VC in Canada 2016

OMERS Ventures estimates that total venture capital (VC) invested into Canadian startups increased 15% year-over-year in 2016. Early-stage startups received most of that increase, while investment in late-stage companies contracted.

It is encouraging to see early-stage companies getting more funding year-over-year. But the fact seed funding was down is alarming, and needs to be corrected.

Passive VC: thing or not a thing?

Passive VC, in my terms, is something like YCombinator (YC). Not exactly like YC, but shares the following characteristics:

a group of seed startups
each startup gets an office for 3 months, and enough money get their MVP polished and shipped
the terms and process are simple and transparent: $100k, 7.5% equity, 13 weeks

The rest will take care of itself. Because equity is involved the incentives of founders and investors are aligned (unlike most of the Toronto-based )

Ego, Performance, Culture

Lets talk about the poisonous impact of ego in investing.

Active investors play the losers game despite the data showing how fleeting the returns are for active traders. They want to be the smartest person in the room, or on Earth.

Seed stage investors call themselves 'angels' FFS...

VCs hold onto the cash because it gives them power. Once they invest, the power shift to the entrepreneur.

Of course, in finance there is always institutional reasons that encode for bad behaviour. In VC, growth is over-valued, longevity/durability is under-valued (source: Peter Thiel). Why?

most of the value of startups exists far in the future.

If you run a sophisticated financial model like DCF (discounted cash flow), or do the math on profit streams, there are two components.

A) growth rate B) discount rate

Because the growth rate is higher that the discount rate, the value exists far in the future. Using PayPal as a case study, (in March of 2001), growth rate was 100% a year, discounting future cash flows by 30%, means roughly 75% of the value of the business came from cash flows 10 years in the future and beyond!

Generally, you can apply this across most high-growth startups.

75-85% of company value is realized 10 years from now...

Because it's so far in the future, everyone wants more growth to realize value sooner. Thiel emphasizes that in Silicon Valley, "we always over-value growth rates and we undervalue durability".

OMERS

OMERS Ventures made 4 investments in 2015. THIS IS INSANE. They raised $260 Million dollars in 2015. Total funding $470 million, they self-proclaim "...our two funds together represent one of the largest long-term private capital pools active in Canada’s venture sector"

Despite their cash, US investors provided ~52% ($559M) of all capital invested in Canadian startups in 2016. Fifty cents on the dollar comes from the US?! In 2015, US investors poured $482M into Canadian venture capital market (48% of all VC).

From 2011-2015 OMERS Ventures invested in 23 startups, "doubling venture capital spending", via Financial Post.

YC vs. VC

YC is more formulaic than traditional angel / VC.

YC has "batches" (a cohort of startups that starts/stops their incubator program at the same time. Loosely, they operate as follows:

-- 50-60 startups per batch -- enter the batch with a specific goal/product in mind -- a batch is incubated for 3 months -- demo their product the end

Demand for Quality Incubators

Ryerson DMZ is so successful it is busy to the point of being crowded, via Ottawa Business Journal:

The competition for space in the DMZ is high, and some of the startups talked about “squatting” in a facility that is packed to the rafters. Others noted the huge number of companies in the DMZ makes it very difficult to find experienced mentors and sources of funding

List of Incubators in Canada (from 2014, via Mars): https://www.marsdd.com/mars-library/accelerators-incubators/

YC Clones?

One of the key benefits to YC is standardized term sheets.
FounderFuel Facts, source:

-- 13 week program based in Montreal -- focused on the pre-seed to seed stage -- 67 companies since 2011 -- $6 million in funding from Real Ventures in 2012 -- 14 acquisitions, 13 shutdowns, remaining in operation -- investment of ~$100K for ~5% in equity.

Mid market VC is a trap!

Peter Thiel in his lecture to Stanford student provides this inThere are businesses that are perfectly competitive and there are businesses that are monopolies. There is shockingly little that is in between. startupclass.samaltman.com/courses/lec05/

Over a year since @marcusdaniels wrote: Canada needs more pre-seed & seed in VC. http://www.huffingtonpost.ca/marcus-daniels/pre-seed-funding-venture-capital_b_8451236.html How has landscape changed since?

Daniels lists several reasons more seed (and pre-seed) is good. For starters, the benefits of standardized term sheets are huge!

There is considerable variance in pre-seed term sheets. This is a problem that has been partly resolved in the U.S. via standardized term sheets like "safe," which was developed by the famed Y Combinator accelerator.

Standardized terms removes confusion for founders. Also helps investors understand their risk/reward better. Keep the funding simple, focus on the product (cut out the bankers and lawyers!).