Bootup Labs Blog

On March 3rd, It was announced that Section 116 will finally been fixed in the most recent Canadian budget.

Many US venture firms or angel investors are not even aware of the reporting requirements under Canadian section 116 of the Income Tax Act.  But those that are, have often foregone investing in Canadian private companies because of it.  It’s been a big barrier, and it’s finally been removed.

In a nutshell, section 116 required that, upon a share sale, the purchaser must withhold 25% of the purchase price from non-resident shareholders until the shareholder obtained a clearance certificate from CRA, which could take many many months.

Special thanks to Steve Hnatiuk at Yaletown for his work via the CVCA for working so hard to get this issue resolved, who emailed me this:

The fact that US VCs would have to file clearance certificates for every single one of their underlying fund investors was a massive disclosure and administrative burden that significantly complicated distributing exit proceeds to the investors.  This was simply too big a deterrent and tax risk for many US venture investors to take on, and resulted in complicated and expensive structures often being put in place for Canadian deals as a work-around.  All of these things impaired the ability of Canadian companies to access venture capital from the US.

And, I will quote Keith Spencer from Fasken who put it simply:

Practically speaking, US vc’s can now invest directly in Canadian technology companies, pay no tax in Canada on their gains, and not be subject to any filing or withholding requirements. We’re open for business baby!

This is a great step toward helping capital flow across the boarder in both directions. Since, The more deals that are done by US VCs in Canada, the more deals Canadian VCs are invited to participate in south of the boarder. The circle life is complete.

Bootup Labs is in the midst of raising it’s next fund.  If you’re an Accredited angel investor, and would like to learn more, I’ll be presenting the Bootup Labs investment opportunity at the VANTEC Angel Forum this Tuesday March 2nd. Bootup Labs is managed by experienced entrepreneurs, and is exploiting an emerging asset class that is greatly underserved and highly lucrative.

I’m really excited to be on a panel at the Future of Funding event in San Mateo on Feb 18th.  I’ll be joined by Adeo Ressi, CEO of the Founder Institute (and TheFunded.com), David Cohen, CEO, Techstars and Reshma Sohoni, CEO, Seedcamp, and It’ll be moderated by, Matt Marshall, CEO and Editor, VentureBeat.

Incubators and Accelerators

Time: February 18, 2010, 2:30-3:30pm

Description: There is an increasing number of incubators and accelerators appearing around the country. What has been their effect? What models are working? How are they succeeding, and what challenges are they facing? This panel will examine the growing role of incubators.

If have any intrest in learning more about how the funding world is changing, and how fast, I encourage you to attend.  Here’s a 50% off link.

Bootup Labs will inevitably choose companies from outside the country to invest in.  These companies would work for a minimum of 8 months with us in Canada.  In the case of our January cohort, potentially 3 of the 6 founding teams are moving here from outside the country, and all 3 companies have proactively indicated that they have no intention of leaving Vancouver after they have completed their time at Bootup Labs.

Bootup Labs has neither the time nor resources to work through the immigration red-tape every time.  I have to believe that reversing the brain-drain has to be a priority for the government.  So, I am asking for your help.  Let’s make Vancouver (and Canada) an easy place for entrepreneurs to set up shop!

The startup community in the US is rallying behind a way to streamline the immigration of foreign startup founders.  I say, let’s take advantage of Canada’s nimbleness (relatively speaking of course) and beat the Americans to their Startup Visa concept. This is how is could work for us:

1. VC Firms and Investors apply to become “Sponsors”
2. Founders apply to Immigration Canada along with an accepted Term Sheet from the pre-approved VC Firm
3. A temporary work visa is approved for the founders with certain conditions:
   1. They incorporate a canadian company within X days of Landing in Canada and become employees of that company.
   2. They close on the financing.
   3. They cannot work for another company.
   4. They can apply for a more permanent status after a “probationary period” of some amount of time.

<<  –  SIGN THE PETITION —  >>

more links:

• Start-up Visas Can Jump-Start the Economy – Wall St. Journal
• The Founders Visa Movement – Brad Feld
• The Founders Visa – Paul Graham
• The Startup Visa And Why The Xenophobes Need To Go Back Into Their Caves – Techcrunch

Bootup Labs Demo Days

Today we announced our plans for our first Demo Days for Bootup Labs’ first crop of companies. The event will be broken up into two events

Vancouver on January 28th, 2010
Hyatt Regency Vancouver
655 Burrard Street,
Vancouver, British Columbia, Canada V6C 2R7

Silicon Valley on February 3rd, 2010.
Plug And Play Tech Centre
440 North Wolfe Road
Sunnyvale, CA 94085-3869

<< — INVESTORS RSVP HERE – >>

Bootup Entrepreneurial Society

The Bootup Entrepreneurial Society (BES) is an independent non-profit group founded to support founders starting digital media companies in Vancouver.  BES is organizing the Bootup Demo Days event.  In addition to the 5 Bootup Labs companies, BES is inviting 5 additional BC companies to join us, free of charge, travel expenses paid.  Interested companies should apply to be a part of this first-of-it’s kind event.  You can read more about it from their blog post.

I attended this month’s VANTEC Angel Network meeting today.  I’ve attended many of Mike’s events in the past, but today’s was different for some reason.  I don’t know what it was. I just felt much more productive, professional. Maybe it’s because Mike has increased the cost to the investors from $10 per session to $50 per session (or $300 for the year).  It’s still not a lot of money, but only serious investors will pay.  Maybe Angels are feeling more confident about the economy.  I like to think my rant about inappropriate public comments about the presentation style has something to do with it, but honestly I highly doubt anyone in the room had seen that post.

Anyway, kudos to Mike.  He’s providing a great service to our Startup and Investor community alike.  If you’re looking for money, I recommend VANTEC.  There’s no cost to present, but you need a sponsor (a current investor or advisor will do), and then you have to go through a selection process.

The companies that presented and are in the digital media space were:

• Jostle.me – a collaborative Social intra-network to help employees communicate, collaborate and find hidden talent within their own organizations.
• Ayogo – a company that can port video games to social networks and help monetize them.
• Wireless Image – Very simple and cool way to advertise via people’s mobile phones.
• TinySpeck – This company didn’t actually present, but Stewart Butterfield (founder of Flickr.com, which was originally started in Vancouver) was in attendance to sponsor  Michael Fergusson’s Ayogo.  In the process, he mentioned the name of his new Startup and thought you might want to check it out.

If you’re interested in learning more about investing in Digital Media, check out my previous posts. More to come!

• VC is not broken – Anymore. Digital Media’s new funding models
• Assessing Competition Risk for Digital Media Startups

I often hear the statement: “I’m not going to invest because if [fill in the blank large company] wanted to do this, they would just wipe you out.” I usually respond: If that was true…

• …Yahoo would have taken out Google
• …Amazon would have taken out eBay
• …MySpace would have taken out Facebook
• …Facebook would have taken out Twitter
• …Blockbuster would have taken out NetFlix
• …and the list goes on and on and on.

I had the pleasure of getting to know some of the management team at Amazon who was around long enough to remember when they had the option to buy eBay.  They tell the story as if it was the largest missed opportunity that Amazon ever made, and they never want to make that mistake again. Still, they waited until Zappos had an $800M price tag before they bought them, but how come Amazon didn’t just do it themselves?  I use Amazon as an example, specifically because they have to be the most innovative large-companies that I can think of, and they still can’t defend themselves against anyone coming along and making a superior product.

Exceptions to the rule will always have to do with some sort of manipulated market channel.  Anyone who owns/rents a Motorola DVR knows what I’m talking about here.  No reasonable consumer would ever buy this product if they had a choice.  It’s the worst piece of garbage I’ve ever used.  Especially if you’ve used a Tivo before.  Motorola has the muscle to be able to negotiate big long term contracts with the cable companies and force them to restrict consumer choice.   There are similar exceptions with AT&T and the iPhone, and Microsoft with Windows.

But, The Internet is unique. It’s the ultimate in disintermediation.  It’s very difficult to lock up any particular channel.  For example, If I don’t like Google, I’m headed over to Bing with one click.

On the Internet, the best product wins.  It’s truly a case where the best defense is a strong offense.  And winning has NOTHING to do with the size of the company you’re competing against.  Large companies “get this.”  77% of acquisitions made by the top 10 acquirers in the entire technology industry are web companies.  Large companies have really no choice but to succumb to using the start-up ecosystem as their outsourced R&D departments.

So, what can you conclude about competition risk for digital media startups?

1. There is no such thing as a big company who is going to come and eat your lunch.  All companies, regardless of their size, are run by a collection of individuals.  By definition a decision maker is just one person, whether you’re in BigCo or NewCo.  And, although large companies have more data and more money, their decision makers have to listen to lots of opinions (causing a watered down unfocused product), too many people to please (causing the product to launch and change very slowly), and have a reduced tolerance for risk because they’re afraid of losing their job if they screw up.  These are all impedance’s that startup decision makers don’t have.
2. The product development and engineering teams the most important positions in the company.  Companies may soon fight for the elite PD guys the same way that TV networks fought for Dave Letterman. See Boris Wertz’ post (any my comment) to get a glimpse of our future.
3. The best of the best will usually not want to work to make someone else rich, when they can simply start their own company.  So, the most innovative product teams will not fear risk, and leave to start their own companies.

All this boils down to another great reason to invest in digital media companies.  I’d love to hear your thoughts on this.

I was a having coffee with a VC colleague last week.  This is someone I respect, and hope will fund some companies graduating from Bootup Labs.  I have probably explained Bootup Labs and why our investment model works to this individual on at least 7 different occasions.  It turns out that it took 8 times to get the ‘ah-ha’ that I was so patiently waiting for.  Up until then, I just didn’t think he liked the idea.  I’m happy to say, he is now a believer.  But, as any good entrepreneur would do, I immediately reviewed the other 7 pitches in my head — searching for the flaws that made it so difficult to inject the concept into this guy’s brain cells.  Could it be that he isn’t staying up to date with the VC industry? Is he not reading the same blogs, following the same people on twitter that I am? Is he not talking to entrepreneurs at the seed stage, flying to meet the thought leaders in the space, or engaged in local startup community?  And if not, why isn’t he, or more importantly, why was I?  Perhaps I was the one missing something; Maybe there simply isn’t a return-on-time for those activities.  Who am I to judge?  Maybe the status quo is simply good enough?

The truth is that the status quo is good enough for bio-tech, clean-tech or any other capital intensive, high risk, high reward company, which is why you see many VCs move toward those sectors and away from investing in digital media companies.  Internet companies quickly have become low capital, lower risk, investments, but can still have some pretty big exits.  Basically, if the companies you invest in don’t need very much money, then you don’t need to raise large funds, so the 10-2-20 model is officially broken.  (10 year fund, 2% fee on capital under management per year, plus 20% of proceeds paid to management)  If you don’t have a large fund, the 2% management fee doesn’t add up to enough to pay for the fund’s expenses. Plain and simple.

I touched on the concept of a broken VC model over a year ago, and since the economic down turn, it’s been talked about by a plethora of notable industry insiders. But, since then, I’ve learned a lot about the inner workings of the venture capital world, and one thing is for sure: Investing in Digital Media companies (Consumer Internet, Enterprise Internet, Online Gaming, and Mobile Software) requires a new model.

It wasn’t until my 8th pitch to my VC friend, that I defined what “lower capital requirements” means in real life.  It means that some of these companies will never need to raise a series A and most will not need a series B.  On top of that, these companies are exiting within 2-5 years at a rate of 25 exits/month.  This formula has changed so much and so fast, it caught most of the industry off guard, and if they’re not paying attention, they’re paying the price.

The Bootup Labs model is unique, even among our well established peers.  There is TechStars, Seedcamp, Extreme University, Launchbox, YCombinator, etc who all invest around $20k in each group of founders and provide a great deal of support and connections for around 3 months.  Then there is Union Square, CRV, FirstRound, SoftTechVC, etc who typically invest $250k-$1M. We feel the sweet spot is a TechStars-like, mentorship driven program for founders, but instead of focusing on getting them seed funded, we invest $150k and give them 8 months to get their company to at least “ramen profitable“.  After that, they can choose to raise a larger round or continue to grow their business organically.  Their success does not rely on upstream VC support, but many will probably choose to take it anyway as a way to accelerate their growth.  If you happen to be a VC, don’t worry, there will still be plenty of deal flow coming your way.

View this Google Spreadsheet to see how the Bootup Labs Fund makes money, and if you’re an investor, please contact me.

Subscribe to these guys if you want to get caught up.  Their twitter addresses will be listed on their blog too.  Follow them (and us).  Use an RSS reader.  But better yet, start your own blog, comment on this post, and start tweeting out your thoughts.  We’re listening!

• http://crunchbase.com/acquisitions
• http://www.avc.com/
• http://www.startuplessonslearned.com/
• http://www.askthevc.com
• all these: http://firstround.com/blog.html
• http://ycombinator.posterous.com/
• http://blog.softtechvc.com/
• http://sethgodin.typepad.com/
• http://www.unionsquareventures.com/
• http://500hats.typepad.com/
• http://ricksegal.typepad.com/pmv/

The truth is that the evolution of this space is still evolving at an enormous rate.  More on my predictions in a subsequent post.