Roger Ehrenberg just wrote a post entitled: “The Pyramid Principle: Venture Investment in a Capital-Efficient World”  I think it’s very much worth reading if you’re as passionate about making Vancouver a world class tech center as we are.

It will require a culture that pushes rapid assessment and admission of mistakes, rewards innovation and compensates heavily for successes that can be broadly applied. Most large venture firms find this activity too time-consuming and capital inefficient to warrant much attention. In the future I believe that getting the base right will be the key to success in the large-scale venture field.

Bootup Labs is the base of the Pyramid.  We live to serve the rest of the Venture Capitalists who don’t feel like changing their model or letting go of their management fees.  Help us, help you.

We were all crossing our fingers and holding our breath, hoping that Yaletown would close their new fund in these tough market conditions.  That’s why I was so happy to learn that we can finally exhale!  Yaletown did a first close with $65M and plan to do a second closing to top the fund out at $100M.

Congrats to Steve, Mike, Kirk, and Hans.  But more importantly, I think this is a big win for the Vancouver tech scene in general.  Many funds around town have put themselves in maintenance mode, and angels are in a wait and see pattern, which has all but halted any new innovation in BC.  I’m hoping that Yaletown folks will be acting like kids in a candy store.

My favorite warren buffet quote: “Be fearful when people are greedy, and be greedy when people are fearful.”

I’ve been watching and reading CNBC, Bloomberg, New York Times, Paul Kedrosky and everything else I can get my eyes on.  And I think I’ve figured it out!!  NOBODY knows what’s going to happen with the economy.  It’s a very unsettling time.  I actually feel like I’m staying up to date with developments of the bailout, the elections and the extreme depth of the problems the world faces as a result, but they’re not providing me with any conclusions.

I do, however, have two fundamental beliefs:

1. The economy will recover at some point (1-5 years)
2. Investors make the most money when they buy low and sell high.

So am I making is this just too simple?  Is the “Buy low and sell high” doctrine just too obvious to really work?  With the dow closing at 9447 today, I think we can all agree, that we’re in a buyers market.  Take Warren Buffet and JP Morgan for example.  A New York Times article, Like J.P. Morgan, Warren E. Buffett Braves a Crisis, calls Warren a “Profitable Patriot”.  The biggest fortunes in the world’s history have been made in times like these. But investors are also human, and fear does often override this basic common sense logic.  The smartest investors are the ones who can put their fears aside, and invest long in companies now, when valuations are low.  By the time these companies are ready for a liquidation event, the markets will have returned.  I still find it very puzzling how some long term investors (like Angels and VCs investing in private startups) make investment decisions based on short term indicators.  Ron Conway is one of the more respected Angel investors, and I take the message that he’s sending out to entrepreneurs as a pragmatic warning of my very point.

“I would tell (entrepreneurs) to keep their day job until they got one year of funding, and if they couldn’t get that, then they’re not meant to start that company right now…. My advice to (start ups that don’t have a year’s worth of money in the bank) would be to raise money by reducing your own spending. If you can’t raise more money, you have to cut costs. And that’s what I’m harping on to my companies.”

Vancouver’s own Lyal Avery had some pretty insightful words to say in the comments:

“With all respect to Mr. Conway, I think it’s dangerous advice to tell people behind startups to “not quit their day job.” In my opinion, economic downturns are the perfect time to get started - the conditions are better than during a boom. Labour is cheap, distractions are minimized, and a lack of over-abundant investment means the business models produced can weather future storms. “

Another article to back up the trend. This one in the New York Times entitled “A New Kind of Venture Capitalist Makes Small Bets on Young Firms”

Thanks Scott Dunlop for emailing the link.

Here’s a book I’m looking forward to checking out. Reality Check: The Irreverent Guide to Outsmarting, Outmanaging, and Outmarketing Your Competition.  Obviously, I’m a Guy fan, but what entrepreneur isn’t

Disclaimer: I’m going off of memory, so I apologize in advance to anyone or organization I forgot.  Please leave your link in the comments and I’ll make sure to add it the list.  Please note that I purposely left out Bio-tech and Clean-tech because we don’t work in those areas.  And, I realize that my video gaming links are weak, so I could use some help there if anyone has any good online resources or funds (Paul Lee?).

Networking Events

• VEF
• BarCamp
• DemoCamp
• Launch Party
• VC RoadTrip
• Canadian Financing Forum
• New Ventures BC
• Founders and Funders
• VidFest
• Northern Voice
• Massive Tech Show

Online resources

Local VCs

• Growthworks
• Ventures West
• BDC
• Lions Capital (BC Advantage Fund)*
• Pender Financial*
• Yaletown Venture Partners
• Discovery Capital*
• W Media Ventures
• VenCorps

Renaissance Capital Fund VCs

• ARCH Venture Partners
• Celtic House Venture Partners
• Kearny Venture Partners
• VantagePoint Venture Partners
• Ventures West Management Inc.
• Walden Venture Capital

Eastcoast VCs

• Rho
• JLA

Angel Networks and Angel Funds

* These have been granted tax credits by the government under the Venture Capital Corporation “VCC” or Eligible Business Corporations “EBC” program.  If you’re an investor and you invest in a VCC or EBC, you’re entitled to a 30% refund from the government of BC.  You can amplify those savings by using investing in VCCs or EBCs using money from your RRSP.

Those who know me would probably not describe me as an overly wordy person, but when I read Jevon’s post and had so much to say that it wouldn’t all fit in the comments section, so I decided to write it up here.

“The title is “Why Startups Will Save Canadian Venture Capital”, and it doesn’t let anyone off the hook. It isn’t a criticism, but instead it is an analysis and a call to action for both Angels, VCs and Entrepreneurs. Things are pretty busted up right now and it is time to start talking about what we need to do to make a difference.” – Jevon MacDonald on July 16th, 2008

I, for one, am ready to stand behind you Jevon, and accept your call to action.  It’s up to us, the Canadian tech community, to fix this.  Nobody else is going to do it for us.

I just got back from a tech event in LA called Twiistup.  It’s very similar to our Vancouver based event, Launch Party.  I met all sorts of VCs, Angels, and Entrepreneurs from the LA tech community there.  Surprisingly, they reminded me more of Vancouver than I had expected.  They are a small, tightly connected and highly supportive group who shared the same exact problems as we do.  What I learned is that just because they’re in California, doesn’t make them part of Silicon Valley.  I spoke with one person at great length about the exact issues that we are experiencing as a small, non-valley, aspiring tech center.  It was as though I was a shrink and just articulated his frustrations with LA as if I was reading his mind.  I explained to him our model for Bootup Labs and how I feel it’s a big step toward solving these problems.  His response was simple, but so simple that it helped to clear my mind “It’s time to stop talking about it and just DO IT!”

That’s the attitude shift that needs to occur within our community as well, but the good news is that I feel it happening already.

So, Let’s get started…  First, we’ll break down the problem:

Problem (where we are)

From where I stand, in the trenches, I can see the problem very clearly.  The problem is that there aren’t enough new entrepreneurs starting companies because they need money, and there isn’t money because there isn’t enough entrepreneurs who can get far enough along to interest investors.  To be clear, the problem is not at the later stages, it’s at the very earliest stage, as explained so well by Jevon’s presentation.  I’m eager to hear any comments from anyone who disagrees with this assertion.

Desired results (where we want to be)

To have created the equivalent of a perpetual motion machine of new tech deal flow.  At first, it spits out many small fundable companies which can exit in the $20M-$80M range.  These are wins for Founders and wins for VCs. Hey a win-win!  Those founders then re-enter the ecosystem, personally flush with cash and ready to, both, be an inspiration to new entrepreneurs, and also take a bolder risk on that $100M-$1B idea.  Some will leave after being acquired by a US company, which is great!  We haven’t taxed or created any regulatory barriers that would prevent companies from leaving our Province. Because of this and the high quality deal flow, our eco-system attracts entrepreneurs and investors from all over the world to build their company in our supportive environment.  We gain more than we lose.  Our community competes on a global stage with ease.

Strategy (Solution to the problem)

So, now that we understand where we are, and where we want to be, we can focus.  We need to start by breaking the catch 22.  We accomplish this by feeding the bottom of the food chain — cultivating it.  VCs and Angels should invest in their deal flow, and government and universities have a lot to gain by helping as well.  Startups have always supported the VC industry, and the VCs reciprocate, albeit secondarily.  Startups are first and will always be first; It’s our role, and how we earn the title “Entrepreneur.”  So, doesn’t that make the VC dependent to Startups?  Let’s face it, if entrepreneurs stopped starting companies, VCs would eventually die off, but if VCs stopped funding entrepreneurs, it wouldn’t stop companies from being started, it just may slow it down.  Point and case: PlentyOfFish, Club Penguin, Elastic Path are just a few examples of Vancouver based Internet companies who haven’t taken a dime of VC money and are only three of the west coast’s biggest and most recent success stories.  It’s simply where VCs exist in the food chain, and there’s nothing wrong with that.  Investors are starting to realize that supporting, enhancing, and cultivating deals at the earliest of stages is in their own best interest.  Doing so will enable them to play to their strengths, which is to invest only after the companies have achieved a certain level of maturity and need a larger amount of money to grow.  In fact, it just may be what saves the Venture Capital industry.  And these days it’s a CHEAP hedge.

Next, we need to celebrate failures and re-up our investment in founders with the passion and will to try, try, try again.

Finally, we need to start the perpetual motion machine.  We do this by investing in the community around us, encouraging smart people who have great ideas to give it a shot.  Also, we reach out to our networks in Silicon Valley, Europe, and other parts of the world and offer support to come to Canada to build their companies.

Tactical plan (Executing on the solution)

Break the catch 22

1. Create a facility that allows ideas to be tested and formed into fundable companies. - DONE
2. Raise money from angels, institutions and governments who benefit from such a facility.  (Share in the risk.) - IN PROCESS

Start the perpetual motion machine

1. Assist first time founders with business model formulation, and basic business operation skills. - IN PROCESS
2. Test idea in the marketplace.  Get customers. Prove it.
3. Introduce the company to the investor community for larger growth financing.
4. Distribute excess proceeds to shareholders.
5. repeat

(Hopefully it’s obvious by now that I’m explaining a lot about what Bootup Labs’ does.  But, we’d absolutely welcome some competition.  The more people help to build the local ecosystems, the better it is for everyone.  And we’re really competing against other areas of the world anyway.)

This plan does require a bit of a paradigm shift in the way we think:

It requires some changes to the common definition of what it takes to be an entrepreneur.  The entrepreneur should be able to build something first and then ask for money later.  That’s what separates the founders who will do whatever it takes, from the less committed, thereby reducing the risk for the investor.  Right?  Maybe not.  Maybe a person’s ability to take a personal financial risk is not a prerequisite to building a valuable company.  Maybe the person who tests the idea doesn’t have to be the risk taker.  If the product is accepted by customers/users, isn’t that all that matters?  One VC I worked with used a term “founderitis” which I interpreted as a founder who thinks they know it all, isn’t willing to take advice, and makes poor decisions based on of fear of losing control.  Maybe we can avoid founderitis by removing the old process of natural selection and replacing it with a new one.

SIDE NOTE: It should be noted, that the last thing I want to do is create any more animosity between founder and funder than there already is.  VCs play a vital role in boosting our economy and helping our tech community compete on the global stage!  But, It’s a relationship that requires mutual respect and balanced terms.  Both entrepreneurs and investors need to master these skills, and if you’re one of these people, and the first thing you wanted to do when you read this was forward it to your investors or founders, respectively, then you’re the problem!  Look to yourself and make sure you are helping the other side succeed.  Make sure there is enough incentive left on both sides to stay engaged.  Don’t “control” something out of fear that the other side is going to screw up.  After all, you will get what you focus on.

The old VC model is simply broken for companies in the digitally distributed technology sector of tech.  The problem though is that there are still huge exits in that space, and will be for the foreseeable future.  Internet, casual gaming, mobile and new enterprise 2.0 deals no longer require the capital that they used to.  VCs simply couldn’t manage the size of their portfolio if they only invested $100k into each company.  It also means it’s easier to get companies off the ground and tested, and much harder for VCs to pick the one who will win.  But, one thing that will never change is that VCs will always compete over really great deals, or said differently, Startups who are fundable will always be able to pick and choose who they take money from.  That’s why the added services that a VC can offer, (connections, credibility, advice, etc) will make or break if they get good deals.  This is how we we will attract the Tier 1 VCs out of the valley to syndicate with the local investors which juices the ecosystem at the upper end of the food chain and just makes everyone happy.

Go!

Anyway… I don’t see failure.  It’s not even a possibility.  I am diligent about pushing doubts out of my mind anytime I’m tempted to consider them.  I have no time or patience for anyone who is skeptical.  Vancouver WILL be a globally recognized tech center.  It’s a fact! “It’s time to stop talking about it and just DO IT!” together.

–

If that’s not enough.  We’re actually late to this game.  Other regions have already figured this out and have working models running.  TechStars based in Boulder, Colorado (~12% the size of Vancouver), for example, started up last year and helped 10 companies get started.  8 out of 10 have already closed subsequent VC rounds.  How about not being late for once Canada?  It’s time to show some leadership.

Website:	ycombinator.com
Location:	Mountain View, California, United States
Founded:	April 1, 2005

Y Combinator is a venture fund which focuses on seed investments to startup companies. It offers financing as well as business advice and other opportunities to 2-4 person companies looking to take a great idea to a product. Y Combinator looks for… Learn More

Website:	seedcamp.com
Location:	London, United Kingdom

Seedcamp is a week long event in London, September 3-7, 2007 for twenty young entrepreneurs to showcase their early-stage strategies and product concepts. The idea is similar to the early stage startup programs… Learn More

Website:	techstars.org
Location:	Boulder, Colorado, United States
Founded:	August 1, 2007

With the motto “the geeks shall inherit the earth”, TechStars is truly motivated to getting good ideas off the ground. TechStars is a seed fund similar to Y Combinator. It offers $5,000 per founder to companies that make its list for up to 3… Learn More

Information provided by CrunchBase

We just wrapped an invite only VC Forum event (Danny talked about it a month ago). I ended up Twittering a few comments during the day.

I think the general consensus from both pitching companies and attending funding sources (a mix of mainly VCs, banks, and some government options like the NRC) was that it was a good event. We’re continuing to show that interesting things are happening here in VC, and there are lots of good potential early stage or Series A companies making things happen.

As always, I would love more transparency, but some of that will only happen over time. I think it was rough on pitching companies that they didn’t know much about who they were pitching to, but this is something you have to get used to. Be ready with your story, believe in it, and be willing to say you don’t know, or it’s something you haven’t encountered yet. One thread that was common was companies stating clearly either how much they were looking for today, or outright saying they *weren’t* looking for funding until some time in the future. Definitely appreciated, and a good way to set the stage for keeping in touch with potential investors.

Thanks to Blakes for hosting the event at their firm, and to Gordon Smythe from Propel and other participants for pulling this together.

Lastly, aside from pitch events, it sounds like lots of companies are interested in weekly working lunches, such as the one that Igor from Handi Mobility suggested for tomorrow. Interested in weekly meetups with your startup peers? Leave a comment and we’ll see about setting this up on a regular basis.

P.S. Yes, Launch Party 4 last night was excellent. This is a super busy week (check out the vidfest buzz on Twitter!) so we’ll be doing wrap up posts as time permits. It’s almost time to ready up for both DemoCamp and Founders & Funders… 

Gordon Smythe of Propel Partners is working with VC Forum to bring a bunch of VCs to Vancouver to see what all the hype is about.  Bootup Labs will be Sponsoring the upcoming VC Road Trip. David Thomas, of Rocket Builders and the Canadian Financing Forum, and I have been asked to help find the top 6-10 startups in Vancouver to present to about 16 VCs representing up to 14 firms. It’s a VC only event, so there will be no press or spys from your competition allowed in. Most of them are from the Valley. If you’re fundable, or soon will be, please let me know. danny [at] bootuplabs.com

(note to self: definition of “fundable” needs it’s own post on this blog)

If you’re starting a consumer internet company, casual game, or consumer mobile app and are at the seed stage, there’s really only ONE source of funding for us in Vancouver: Angels. That’s why Bob’s Angel Forum is so well attended and very much appreciated by us in the tech community. If you’re a founder or funder, you should make sure to drop by next week