Ideas aren’t enough

Canadians are often left grasping for venture capital. Here’s what a few thriving startups did differently.

 
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Illustration: Daniel Stolle

Bryan McLeod remembers one particularly insulting moment well. A few years ago, he was trying to sell his company’s product, a data-backup utility called Clickfree, to a large retailer and had just finished his half-hour demonstration. The store’s buyer turned to him and said accusingly, “Your competitors tell me they wrote your software.”

McLeod was shocked. He couldn’t understand why the buyer had sat through the demo without saying a word, only to spring her bombshell on him at the end. “It seriously happened,” he says. “The retailer ended up firing the buyer because the buyer was crazy.”

The incident was just one of many headaches on the arduous road to getting Clickfree into stores. There was also the constant driving around, the endless meetings with buyers, the long hours. There were the retailers who were seeing their margins squeezed by the Internet so they, in turn, squeezed their suppliers.

The difficulties have ultimately been worth it, though, because Clickfree and the company behind it, Richmond Hill, Ont.–based Storage Appliance, is now being courted by big-league investors.

Storage Appliance is not McLeod’s first go-around in the startup game. He was previously an investor and owner of  medical equipment maker Excel-Tech, bought by Natus Medical in 2007, and Intrigue Technologies, maker of the Harmony universal remote control, which he sold to Logitech in 2004.

He joined Storage Appliance as chief executive in 2008 and has since helped the company land more than $32 million in funding. The latest batch came in January from Intel Capital, the investment arm of the microprocessor maker, which was attracted to Clickfree’s retail buzz.

But Storage Appliance’s is not a typical story. According to Canada’s Venture Capital & Private Equity Association (CVCA), Canadian startups are having an increasingly difficult time getting the money to get off the ground. For the second quarter, venture capital investment in Canadian companies was down 2% to $328 million. Comparable spending in the United States, by contrast, was up 5% to US$7.5 billion.

There is also considerable disparity in funding amounts between the two countries. Canadian recipient companies are averaging about $2.4 million per investment, or less than a third of their U.S. counterparts. Worse still, the amount of money being raised by Canadian venture capital companies—the funds they will eventually dole out—is also shrinking. For the quarter, they raised only $132 million, down dramatically from $308 million a year earlier.

The CVCA’s numbers largely jibe with findings from the Organization for Economic Co-operation and Development (OECD). While Canada fared relatively well a decade ago in terms of venture capital investment as a percentage of gross domestic product, in recent years it has slid to the middle of the pack. Scandinavian countries including Denmark, Finland and Sweden now lead the OECD, with Canada sitting in 15th place.

“Relative to the size of the economy, the Canadian innovation economy is not punching at its weight level,” says CVCA president Gregory Smith, who is also a managing partner at Brookfield Financial. “That’s going to have an impact on jobs and job creation over the next decade. We do have a crisis in the innovation economy in Canada.”

It’s a familiar refrain. Whether it’s education and training, infrastructure, political leadership, research and development or investment funding, study after study has found Canada isn’t doing enough to create an economy of the future. Canadians who have ideas for innovative new products and services—perhaps the next Google or Amazon—may have to leave Canada to get them funded. The fear, then, is that the rest of the country will have to continue drilling around in the ground and chopping down trees to remain prosperous. To escape this reliance on resources, more companies will need to learn the secret of attracting venture capital in Canada: you can’t count on just a good idea; you need a good business too.

The statistics don’t face the successful entrepreneurs like McLeod, though. They feel like they’re attracting money in spite of the numbers. Indeed, many espouse an “If you build it, they will come” mentality. They stress the word “build,” though. In contrast to Silicon Valley, where even mediocre ideas and companies with no demonstrated revenue can get funding, here startups have to roll up their sleeves and build a proper business around their innovation first. The good news is that if they can do that, venture capital dollars will eventually find them.

Clickfree, for one, started as a simple idea in 2005. Ian Collins, who had previously founded and sold off a number of telecommunications, software and customer-service firms, including Wysdom and Mobile Diagnostix, had just bought his mother a digital camera. When he discovered that the available products for backing up her photos were too complicated, he created his own.

That was the easy part. At first, Storage Appliance tried to license its technology to other companies. Collins and McLeod found a few takers but not enough to facilitate the kind of growth they wanted. The whole endeavour could have ended there. McLeod and Collins, however, decided to reorient the business by trying to sell the product themselves.

“We had to do a lot of TV shopping shows, we had to get into retailers, we had to make a lot of contacts and put products on the shelves first before people started calling us,” he says. When Clickfree started clicking at retail, the company’s original business plan sprang to life as licensees and ultimately investors started calling. Finally Silicon Valley came knocking, in the form of Intel Capital. The chip maker’s investment arm has a very specific mandate: it seeks out companies working on technologies that can ultimately benefit Intel strategically. These days it is particularly focused on cloud and mobile computing.

Bryan Wolf, managing director of enterprise, embedded and visual computing investment at Intel Capital, came across Clickfree at home one day while he was looking for a way to back up his personal files. “I kept arriving back at Clickfree as one of the easier-to-use, consumer-friendly and effective solutions out there,” he says. “I took the chance and have been a happy personal consumer ever since.”

Meanwhile, back at the office, Wolf’s team was also studying data-backup companies. Through spreadsheet and data analysis, they separately came to the same conclusions as Wolf had as a customer. “We were looking for a company with a proven product, proven technology, was scaling both in terms of customers and geographic breadth and had a business model that was very conducive to working with us,” he says. “We did a competitive analysis and came to Clickfree as one of the best out there.”

The story was similar for SecureKey Technologies, another Canadian company that received funding from Intel Capital earlier this year. Greg Wolfond founded the Toronto-based company after two previous successful ventures. He sold his first, Footprint Software, to IBM in 1995, while his second, 724 Solutions Inc., went public in 2000. SecureKey’s main product is OneTap, an e-commerce system that lets consumers make payments by tapping their credit cards onto a USB stick attached to their computers.

Wolfond recalls many long meetings with banks and financial institutions about his company’s technology, which uses near-field communications for no-contact purchasing. Given the high level of caution required when dealing with financial transactions, the company spent many months tweaking the product before anyone would agree to buy it.

SecureKey is now used by several banks, and the company is starting to “step on the gas” in terms of adding new customers, Wolfond says. As with Clickfree, creating the technology was only half the battle. Doing the legwork and cultivating customers was the far more important step that led to getting Intel Capital’s attention. “To be successful, you have to be able to do both. You have to build a better mousetrap, and you have to sell it,” he says.

Both Storage Appliance and Securekey have benefited from having experienced entrepreneurs who know the secret to success lies in building a functional business. Some rookie startups, however, are learning those lessons, too.

Duleepa (Dups) Wijayawardhana launched Empire Avenue in 2010 after working at Edmonton-based video-game maker BioWare. Empire Avenue is a website that acts as a virtual stock market where people buy shares in each other. The idea is to get users to communicate, but also compete to see who can get the highest worth.

At first, Wijayawardhana’s plan to earn revenue revolved around selling ads on the site, but he didn’t have much luck there. “We were gamers and social-media people, not advertisers,” he says. “We didn’t understand the advertising market and didn’t know how to break into it.”

Wijayawardhana credits Ben Narasin, president of seed stage investments at Silicon Valley venture firm TriplePoint Capital, with putting his company on the right track. The two met last year at 48 Hours in the Valley, an event organized by the C100, a group of expat Canadians in California. “He said to me, ‘You guys have a great product, but you’re kind of off the mark,” Wijayawardhana recalls.

TriplePoint took Empire Avenue under its wing and helped steer it toward a more immediate source of income, by selling virtual currency to users, who then use it to purchase shares in each other. Since then, revenue has been climbing, Wijayawardhana says. The bolstered revenue impressed Silicon Valley venture fund Crossfire Capital, which in August invested $1.2 million in Empire Avenue. Like Clickfree and SecureKey’s OneTap, the site has become more than just a neat idea; it’s a business with cash flow—and investment dollars to boot.

These examples are encouraging in the face of the venture capital “crisis,” but they do go some way to proving the fears expressed by the likes of CVCA. Storage Appliance, SecureKey and Empire Avenue have successfully raised money this year, but it all came from U.S. investors. If this keeps up, won’t innovative new startups just inevitably move south? Maybe, but maybe not. All three companies agree that while it is imperative to have a presence in Silicon Valley, as well as in other important customer markets such as China, none feel they need to leave Canada to succeed.

As Intel Capital’s Wolf puts it, the nature of venture funding is changing. Not only is the demand side competitive, with more and more companies looking for investment, so too is the supply side. In the United States, there is a lot of money chasing a finite number of quality deals, he says, which is forcing venture firms to expand their scope, both internationally and into different stages of investment. “Access to capital is there even beyond the borders. The question then becomes: Is there still core innovation happening? Clearly we’ve found companies [in Canada] that we think are very innovative.”

In some ways, Storage Appliance’s McLeod says, Canadian companies have an advantage in that they can’t depend on just a good idea to get by. They have to put in the work to build a good business, which will ultimately help them in the long run. “You can’t just build a story and try to sell the story,” he says.

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