EVENT: CVCA Insights, Data Release Roadshow (Apr 6th, Halifax)

Pleased to be co-sponsoring this event with innovacorp!

Join us for a morning of networking to mark another great year in the private capital industry.  The CVCA‘s Chief Executive Officer, Mike Woollatt, will discuss the 2015 Market Overview, including transaction and fundraising data, most active Venture Capital and Private Equity investors, top firms, rising investment sectors, and other insights.

Registration is required by March 30, 2016 and seating is limited.  Reserve your place today!

Go Big or Go Home: What does it take to build a great company?

Published by the Canadian Venture Capital Association in Private Capital

If early stage companies know little about the expectations of venture capitalists (see Bridging the Gap, malady Spring 2011 edition of Private Capital), they probably know even less about the working relationship between the two parties post-investment.  While VC’s might see the next steps as obvious (“let’s go and build a great company!”), early stage companies may be exhausted and overwhelmed from the due diligence and closing process and may simply be wishing for things to return to normal; but will their world ever be “normal” again?  Most VC’s certainly hope not.

If the devil is in the details, the challenge is in the goal: taking a largely unproven, early stage business and building it into a great company.  To a VC, this means the elusive “big win”; the company that grows from mere obscurity to sales of $50 million, $75 million, or more.  Beyond the cash that is generated, these winning companies are leaders in their markets, innovators in their industry, and perhaps, most importantly, they share in this powerful vision of top tier growth.  They too want to build a great company, and will take whatever assistance and valuable insight they can find in order to get there.

If a journey begins with a single step, where do you start?  Surprisingly, there may not be a lot of magic in terms of starting the relationship with a new portfolio company off on the right path.  As with the preparation for raising early stage capital, the fundamentals also matter when building a business.  Although strategy is important, what can be even more critical is successful implementation (i.e., getting it done!), while being in tune with the industry and market to know when to shift gears and make the necessary changes.

Investee companies need to take the necessary steps to build the business to support future growth, and not get caught up in the status quo.  And while distractions often arise, it is critical to focus on the fundamentals and the ultimate goal, a discipline that can be difficult for young companies.

As part of this process, a number of key areas require careful and consistent attention, including:

Fundamental Area Critical Success Factors
Aligned Objectives Management buy-in to the short term and long term objectives, as well as the exit strategy.  Willingness to use experienced resources/advice to grow the company.  Consistent focus on what is in the best interest of the business
Product Focus on sustainable competitive advantage. Strong understanding of industry and market developments to guide future product development efforts.  Ability to deliver new products and product enhancements on a timely basis
Market Demonstrated ability to reach and penetrate target market(s) through an appropriate strategy (i.e., pricing, advertising, promotion, distribution, etc.).  Strong focus on competitive landscape and market developments, making necessary adjustments to grow market position
Management Management team includes those with aligned objectives, the right skills and expertise, and strong implementation skills.  Problem areas are addressed on a timely basis
Financial Results & Capital Requirements Timely and accurate financial information that is used to track progress and make adjustments where needed.  Established short term budgets and long term financial targets, as well as the necessary capital to achieve results
Exit Strategy Well developed strategy, including estimated timeline, key milestones, and exit approach.  Should consider market and industry trends and outlook

Given the importance of building the business to support future growth, management may lack the experience to do so, but can gain valuable assistance from the expertise that VC’s bring to the table.  In order to raise the likelihood of success: (i) management needs to be receptive of this type of assistance; and (ii) VC’s need to take an active role in providing it.  Although it is a given that VC’s don’t run companies, this process can mean that early stage investors might have to roll up their sleeves more than they would like, particularly when difficulties arise.  Failing to do so could result in a company that never really reaches its potential, falling well short of “great”.

Beyond providing assistance with the fundamentals, important problem areas for VC’s to play an active role in resolving include the following types of situations:

When the founder flounders Just because a CEO has what it takes to start a business and manage it in the early days does not mean that they have the skillset and desire to build a company.  It’s been said that many high growth companies have at least three CEO’s during the course of their history: one to start the business, one to grow the business, and one to position the company for exit.  All of these situations have a different focus and require different skillsets.  Chances are that all of these skillsets do not reside within a single CEO, so a change in leadership as part of the strategy should not be surprising.  It can, in fact, represent an opportunity to drive growth in each stage of development.

Where the issue can become really problematic, however, is with a CEO who is truly out of their element.  This situation can be typical with early stage companies, where: (i) one of the founders was arbitrarily put in the CEO position, but clearly lacks the necessary skillset; or (ii) the investee company hired the best CEO they could afford, on a very limited or part time budget, and got what they paid for.

In any event, VC’s need to recognize situations where the “CEO has to go” and take swift action.   Weaknesses at the top normally don’t turn around, and sub-par performance results in opportunity that is forever lost.  Although CEO recruitment is often a time consuming process, leadership is beyond important and maintaining a poor CEO and hoping for improvement does not represent a strategy for resolving the problem or for generating solid financial results.

When financial management gets no respect Many young companies underestimate the importance of the finance function, including the critical nature of timely financial information as a management tool, as well as in terms of attracting capital.  Companies with a significant technical or intellectual property component, in particular, tend to put the majority of their resources into technology or product related areas, while downplaying the need to hire a qualified Controller or CFO.

It is often up to the VC to drive change in this area, as they truly recognize just how much a good CFO can do for a company, especially when there is more capital to raise.  VC’s need to ensure that companies build a finance function that can support future growth and create the necessary level of confidence to attract future investors.  The bottom line is that sound financial management is always critical, and you simply won’t build a great company without the right resources and systems in the finance function.

When the culture isn’t a learning one Building an early stage business can be an isolating process and the founders and their team can become overly focused on internal activities.  Growing a business requires a more balanced approach, with sufficient focus being paid to customers, competitors, and market developments, as well as to internal matters.  CEO’s who tend to rest on their laurels and what they already know, without upping the knowledge ante, can be a problem, as well as a sure fire way to get stuck in the status quo.  Successful businesses are always learning, from the CEO’s office throughout the ranks, and building for growth requires new knowledge and skills.

VC’s can be an important catalyst in this regard, setting expectations for CEO’s to actively network and stress the importance of continuous learning throughout the company, as well as seeking out collaborative relationships, perhaps with other investees.  VC’s have almost constant access to industry events and professional development opportunities crossing their desk, and taking a moment to invite portfolio companies along can help to set these important expectations and fuel growth.

When the company needs more help than a VC can provide Early stage companies often lack the experience to address issues that arise, while maintaining forward motion.  This is often the case in “business as usual” situations, so imagine how much of a skill and knowledge shortfall could occur when building a company to support significant growth.  Assisting an investee company in this area could become a full time job for a VC, and that’s just not workable for the long term, given that there is an entire portfolio to manage.

Hands on advisors can be a real help in this type of situation, and VC’s should play an active role in making it happen.  Early stage companies may lack the experience to fully understand the type of resources they need to assist with a particular situation, and as a result, are often not well equipped to identify the type of assistance they require.  VC’s, on the other hand, have typically seen the same situations many times, understand what is needed to support growth, and can be in the best position to diagnose the problem and suggest a handful of qualified advisors who can help; they just need to make the effort to do so.

Helping portfolio companies go from good to great is not just about the big moments; it’s also about paying careful attention to the fundamentals and taking timely corrective action when needed.  Setting expectations of disciplined implementation, seeking out the right resources for assistance when needed, and not tolerating sub-par performance can help to make the most of investment opportunities.  It could be the difference between a breakout company and those that just plod along.

Bridging the Gap between VC’s and Entrepreneurs: A fresh look can be well worth the effort

Published by the Canadian Venture Capital Association in Private Capital

There has been plenty of talk about the state of Canada’s venture capital industry over the last few years; Are returns improving? When will fundraising levels increase? Are more deals getting done?  Although the industry, find like many others, medicine moves in cycles, there are some things that seem constant: the gap between the expectations of venture capitalists and how entrepreneurs approach fulfilling these requirements is a good example.

In times of limited capital, bridging this gap to establish the necessary common ground for an investment to occur is critical, particularly for entrepreneurs.  The great divide may be as simple as this: entrepreneurs often focus on building technologies, while VC’s focus on building companies.  Although both aspects of the equation are required in order to capitalize on a market opportunity, why is it so often a zero sum game?

While entrepreneurs are busy perfecting existing technologies, developing new ones, and perhaps focusing on securing support for ongoing research and development, venture capitalists are focused on assessing investment opportunities in terms of key business fundamentals: Product, Market, Management, Financial Requirements and Potential, and Exit Strategy.  VC’s focus on all of these areas, as each one is integral to building a business to capitalize on a market opportunity and generate growth to the point where a successful exit can be achieved.  Many entrepreneurs, however, concentrate their efforts on one or two of these areas, most often the Product category.  Is it any wonder that so many transactions fail to occur?

The very fact that this gap still exists makes it worthy of a fresh look.  The crux of the issue is the opportunity that is lost when an investor and entrepreneur simply are not on the same page, each having different expectations and requirements in order for a transaction to occur.  How often have venture capitalists mused “great product; but they just don’t have a clue about business…”?  In cases like this, they might as well be speaking different languages (and, in fact, they probably are).

Entrepreneurs need to do their part; by taking the time to increase their level of business and financing knowledge and to actively listen to what a VC requires in order to move forward.  Expecting the process to change and balking at the requirements is not realistic or constructive; not as long as VC’s have the money.  Entrepreneurs need to make a conscious decision in terms of whether or not they are truly committed to fulfilling the requirements of the financing process and stick to it.

Venture capitalists, on the other hand, may not have the time or resources to address the areas of development within a potential investee company; and it is not typically their role to do so.  However, there is much that a VC can do to positively influence and expedite this process.

Recognize the language gap:  Venture capital is a complex business, and it does not take much to confuse those who do not work in the industry.  Given that many entrepreneurs lack knowledge of the financing process, they can quickly become “lost” in discussions with potential financial partners.  A VC might think they have been clear in their expectations with an entrepreneur and may be surprised to learn that only a small percentage of their message was actually heard.  Although it may sound simplistic, making a conscious effort to communicate expectations in a plain and straightforward manner increases the likelihood that the message will be both heard and understood.

Demonstrate the fundamentals:  Many entrepreneurs wonder what it is exactly that venture capitalists are looking for in an investment opportunity.  Although the final analysis may be in the eye of the beholder, as much as things change, the fundamentals stay the same.  Articulating the fundamentals in a clear and concise manner is much easier for an entrepreneur to absorb and fulfill.  A simple table, such as the one shown here, not only can help an entrepreneur to better understand the requirements, but also to identify the areas where assistance is needed.

Fundamental Area Items to Address
Product Proprietary technology (i.e., patents, etc.); stage of completion (i.e., market readiness); sustainable competitive advantage; future product development opportunities and capability
Market Demonstrated market need for the product; identification of primary and secondary markets; competitive landscape; strategy to get the product to market (i.e., pricing, advertising, promotion, distribution)
Management Management team members; qualifications; roles and responsibilities; gaps in management team and how they will be addressed; board of directors/advisory board members; advisors under contract
Financial Requirements & Potential Current and projected financial results (including Income Statement, Balance Sheet, and Cash Flow); schedules and key assumptions; sensitivity analysis; estimated valuation; amount of financing required and use of funds
Exit Strategy Industry life cycle/outlook; timeline; key milestones; and exit approach

 

Provide clear action items:  After meeting with a VC, an entrepreneur might walk away with the basic understanding that they “need to improve their business plan” in order for an investor to take the next step.  In practical terms, what does this mean?  Although the VC might have made reference to particular areas, the entrepreneur may simply be at a loss in terms of what they need to do to fulfill the requirement (or simply, how to start).  Providing clear action items (i.e., “develop a table that summarizes competitors in the following categories”, etc.) can help create the “to do” list for an entrepreneur to fulfill what is being asked of them.  Examples can be particularly helpful.

Suggest practical, hands on assistance:  At the end of the day, some entrepreneurs lack the experience and focus to address the needs of a venture capitalist.  Utilizing an experienced business advisor who understands both the early stage financing process and building a business can be an effective way to bridge the gap and a valuable resource when the going gets tough.  An advisor with this type of experience understands both sides of the coin; in terms of where the business needs to “get to” in order to meet the expectations of the VC, and how to work with an entrepreneur to get the job done.  This role can also be the translator between those who speak the language of venture capital and those who do not.

Is it worth the effort?  Sure it is.  Aren’t we all looking for that one great deal?