Getting Financed in Today’s Environment

Financing deals are still getting done in today’s challenging economic environment, but the bar has been set higher. The 12th Annual Canadian Financing Forum was held yesterday in Vancouver, drawing an impressive array of financiers from the US and Canada. There were two streams – IT and Clean Tech and Advanced Tech companies – with thirty companies presenting.

Financiers are generally looking for companies that are at or near profitably. For earlier stage companies seeking smaller amounts of financing, they will need to work with angels longer. As one panelist put it, angels are the new VCs – they are taking on the first level of financing that was previously the realm of VCs

Despite the economic concerns in the market, financiers are still very interested in certain sectors. There remains a strong desire in interest in climate and environmental issues, which clearly have not been solved. There remains a need for more fuel efficient vehicles and ways to reduce greenhouse gas emissions.

Kirk Washington, General Partner, Yaletown Venture Partners, explained his perspective: instead of pushing technologies we look for solutions to problems. He stated that one of the challenges in Vancouver is that, while there is technical expertise, there is a lack of management talent.

David Berkowitz, Ventures West, noted that in today’s market that VCs are shifting to later stage opportunities; they want to see profitable opportunities.

Marianne Wu, Partner, Mohr Davidow Ventures, Menlo Park, CA, pointed out that BC has a strong history of entrepreneurial talent pool and that this fact coupled with a tradition of expertise in the forestry and mining industries is a rare combination. So BC is well-positioned to do well in this sector

Jamie Boyd, Senior Vice President, Cascadia Capital LLP, reiterated that there are big opportunities in the solar energy space. His Seattle-based firm focuses on sustainable technology companies.

Chris Albinson, Managing Director, Panorama Capital, Menlo Park, CA was asked about the new US administration and its impact on the economy. He opined that the new regime is going to spend money and with it the US economy, which is $11trillion in debt, will be heading for $20 trillion in debt. The bottom line: don’t rely on US consumers alone for your future market.

Albinson, who hails from Canada, expressed his shock that Canadians are not talking about how to save Nortel which was an innovation engine for the past forty years and attracted a cluster of expertise around it. He compared it to the situation in the US with the rescue of the automakers.

The panel discussed the changing roles of angel investors and VCs in the altering economic climate. Tomas Valis, Partner, Celtic House Venture Partners, Toronto, cautioned that angel investors should reserve 2 to 3 times their investment in order to provide support for the life cycle of the company. In better times it might be a matter of putting in a bit of money early on in the stage of a venture and expecting a relatively quick return. Valis suggested that angel investors should look at a 5 to 7 year time frame for a reasonable return on investment.

John Albright, Founder & Managing Partner, JLA Ventures, Toronto explained that they have created a program for investing $250 to $500,000 by way of a convertible debenture to fill the role often taken on by angels.

Tim Porter, Principal, Madrona Venture Group, is part of an angel investor network in Seattle. Porter explains that angels are the new VCs, since the bar for investment has risen. The negatives is the cash side in that angels have less money as it is their personal resources; most angels don’t have cash, aren’t investing and look harder at investment risk

Where are the opportunities for software companies? Chris Albinson’s strategy is to “burn down the mahogany walls.” He looks for situations where a business is like a pyramid where everything gets aggragated up (such as a law firm). Then “we want to destroy that!” He gave the example of magazines and the creation of Federated Media. Why have fancy offices in a pricey location, when you can access great content from many sources and not just through a company pyramid?

Jeff Grammer, RHO Venture Capital Canada, in Montreal talked about the shift from offline to online advertising and the impact it has had on traditional media. Of course, RHO is an investor in NowPublic, a significant local success story. NowPublic has been able to tap in the current mode of communication and develop a significant following.

The Financing Forum is a welcome part of the local hi-tech landscape which attracts the attendance of many VCs along with government sources, from BDC to the BC Renaissance Capital Fund. Entrepreneurs can still get financed, but they have to recalibrate their strategy to match today’s challenging environment.