Created in 2007 out of the venture capital arm of BCE Inc., Summerhill Venture Partners earned a huge payday last spring with the sale of Fredericton, N.B.-based Radian6, a company that monitors social media habits, to Salesforce.com for US$326 million. Canadian Business’ Western Editor Michael McCullough sat down with Rubinoff, Summerhill’s Boston-based managing director, at the Canada’s Venture Capital and Private Equity Association annual conference in Vancouver on May 27 to talk about the state of Canada’s venture capital industry.
CB: Is your background in finance or technology?
GR: A bit of both. My formal training is law, MBA, but I’ve been working in the technology industry for 20 years now, so I’ve taught myself technology and certainly surround myself with guys who are very knowledgeable about the technology industry. I’m constantly learning. Technology moves quickly, so there’s always a lot to learn.
I practiced law for three years, then worked in Boston managing a technology company for a few years, then did a little bit of time in investment banking, then joined a venture fund. That was in 1993.
There are some differing opinions at this conference as to whether Canada is a good place to invest in technology, especially with respect to the exit. What’s your take?
From an IPO point of view, we would always insist, and it’s in our term sheets, that if a company does an IPO, it’s going to be on the Nasdaq, not on the TSX. From an M&A perspective, you cannot have success being a Canadian company. You’ve got to be a global company. If you’re not successful selling in the United States, you’re not going to be a successful company. So it’s really important to be successful south of the border, and you really have to have that honed before you go out internationally.
Were you the lead partner on the Radian6 deal?
It was my partner Joe [Catalfamo, head of Summerhill’s Toronto office], and he seeded Marcel LeBrun, whom he had seeded in a company called IMagicTV, which went to the public markets. And then when Marcel came up with the idea for Radian6, he called up Joe and said, ‘I’ve got an idea for another company that I want to do.’ And Joe backed him.
So it was a long-term relationship. Over how many years?
Over 10-plus years. It was a serial entrepreneur [situation]. We spend a lot of time cultivating those relationships because we’re very close to our CEOs, we’re always the lead investor. We have a stable of CEOs and they will sell a company or IPO a company and then they are on to the next.
Who else is in that stable?
The motivation of entrepreneurs is not necessarily money. Money’s great, but they are trying to build something of value and meaning. The fact that they make 10 or 20 or $30 million—they are not going to retire. They are going to go do it again. Those are the types of guys that we love to back.
We sold another company called Third Brigade to Trend Micro. Wael [Mohamed], the CEO, is there, but we’re always talking to him about when he’s finished there, what’s the next thing he’s going to do. Charlie Harris, who was our CEO of Intellon—Intellon went public, then it was bought by Atheros and it’s now closing a deal with Intel—Charlie, I just had breakfast with him, and he’s looking at a number of things. We have a stable of companies right now and as those companies exit, we will be backing the CEOs.
There’s another company that we invested in called Trust Digital, and the CEO there, Mark Shull, we’ve been talking to him about a new idea that we’ve come across, and potentially his running a company from scratch with a new innovation. It’s a startup from a technology guy. That’s something we do quite a bit.
Was Radian 6 your biggest payout?
It’s been our biggest payout to date.
What did you see off the bat that this was something to back?
The management team, first and foremost. And we loved the idea. It was very scalable. We loved the SaaS [software as a service] business model, and we believed they had the capability, with the technology they were developing, to be the market leader.
It was mentioned in the panel there’s been a rise in sales to U.S.-based “strategic” players like Salesforce.com. We had an unsuccessful IPO here in Canada last year with Smart Technologies. Is that the way to go right now, to sell to multinational “strategics”?
Strategics have a lot of cash on their balance sheets right now. I think it hasn’t been this high since the 1960s, the amount of cash in aggregate that large corporations have on their balance sheets. As was pointed out on the panel, a lot of that cash is being held overseas because of the tax laws in the U.S.; it’s taxed 30%. A lot of companies are looking to use that cash for acquisitions because they’re really getting it at 70 cents on the dollar.
So there’s a lot of acquisitions that are happening right now, for a variety of reasons. And it all comes down to the number of options that the company has. So the terms and the purchase price that you are going to get depends on what your other options are. If you have no other options then, unless you’re a good poker player, you’re not going to maximize your value. But if you have other options, like going to the public markets, or to wait and sell to other strategics, then you’ve got a much better shot at maximizing the value of your company.
It’s very hard to go public with [the] Sarbanes-Oxley [Act, which imposed new rules on U.S. public companies] —very time-consuming, very expensive. And the public markets are unforgiving, so unless you have a history of making your quarters, it’s not something you want to do. You want to be totally ready before you go to the public markets, because if you miss one quarter, there’s no forgiveness.
Let’s look at the capital side, where your money is coming from. Is that changing at all?
When we raised this fund in 2007 we raised $175 million. Most of that money was raised from funds of funds and pension funds in the United States. We had one large investor in the Middle East. We had spun out of BCE; it was at the time of the BCE privatization so we stayed away from the Canadian funds because a lot of them were involved in that privatization. For our next fund we’re talking to the Canadian guys. There’s a lot of activity going on in Canada right now. It’s certainly a better market than it has been over the last few years. Nothing was happening in the last two years because people did not know where the market was. People didn’t know how long the nuclear winter was going to last. We’re slowly coming out of that. Exits are starting to happen in the VC world so people are getting more comfortable. They’re seeing that venture can make money.
With all these sales to big companies, is it going to be difficult to build Canadian champions going forward?
I don’t think so. I think it’s really encouraging for the Canadian market. People, particularly in the U.S., are looking at Canada as a source of innovation, and I expect that innovation to continue with the strong educational system that we have. I expect to continue to see entrepreneurs and strong innovation to come out of Canada.
What is the most important skill for a leader to have?
Having a vision, where he sees the company going.
What mistake taught you the most in life?
Probably not acting quickly enough to make a change at the CEO level at a company we had invested in.
What’s the greatest challenge facing your business today?
There’s a slew of them. Probably the perception that venture cannot provide adequate returns. Venture has not done well, particularly in Canada, for the last 10 years. When Americans look at Canada, they only see negative returns, because we’re such a nascent venture industry. When they look at the United States, they say, ‘OK, returns have been poor for the last 10 years but before that we made good money. There’s the perception that it has never made money in Canada, although over the past 10 years it hasn’t been any worse than anywhere else.
What quality do you value most in an employee? The least?
Communication [skills] would be the most important. And not being able to communicate would be the least!
What was the last book you read?
The one they gave out today at the conference, Wave Theory [for Alternative Investments, by Stephen Todd Walker].
The chairman and president of George Weston Ltd on focus, family ties and the ill-timed U.S. expansion.