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Entries Tagged 'Seed investing and entrepreneurship' ↓

Montreal, the best city in the Whole Wide World

I live in Montreal, Quebec, Canada, one of best cities in the world. As of 2005, more than 3.6 million people lived in the MontreaI metropolitan area. I love Montreal for many reasons. It is diverse and international with close to 1 million people members of 80 vibrant ethnic communities: Haitian, northern Africans, Italian, Greek, Arab, Chinese, Southeast Asian, Berbers, Russian, Jewish, Brazilian, Portuguese, Germans, Scottish, Spanish, Lebanese, Polish, etc. It’s bilingual (French and English), the second largest French city in the world (after Paris) and hundreds of thousands of people have a different native language.

Montreal is also pro entrepreneurship, pro enterprise and pro startups with low corporate taxes, the best research and development tax credits in the world (free money for tech companies, up to 80% of R&D spending) and government support for the venture capital industry. Real Ventures just closed a $50M seed fund that will invest in 50-60 startups over the next 3-4 years. Montreal has a 60 member strong angel network that meets every month. There are 2-5 startup events every week, from product camps, to demo camps to UIX events. The city also counts half a dozen incubators/accelerators. Montreal is close to major North American cities including Toronto, New York and Boston (1-hour flight) and between a 4-5 hour flight away from San Francisco and Los Angeles. Montreal is very well positioned for the new convergence of Mobile, Gaming and Web. Some of the largest gaming studios are in MTL, including Ubisoft, EA and Warner. Nokia and Ericsson have hundreds of employees in Montreal. Montreal is world renowned for its machine learning, natural language processing and operations research talent, and the local web development community is thriving.
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The implications of combining excess supply of capital with the war for talent in the digital economy

The world of early stage investing is changing in ways that are reminiscent to the tech bubble of 1999. As Fred Wilson points out in “Storm Clouds” that investors are behaving badly, making $5M to $15M investments in web startups in days, without proper due diligence. Even larger web companies like Facebook and Google are contributing to the madness, paying tens of millions of dollars to acquire companies to shut them down, just to get access to their engineers. According to a story by Mike Arrington, Google even gave an engineer a $3.5M package to stay with the company. Are we in another bubble that’s about to burst and take us all with it? What does this all mean for entrepreneurs, engineers, investors and startups?

I believe we can use the simple laws of supply and demand to understand the situation and give ourselves a framework we can use to better prepare ourselves for what lies ahead

We can look at our ecosystem as the combination of two markets: the startup market and the IT market. By IT market I mean large companies in the greater IT sector (web, Internet, mobile, software, gaming, advertising, etc.) such as Google, Apple, Microsoft and Facebook that are an integral part of the startup ecosystem. Both markets need the same basic resources to thrive: infrastructure (computing power, storage and bandwidth), customers or revenues, capital (angels, VCs and public markets), ideas/products and talent (engineering and management). The two markets have also had a symbiotic relationship over the years that is now at risk due to an important imbalance in the supply and demand curves of capital and talent. For years, startups have been considered a resource in the larger IT market. Large IT companies have used startups to fill gaps in their product roadmap (ideas/products) and acquire qualified engineers (talent). Large IT companies have also been a major part of the startup market either as partners, customers, competitors, investors or acquirers, fueling the virtuous circle that makes the startup ecosystem viable.
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The Age of the Entrepreneur

I have been reading about the changing landscape of how technology companies get their initial outside funding after friends and family have chipped in. Seed or early stage investing, as it is referred to by entrepreneurs, angels, VCs and their investors (limited partners) is a critical part of the technology innovation and funding ecosystem because it has historically been the only consistent source of returns for the industry. This is where angels and VCs make their money and why so much has been written about the subject over the past 6 months. Paul Kedrosky started the discussion with “The Coming Super-Seed Crash” in which he argued that a crash was inevitable as a result of too many companies getting funded by too many angels and third string VCs at skyrocketing valuations. Entrepreneur, angel investor and blogger Chris Dixon picked it up and wrote an interesting post about how the changes were caused mostly by entrepreneurs getting smarter about raising money, which I believe is part the reason. Successful venture capitalists and bloggers Fred Wilson, Mark Suster and Brad Feld felt compelled to chime in and describe their approach to seed investing and their thoughts on the evolving funding landscape. Dave McClure, the most outspoken of the angels wrote this now infamous post “Moneyball for Startups” in which he called traditional VCs dinosaurs and on the way to extinction and talked about how investors had to innovate to remain relevant. Angels and VCs even publicly discussed the evolution of deal terms and the pros and cons of straight equity versus convertible debentures at the seed level. As you can read my post “Equity vs Convertible Debt: What’s best for Entrepreneurs”, I believe equity is the way to go for investors and entrepreneurs alike because it aligns the interest on both sides.

Then Michael Arrington dropped into the conversation in dramatic fashion by accusing a group of “Super Angels” of collusion and price fixing at the seed level in his post “A Blogger Walks Into A Bar…“. These events are now referred to as Angelgate. Finally, Paul Graham, the founder of Y combinator which is at the center of this storm wrote this great essay “The New Funding Landscape” which claims that the changes Y combinator companies are currently experiencing (convertible debt, faster and bigger rolling seed rounds, higher valuations, etc.) and that the competition between Super Angels and VCs are here to stay. Although he makes a lot of good points, his essay mostly reflects the realities of Y combinator, which graduates less than 50 companies per year. Continue reading →

Should entrepreneurs raise a seed round?

A lot has been written about seed funding. How much should you raise, from what type of investors, under what terms and conditions?

I believe the first question an entrepreneur should ask himself or herself is whether they should raise a seed round at all.

Unless you’re building semiconductors or hardcore hardware, it is no secret that the cost of starting a company and achieving market validation, the ultimate value creation milestone for startups, is trending to zero for engineer founders that can moonlight or survive three to six months with no or limited income. Dave McClure’s “Moneyball for Startups does a great job explaining this. An incorporation and simple shareholder’s agreement will cost a couple hundred bucks if you do it online and use some of he free templates. The open source software stack and its numerous development frameworks like ruby on rails are free and have sped up development cycles to the point where a common mortal can build a brand new application and release it into the wild in months. In fact, a team of two should be able to build the first version of its product or service between one to three months, depending on the complexity. Accelerators like Y Combinator, Techstars, Seedcamp and Launchbox Digital have proven this assumption over the past few years. On the hardware side, cloud services like Amazon Web Services allow startups to scale their computing, bandwidth and storage costs as their business grows, limiting the initial costs to less than $100 per month. With a first product in hand and a scale-as-you-go infrastructure, a team can then deploy and test customer fit and market adoption assumptions for free (except for a few hundred $$ Adwords) on multiple platforms and channels including Social (Facebook, Twitter, Youtube, Gmail), Search (Google, Bing), Mobile (iPhone, iPod, Andoid, Blackberry, etc.), each with audiences of hundreds of millions or more and the emerging Business Marketplaces such as Google Apps and Salesforce’s AppExchange, to name a few. Continue reading →

Real Ventures is here

After a long journey which started in 2007 with the creation of Montreal Startup, Real Ventures, a $45M seed fund, is finally here.

For those of you who don’t know, Montreal Startup is a $5M seed fund that was founded by John Stokes, Daniel Drouet, Alan MacIntosh, Austin Hill, and yours truly. Mark MacLeod has since joined the team for Real Ventures. We invested in 15 web, mobile and software companies between February 2008 and March 2010, including Beyond The Rack,, Whatsnexx, Vanilla Forums, Recoset, mConcierge, Oneeko and SocialGrapes. For the majority of our investments, we were the first money in, acting as the lead investor. We hold board seats in most companies. Montreal Startup was created for two reasons. First, we all shared a passion for entrepreneurship. I for one love entrepreneurs. I believe they are the driving force of change, innovation and evolution, our modern day conquerors that are making our future. They are are future leaders. Participating in the shaping of these men and women and supporting them in the building of their respective empires is a fulfilling and gratifying experience. We also started Montreal Startup to take advantage of what we believed was a disruption in how technology companies were being built and financed. In fact, we set up the fund to test the following assumptions which are now some of the pillars of Real Ventures’ investment strategy:

1- The cost of getting a company from idea to the validation of the business model is now 10X less than what it was 5-10 years ago and is no more than a few hundred thousands $ for consumer Internet companies and less than $1M for companies targeting the enterprise:
a) The evolution of opensource platforms and development frameworks means that software or web services that used to take a team of 6 people over a year to build now takes 2 people less than 3 months. In addition, software infrastructure costs are zero (operating systems, databases, etc.)
b) Because of the cloud, hardware costs (servers, storage, bandwidth) are now directly proportional to utilization, meaning that startups can get started for less than $100 per month;
c) There are now many platforms with more than 100 million active users that are seamlessly accessible to third party apps, software and web services providers including Facebook (500M +), Twitter (200M+), Iphone and ipod touch (more 250M+), Android (250K new activations per day), Google search and adwords, Google Apps, Gmail, Salesforce AppExchange, Amazon, etc. These platforms allow companies to transact with their customers with one click in many cases. Combined with a blog and media industry dedicated to technology, it now costs very little for a startup with a good product to get access to customers. Continue reading →

Buying local and how to support our community

Buying local is hot. It is being mentioned by scholars and influencers as a way to reduce our toll on the environment. It also means buying goods and food produced and grown by local companies. When you buy local, you support your community. Your money goes towards quality and freshness as opposed to packaging, refrigeration, freight, fuel, etc. It’s healthy, good for the environment and the local economy.

There must be a way to apply these same principles to our local startup community

I had an interesting call last week with Martin-Luc Archambault, co-founder of incubator Bolidea. Martin-Luc was telling me about how he had heard that Techstars, the very successful and expanding accelerator co-founded out of Boulder, Colorado by Brad Feld of the Foundry Group and David Cohen was inciting its applicants and graduates to use products and services offered by other Techstars companies whenever possible. He pointed to Sendgrid, an email delivery platform and Techstars graduate as an example of that. Martin-Luc’s point was that we have a growing startup community in Montreal with great startups building world class products, and we need to do a better job at supporting them. He has since switched to Cakemail for email delivery, a local company, which he claims has the best product out there. Continue reading →

Startup Lessons: The bike accident

The Accident

On Friday, September 10, 2010, I biked to work, like I try to do 1-3 times per week. It was a beautiful sunny day with barometer over 20 degrees Celsius. I got on my bike at around 5PM to head to Suite 701 Lounge, the trendy bar and restaurant of Hotel Places d’Armes, one of Montreal’s finest boutique Hotel located in Old Montreal, to attend my good friend and partner Mark MacLeod’s 40th birthday party. It was rush hour and the city was buzzing with activity: people on the streets getting out of work and ready to start the weekend, traffic, bixis, the works. I work downtown which is directly at the base of the Mount Royal and at a higher elevation to Old Montreal. As I was coming down Beaver Hall, a small street that feeds into Square Victoria where The Montreal Stock Exchange, the Hotel W, and the CDP headquarters are located, I started to pick up speed to reach about 35KM/h. About half way through the hill I hit the breaks to prepare to stop at the red light about 50 meters below. To my surprise, although I stopped picking up speed, I wasn’t slowing down. I was on the right side of the street, headed for trouble. My first reaction was to look back to see whether I could cross the street in an attempt to slow down. No car, so I made a tight left turn but still no breaks. I was now less than 25 meters from the red light, on the left side of the street with a car parked right in front of me about 10 meters away. I had two choices: go through the red light and hope for the best or jump off the bike and get hurt. Continue reading →

Equity versus convertible debt: What’s best for entrepreneurs?

Busting the myths about convertible debt financings

A lot has been written about the benefits and disadvantages of equity and convertible debt financings for founders and investors in recent months. Paul Graham of Y combinator seems to believe that all startups should raise convertible notes. Seth Levine from the Foundry Group implies in his post “Has Convertible Debt Won?” that convertible debt is generally good for entrepreneurs and bad for investors. I also like Mark Suster ‘s post and Fred Wilson’s thoughts on convertible debt. I believe that equity is the investment vehicle that gives startups the best chance to succeed. In addition, it is the only funding mechanism that ensures the interest of founders and investors are aligned, which I argue is the single most important trait of successful startups.

A lot has been written about the proclaimed advantages of convertible debt financings over equity. I want to use this post to bust some of the myths and highlight some of disadvantages of convertible debt for both founders and investors, and talk about the benefits of equity financings. For more information on no cap convertible debts, check out my other post about the Alphonso Labs – Pulse financing.

Busting the myths

Convertible debt financings are cheaper than equity.

In our seed fund Montreal Startup, we have completed the vast majority of our seed equity financings for less than $10K. In fact, I believe we can easily get to $5K per transaction for our next fund with the use of standard docs. At this level, convertible debts don’t offer any cost advantages. Besides, clarifying the share terms and finalizing an initial shareholders agreement between seed investors and founders right at the beginning with more founder friendly terms is likely to improve the quality of those terms at the series A or B levels as a precedent has already been set. This approach should also reduce the closing costs of the next round as the terms will already have been negotiated. Finally, an equity investment doesn’t accumulate interest, thus reducing the long-term costs of the transaction (10% interest on a $500K investment is $50K per year). Continue reading →

Are convertible debt with no cap deals good for entrepreneurs: the Alphonso Labs – Pulse financing

I wanted to address the convertible debt deal with no cap that was recently done for Alphonso Labs by Redpoint Ventures, Greycroft Partners, Mayfield Fund, Lightspeed Venture Partners and an unnamed fund from the perspective of the entrepreneur and the company. I don’t want to get into Angelgate and angel-VC relationships for now. In this financing, 5 investors invested $200K each in a convertible note with no cap. Most of the press about this transaction describes it as a great deal for the founders and the company. I’d like to argue the opposite. For the five VCs investing in Alphonso, maybe except for Greycroft which has a smaller fund, $200K doesn’t even qualify as noise. It doesn’t show up on the radar. They could write this off tomorrow and no one would notice. They are obviously making the investment to buy an option for the next round. As a founder, you want investors who become an extension of your team and sit on the same side as you. I’m not sure how having 5 investors with nothing to loose and an option to buy shares in your company in the future helps in any way. That being said, I don’t have all the details so the comments below are not necessarily specific to this transaction but to a hypothetical transaction similar to it. For more information about the subject of convertible notes, you can check my other post on the subject “Equity versus convertible debt: What’s best for entrepreneurs?” Now let’s look at the different possible scenarios:

1- Company hits all their milestones and more: In this scenario, the five investors want to reinvest and do more than their prorata. I’m sure they all have rights of first refusal on the next round. Who sets the valuation? Who negotiates the terms? Who takes the board seat(s)? For most of these funds, their model is to deploy a minimum of $10M per investment and return 10X that. That’s 5 X $10M X 10 = $500M. These economics only work if the company sells for over $1B. How many of those have we had since the collapse of the Internet bubble? How can the entrepreneur accommodate all them? In this scenario which should be all positive, the entrepreneur is likely to have to manage a situation with five unhappy investor who cannot deploy as much capital as they want into the deal. In addition, the company will not be able to raise outside capital as the 5 investors are likely to take everything that’s available. If there’s no outside capital, the valuation discussion is likely to be strenuous at best. In this scenario, had the company raised a seed equity round with angels, it would be in a position to run an auction for its next round and pick the right investment partner to help the company achieve its vision. Not sure this is the situation a founder wants to be in if he’s hitting it out of the park. Shouldn’t he be building the company instead? Continue reading →