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Joshua Geist thought he had started the pitch to a hometown venture capitalist pretty well. Geminare, his small 17-person software company based in Toronto, was quickly going global after signing a deal in November with CA Inc., one of the world’s largest software makers. CA would resell Geminare’s hosted business-continuity software as its own to an initial target group of 300,000 small and medium-sized businesses (SMBs). Geminare had some 30 other channel partners signed on, too, and a year from now, Geist predicted, it would have sales channels infiltrating dozens of countries. That is, if it gets $5 million to support the growth.
But just four slides into a 30-slide presentation, the well-respected VC interrupted him with a question that took Geist aback. “Why couldn’t CA figure this out and you did? They’re a huge company, they would have access to more resources than you.”
Geist, a congenial and straight-up guy, fumbled for just a moment. He explained that CA has 13,700 employees, with multiple large departments dispersed in several locations and a wide array of products. By the very nature of its size and structure, CA is less nimble than Geminare. But what he really wanted to say was: Why does it seem so unlikely to you that a small Canadian company did figure it out?
Less than an hour later, the never-more-than-cordial meeting was over. Geist and his CFO were back on the frigid Toronto streets, making the 10-minute walk to Geminare’s offices in a converted downtown rowhouse. As they hustled past Danger Falling Ice signs, he mulled over the odd question. Perhaps it was irrelevant, considering how strangely quiet the VC’s office had been — not another soul was in sight save the receptionist — but it nevertheless had struck a nerve.
Geist thought back to the several meetings he’d already had in previous weeks with VCs in the Boston and Silicon Valley areas. Not one had asked a question like that. Instead, the underlying tone in the United States was congratulatory, and intrinsically trustful of an entrepreneur’s ability to disrupt a market with new technology. In addition to being more knowledgeable about the software-as-a-service business model Geminare was pursuing, as well as its strategy of using value-added reseller sales channels, American venture capitalists seemed to place more interest in Geist’s own vision and abilities, and the company’s technology and market potential.
Canadian VCs? They only wanted metrics: revenue, deal pipeline, number of employees. Either a company’s business plan populated its spreadsheet models with the right data, or it was too risky for investment. “I did a couple of double-takes with Canadian VCs that said, ‘We want to see you have x-million in revenue, and then we’ll talk about investment,’” says Geist, who has now met more than a dozen each of Canadian and U.S. venture capital firms since the fall. “If we were hitting those gates, we wouldn’t be going for VC dollars, because the company would be self-sustaining,” Geist points out. “I wouldn’t go to a VC, I’d go to a bank and get a line of credit.”
Not prone to entrepreneurial bombast, Geist is matter-of-fact in his pessimistic assessment of the current environment for growth capital in Canada: “We would not have a problem getting a deal done in Canada,” he says, “but the deal would be so poor, and there would be so little value out of it for the company that I already know this isn’t for us.” Instead, Geist, like many before him, is focused on attracting U.S. dollars.
Geist’s gloom is shared by many in the venture capital industry. For most of this decade, the size, number and total amount of investments by Canadian VCs have been slumping, and it’s only worsened since the roiling financial crises started last fall. According to Canada’s Venture Capital and Private Equity Association (CVCA), the total value of venture cap deals slumped 36% last year, to $1.3 billion. Financings averaged $3.6 million, down from $5 million in 2007, and 10% fewer companies received money. Not surprisingly, a large hit came in the last three months of the year, when the average value of a deal dropped 43% from the same period in 2007.
But the biggest problem was that American VCs turned their attention away from Canada. Investment deals by U.S. firms dropped 56% in 2008, accounting for 28% of disbursements in Canada — well off its 41% share in 2007. Venture capital investment hasn’t been this low since 1996. And no one is predicting a turnaround soon.
For many early-stage companies, 2009 is shaping up to be a year of basic survival. Preserving cash is of the highest priority. Unpredictable conditions in the technology market make it difficult to forecast anything beyond 60 days, according to some entrepreneurs, and raising new capital comes at a heavy cost: high interest rates, 12.75% on venture debt, if companies can get it, or low valuations for equity stakes. In short, only those companies that absolutely require capital are raising it. Even then, many VCs are turning them away, choosing to keep their powder dry to help support existing members of their portfolios that could need injections — and not even those companies may get it.
Some in the entrepreneurial community call it scary; others, merely depressing.
But Geist knows that Geminare is in a fortunate position, for several reasons. One is that its product — business continuity software that replicates a company’s servers and simultaneously hosts a copy off-site to offer virtually zero downtime or loss of data should an outage occur — targets an under-served need in the SMB market, even in a recession. Another is that the product is sold as a service, so end customers can roll it into an operating budget at a time when large one-time capital expenditures are unfeasible. Finally, Geminare’s sales strategy is based on using multiple sales partners, which has the potential to rocket-fuel its growth, especially because its software service is a high-margin revenue stream for its resellers.
The challenge is that Geminare now needs to support all those partners, especially the 13,000 or so in CA’s network. Geist flew to Las Vegas in mid-November to attend CA World, the company’s annual trade conference for customers and partners, and witness the public launch of CA Instant Recovery On Demand (Geminare’s product rebranded). H was deluged with meeting requests by representatives from all over the globe.
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