Company Logo Friday, April 20, 2007

Standing out in the crowd

It takes more than an idea to win over venture capitalists


The key to standing out in a crowd of 32,000 technology companies is a billion-dollar idea, a group of investors told entrepreneurs in Kitchener yesterday.
A venture capital panel gave 30 local executives some tips to help them stand out amid tens of thousands of startups and small technology firms.

A report released Wednesday by the Information and Communications Technology Council suggested 80 per cent of Canada's 32,000 information and communications technology companies employ fewer than 10 people.

That means there are many companies that are too small to even be a blip on a venture capitalist's radar screen.

Although the investment bar is much higher than it was during the technology heyday of the late 1990s, the panel told local executives that one principle remains: think big.

Simon Adell, chief financial officer of Kitchener software firm Covarity Inc., said he was startled to hear venture capital investors insist that firms should not be satisfied with a multimillion-dollar market.

"It has to be that magic number of a billion dollars," Adell said. "That's what surprised me the most."

Covarity, which develops software for financial institutions, landed $2.5 million in venture financing in February.

Yesterday's panel discussion, organized by law firm Borden Ladner Gervais, featured three venture capital executives.

Bernie Zeisig, director of Boston-based Vimac Ventures, reminded tech founders they need to research potential financiers and know what they are getting into before signing on to a round of financing.

"We're not in the business of coaching," he said. "We're in the business of making lots of money."

Zeisig said those who have never worked with venture capitalists should expect to cede control of their company to more seasoned executives.

"Be prepared for two to three management changes," he said. "You can have a great company with revenues measured in the millions.

"That's great, but it's so rare to find someone who can take a company from the beginning to hundreds of millions of dollars in revenues."

Jacqui Murphy, vice-president of Waterloo-based Tech Capital Partners, said it's becoming increasingly rare for venture capitalists to invest in an idea.

Lessons learned from the technology meltdown earlier this decade taught venture capitalists to look for proven market success and seasoned management teams. Murphy said there are few companies that can land financing without these two factors. The only notable exception was Sandvine Inc.

Sandvine, which went public on the Toronto Stock Exchange last year, sells network management equipment to Internet service providers. The Waterloo company posted a $5.9-million profit in its most recent quarter ended Feb. 28.

"Sandvine didn't have a product and didn't have an idea," Murphy said. "We invested in the team because we knew they would find something."

Panellists agreed that one of the biggest challenges facing newly funded companies is when to remove a founder in place of a more seasoned chief executive officer.

Borden Ladner Gervais partner Marc Babinski said founders can no longer be control freaks once they agree to work with venture capitalists.

"Right of out the gate, there is a difference like the VCs having a superior ownership position to the senior management," he said.

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