Getting U.S. venture capital

For years, Canadian startups and growth companies believed they were between a financial rock and a hard place. Until recently, Canada’s venture-capital market was underdeveloped relative to its U.S. cousin. At the same time, Canadian companies have operated under the impression that American VCs would rather invest in companies close to home — and that they shun investment opportunities north of the border.

So there was great relief for many attendees of last week’s VentureFair 2004, which united more than 100 Canadian startups and growth companies with 60 angel investors and 56 venture capitalists. During the two-day event held in Toronto, entrepreneurial hopefuls learned that Americans VCs — including the 16 U.S. firms in attendance — are on the hunt for Canadian investment opportunities.

True, U.S. vencap investments in Canada dropped from US$1.5 billion in 2000 to US$257 million last year. But, all told, U.S. venture investors plugged US$3.5 billion into Canadian firms over the past four years. And there remains plenty of cash on the table for the right companies.

“Americans understand and appreciate the Canadian business infrastructure,” says James Goldinger, vice-president of TC Capital, a Boston-based VC outfit. In fact, in 2004 three of TC’s eight investments — and fully half of the disbursed dollars — went to Canadian firms.

However, anyone with dreams of a rich payout from stateside VCs should know that the approaches and expectations of American investors differ from those of their Canadian counterparts. Understand those differences, and you can target the right VCs for your company.

Consider U.S. venture capital when:

1. You’re looking for big sums. “There’s ten times the money to be had,” explains Richard Monkman, CFO of Ottawa-based IceFyre Semiconductor Corp., which develops chips for the wireless technology. The company has raised US$39 million in venture capital to date, including US$19 million in 2003, mostly from U.S. VCs. “In my experience,” says Monkman, “American VCs are willing, and able, to invest much larger sums than most Canadian investors.”
2. You’re in a specialized niche. The size of the U.S. venture capital industry and the plethora of investment opportunities has forced American VCs to specialize. As a result, American VCs will tackle opportunities that Canada’s generalists will avoid.”When we go looking for money for a highly specialized niche company,” says Barry Gekiere, senior vice-president of Vancouver-based Ventures West Management Inc., “we inevitably partner with an American VC that invests exclusively in that niche. That sort of depth doesn’t exist in Canada.” Where a Canadian VC might specialize in, say, telecommunications, a U.S. firms will focus on fibre optics for telecommunications.
3. You’re ready to go public — soon. Having an American VC on board can help you get that all-important NASDAQ listing. “As an exit strategy, American VCs like to work toward an IPO close to home,” explains Gekiere. “So they tend to only seek out companies that are mature enough to go public quickly.” Although U.S. venture investors demand near-public structure before investing and will force public-style discipline on management teams, they can also guide a company to a successful IPO, merger or acquisition by a larger firm.

Favour Canadian VCs when:

1. You want to retain control. “American VCs are ruthlessly pragmatic,” explains Venture West’s Gekiere. “In Canada we see the CEO of an entrepreneurial company as having earned the right to run the show. American VCs see it as a privilege. At the first hint of a shortfall in the plan, that ruthless pragmatism can kick in and the CEO can get kicked out.”
2. You’re willing to move stateside. American VCs like to lead, and the gravity of all those Yankee dollars tends to pull Canadian companies south. “VCs like to see their investments set up shop in places like Delaware,” explains Goldingerp, “where the corporate laws are the most efficient and most business-friendly.” So if you want American money, be prepared for the possibility of moving to the U.S., or at least incorporating south of the border.
3. You think you’ll need Canadian support. “Moving to America cuts you off from some attractive sources of Canadian money,” says Kenneth Gordon, a partner with Boston-based law firm Testa, Hurwitz & Thibeault LLP, which specializes in aiding American VCs place investments in Canadian companies. “Generally speaking, once you incorporate in America you no longer have access to [financing from] the BDC or to any Canadian labor funds.”
4. Your partners despise dilution. American VCs like to invest large amounts. So what’s the problem with that? “Nothing, really,” says Gekiere, “except it often leads to the angels and early-round investors who came up with crucial seed capital getting squeezed out of the company.”

Don’t fret if Canadian venture capital is your better bet. According to the Robin Louis, president of the Canadian Venture Capital Association, the investment climate in Canada is warming. Furthermore, Canadian VCs are increasingly partnering with U.S. investors to spread the risk. And while last year’s venture fair resulted in 13 deals worth $46 million, says Frances Fast, coordinator of the entrepreneur and angel program at the TVG, “This year the talk in the halls suggest there will a record number of deals coming out of the event.”