According to Bill Tam, CEO of the BC Technology Industry Association, 2013 was a banner fundraising year for B.C. tech companies.
Approximately $1.1 billion was raised, of which $681 million came from public equity, $348 million from venture capital and roughly $100 million from angel investors.
What follows is intended as a primer for new investors – angels or others – who are eyeing the new wave of tech startups in B.C. Startups are not equal. Not understanding their differences can screw up an investor’s chance of success.
Lifestyle startups: working to live a passion
Lifestyle entrepreneurs are like ski instructors, working to pay the bills so they can spend more time on the mountain. Lifestyle entrepreneurs live the life they love, work for themselves and pursue their passion. The tech industry equivalent is the coder or web designer who loves the technology and takes programming and U/I jobs because it is a passion.
Small-business startups: working to feed the family
The overwhelming number of entrepreneurs and startups in Canada are small businesses. This category consists of grocery stores, hairdressers, consultants, e-commerce storefronts, carpenters, plumbers, electricians, etc. Small-business entrepreneurs work as hard as anyone in B.C. They hire local employees or family. Most are barely profitable. Most small businesses are not designed for scale; owners just want to own their business and feed their families.
Their only available capital is savings, and what they can borrow from relatives and banks. Small-business entrepreneurs don’t become wealthy or retire on pensions. But in sheer number, they are true entrepreneurs – and their enterprises create tons of local jobs in B.C.
Scalable startups: born to be big
Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook and Twitter are the latest examples. From Day 1, the founders believe their vision can change the world. Unlike small-business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that will become publicly traded or acquired, generating a massive payoff.
Scalable startups require risk capital, and they attract investment from venture capitalists and private/public equity investors. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more capital to fuel rapid expansion. A good recent example of a scalable Vancouver startup is Avigilon Corp. (TSX:AVO), which has grown from virtually no revenue to a run-rate of over $220 million in six years.
Buyable startups: acquisition targets
In the past five years, the cost and time required to build web and mobile apps have plummeted. You can get to a million users with $1 million or less. Many of these startups use crowd or angel funding. In some cases, while they might be able to build a billion-dollar business, the lack of traditional venture-capital investors with lofty return expectations takes away the pressure of the “swing for the fences” liquidity goals. This class of startup is likely to be acquired for between $5 million and $50 million. The founders and investors may walk away with millions but not billions.
Social startups: driven to make a difference
Social entrepreneurs are as ambitious, passionate and driven to make an impact as any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create wealth. The startup may be non-profit, for-profit or hybrid.
Large-company startups: innovate or evaporate
Large companies have finite life cycles, and over the past decade, those cycles have grown shorter. It’s becoming clear that lean startup practices are not just for scalable and buyable startups.
Corporations have been increasing efficiency by driving down costs. But simply focusing on improving existing business models is not enough anymore. Most large companies understand that they need to continually innovate and invent new business models. This challenge requires entirely new organizational structures and skills, and funding is in-house.
So what’s the take-away for investors? Make sure your goals line up with an entrepreneur’s.
Each of these very different startup types has different financial goals, requires different teams and uses different financing strategies. Investors, don’t think of startups as smaller versions of large companies. While large companies execute known business models, growth startups are temporary structures designed to search for a business model. This knowledge is changing how entrepreneurship is taught, how startups are incubated and, importantly for investors, how and why we fund them. •
Harry Jaako ([email protected]) is president of Discovery Capital Corp., a Vancouver-based venture capital firm, and a director of TMX Group Inc. His column appears monthly.
