries as well as to cover travel expenses.
  2. If a startup is selected to pitch FAN, the startup must agree to pay $3000 to the non-profit  FAN.
  3. Startups MUST also sign a “Consulting Agreement” with a for-profit consulting company owned by Ross Finlay and Brian Lowe.
    • You can NOT pitch the non-profit UNLESS you sign the consulting agreement with the for-profit company.
  4. Startups then pitch the non-profit and if successful get a deal done
  5. If a deal is done, the consulting agreement gives the for-profit shell company and FAN organizers 8% of the total proceeds of the transaction
    • 4% in stock directly to Ross Finlay and Brian Lowe (not the consulting company, directly to the individuals)
    • 4% in cash to the consulting company

This is so wrong! On so many different levels. This is worse than pay to pitch.

Crony Capitalism

The thing that pisses me off the most is that the most nefarious part of the process, the consulting company and payouts to individuals, is not listed on the FAN Funding Process page. We have individuals who collect a salary that is partially (if not completely) funded by a government agency (ACOA). First Angel Network Association received at least $1,123,411.00 in funding between 2006-2011 (nothing reported for 2012). That is an average of $224,682.20/year in funding, and that is just what we could source publicly.

Getting paid by a government agency to source your own deals. Seriously, if you thought management fees were high, what about tax dollars going towards salaries of investors. They are using federal funding to source their own deals and cover expenses and salaries. Something is wrong here. Then they charge entrepreneurs for the privilege of their investment. Which someone already paid them to source. The cost of this capital is incredibly expensive to entrepreneurs taking this investment and to the region.

Atlantic Canadian entrepreneurs and startups deserve better than this.

Do Not Pay to Pitch

Startups should not pay angels or angel networks to pitch. Jason Calacanis wrote the definitive piece on why startups should not pay angel investors to pitch.

“It’s low-class, inappropriate and predatory for a rich person to ask an entrepreneur to PAY THEM for 15 minutes of their time. Seriously, what is the cost to the party hearing the pitch? If you answered “nothing” or “the cost of two cups of coffee” you win the prize!”

Jason eloquently describes why this doesn’t work. It is a imbalance between cash poor startups and rich investors. The imbalance is made worst by. We have been running Founders & Funder$ events. There is no imbalance. Everyone pays the same. Founders. Funders. We try to curate the audience to ensure that only founders actively raising money attend. We also invite a limited number of funders that are actively doing deals (criteria change based on angel investor versus institutional investors). We want everyone to be on equal footing.

And there are a lot of startups and founders that will argue that Jonas, Jevon and I have strong track records (well at least Jonas & Jevon do) and even stronger networks:

“Now, before you go saying “Jason is connected and he has access to angels” remember that I hustled my way into this industry from nothing. I networked at free conferences and figured out a way to get on the radar of uber-angels like Ted Leonsis, Fred Wilson and Mark Cuban. They paid attention to me because I had good ideas. If my ideas had sucked, they would have ignored me. Period.”

Our goal has been to help connect and educate founders and startups. We continue to believe that it is not government agencies, or venture capitalists, or angel networks that will build the next generation of successful Canadian companies. It is the founders and the employees of these startups. It’s the big ideas and the big execution that result from the efforts of dedicated people. They are the ones who deserve a great deal, not some middle man.

What can you do?

  1. Do not pay to pitch. Avoid groups like First Angel Network like the plague.
  2. Tell the people who fund FAN and other angel groups who have a pay to pitch model that you believe they should cut off funding.
  3. If you know an angel investor within an angel networks that make you pay to pitch like FAN, tell them what a bad deal they are getting and offer to connect them to great founders.
  4. Help fellow entrepreneurs by making introductions to qualified angels directly
  5. Explain to your peers that an investment by networks which make you pay to pitch, such as FAN, can only be considered as a means of last resort, and taking this money will affect your future funding opportunities negatively.
  6. List your startup on AngelList, our StartupIndex, Techvibes index and other places to get exposure FOR FREE to great investors

Atlantic Canada is generating some of the highest returns in the country right now for angel investors. The community is small but very focused on big outcomes and it is really showing. I think it’s time to cut ties with this old model and to start giving the founders in Atlantic Canada a deal worth taking.