We all make mistakes. Lots of them. Rarely a day goes by without me making at least one, whether it be forgetting to run an errand, coming home late without warning my wife, being late to a meeting, making a bad trade, or losing patience with one of my kids. It’s OK to make mistakes because it’s part of makes us human. I would argue that our demanding lifestyle makes us prone to make much more than our parents.

I believe there are two types of mistakes: the ones that negatively impact us, and those that affect others. It’s unpleasant to be on the receiving end of a mistake, whether it was yours or someone else’s.

People have different ways to deal with mistakes they make that affect others. Some will try (and often succeed) to convince themselves that even though it wasn’t planned, the outcome of their action is better for everyone, including the people affected by it. Others will try to hide it, acting as if nothing happened, hoping no one will notice or that time will heal all wounds. Others will plainly lie, scheming, hoping they’ll never get caught. Others will look for excuses, blaming others, the weather, the market, the cell phone battery, traffic, etc.

We’ve all come across these people, and we can also probably remember times in our respective lives where we used some of these tactics. I know I have. You don’t have to be a scholar to see how wrong these approaches are.

There are better ways to deal with mistakes. This is how I try to deal with mine:

1- Stop everything, concentrate, and put yourself in the shoes of the other. Assume the worst. How do you feel? If it doesn’t feel right, you’ve probably made a mistake.

2- Take full responsibility for your actions. Don’t be afraid to say you screwed up. Assuming responsibility is an important step towards building mutual respect and trust. Only real men (or women) take full responsibilities for their actions.

3- Apologize with sincerity. Check your ego at the door and say you’re sorry. An apology is something you give expecting nothing in return. It shows you care. You can’t fake it.

4- If the apology is accepted, propose solutions to fix the situation and offer to make it up to them.

One can argue that not all mistakes are black or white. To that I say when in doubt, always assume the worst and apologize. What bad can come of it?

The key to all of this is to treat people the way we want to be treated.

I apologize everyday. To my wife, my kids, business partners, friends, acquaintances and people I don’t even know. I don’t think it makes me less of a man.

Imagine a world in which everyone takes responsibility for their actions, apologizes for their mistakes, and looks for solutions to fix them…

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.

Montreal is almost American, with flashes of Boston (architecture, suburbs, student population), New York (restaurants and nightlife) and San Francisco (lifestyle, proximity to nature and wine country). It’s almost European, with flashes of Paris, Madrid and Barcelona. It’s also Canadian with loads of influence from the British Empire. Its French roots give it its own movie, tv, music and book publishing industries and markets, much like France and India. Montreal has Old Montreal, the Plateau, Westmount, and Mont Royal. It has one of cleanest, most efficient subway system, bonified by the largest underground city in the world. Montreal is home to the Bixi, a revolutionary green and healthy city transportation system. It has the most vibrant comedy scene per capita in the world with its Just For Laughs festival which has now expanded beyond Montreal. You can’t find a bad restaurant in Montreal even if you tried. The music scene is solid, anchored by the best Jazz festival in the world. The Cirque du Soleil, the greatest circus on earth, was founded and is still headquartered in Montreal. Montreal is home to world class universities such as McGill University, University of Montreal, Concordia and UQAM, with their renowned engineering programs and business schools. It’s a great place to live, do business in, or move to with the most lenient immigration laws in North America. Montreal International can help you with that.

Montrealers work hard but like to have fun. There is always a good reason to party and have a good time. We invented the “5 a 7″ which often end at 3AM. Montrealers love sports. The Montreal Canadiens, the most storied franchise in hockey is here. Montreal also has the Montreal Grand Prix, the only F1 Race in North America. The city is also home to the Montreal Impact, soon to be members of Major League Soccer and the Montreal Alouettes of the Canadian Footbal League.

It’s a great place to visit and you can follow the Montreal Buzz for the latest.

Montreal is a great place to raise a family. Compared to any other metropolitan city in the world, housing remains affordable. The private and public school systems are solid compared to anywhere else in North America. The value system of the population is strong with a healthy mix of capitalism and social conscience. The province of Quebec has a universal healthcare system which has flaws but remains the best in North America. Montreal has dozens of museums, parks and family activities. Check out I Spy Montreal for the latest.

Montreal is a great place for nature lovers. There are more than half a dozen sky slopes (Saint-Sauveur, Mont Tremblant, Bromont, Sutton, Orford, Owl’s Head) in a 90 minute radius. Dozens of beautiful lakes, and great spots for kiteboarding in the summer and kite skiing in the winter, when you can also find a rink on every other corner. You can also bike to work from anywhere around the city.

Montreal is a cool city, but we’re missing an anthem.

Thanks to Jay-Z, New York has a new one.

Let’s start a movement to find ours.

As I was planning my day this morning I realized that the Montreal startup community is on fire. I keep saying to whomever will listen that Montreal is the place to be if you want to start a company, but it’s nice to see proof points to back all the talk. Just today we have a number of great events to attend:

DigitalPuck Happy Hour
Techno Montreal Cocktail
Conversion Camp

and the main event

Jacques Bernier (Managing Partner at Teralys Capital) VS Francois-Charles Sirois, (President of Telesystem), a boxing match pinning the largest VC LP in Canada against one of his GP for charity

Where else on the planet can you find a startup networking event that combines great people, great food, booze, fundraising for a great cause, blood and violence involving an LP and a GP?

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.

There is an oversupply of capital in both the startup and greater IT markets, with no end in sight except for growth capital, unless we experience another collapse of our financial system.

In the startup market, capital comes mostly from angels, Super Angels and venture capital funds at the early stages. As companies expand, they can tap into other sources of capital such as strategic investors, financial institutions, public markets and mergers and acquisitions to grow or provide liquidity to shareholders. In the IT market, capital comes from a number of sources including public markets, financial institutions, mergers and acquisitions and cash flow from operations. There is currently excess capital in the both the startup and the IT market.

The supply of capital at the seed level in Silicon Valley and some of the top US markets outpaces demand by a large margin for web companies. The sharp increase in the number of new startups that we’ve been experiencing since 2005 has been met by a massive decrease in the amount of time and money it takes them to reach market validation. As a result, the startup ecosystem doesn’t need more capital than before to thrive, I would argue that it needs much less. At the seed level, which I define as a company that as yet to achieve market validation, a horde of angels and Super Angels have entered the fray. Even if these investors have less investment requirements than venture capitalist (smaller investments, lower exit thresholds, broader sectors) and will end up investing in a lot more deals as a group, most of the capital invested at this stage will be concentrated on a small fraction of the startups. As stock markets continue to be volatile and we start to see more exits however small, we should see a steady increase in angel investing activity, resulting in even more capital in the market. More capital means higher valuations, bigger seed rounds that close faster, and less reliance on VCs to get companies to exit. In addition, many VCs already invest at this stage and more will do so over the coming years, further increasing supply. The good projects will continue to be oversubscribed and the decent ones will continue to get funded for years to come, keeping the market in an oversupply state for years. This doesn’t mean that most companies won’t fail, like they historically do, but we may end up with more companies getting to the breakeven point.

There is an oversupply in growth capital that should ease within the next 5 years. Less than 5% of the thousands of new startups being created each year are solving big enough problems to aspire to one day achieve enough scale to sell for $100M or more, which is the threshold for 95% of the venture capital industry. More startups doesn’t mean more large exits. These few companies also need less capital than before to reach each value creation milestone (market validation, repeat customers, hyper growth, profitability, market leadership, etc.) resulting in excessive competition for the few who fit the profile. Another dynamic at work is that because of terrible returns since 1999, the venture industry is at a crossroads and most firms will not be able to raise another fund unless they invest in the next Facebook. This reality is driving many VCs to make “hail mary passes” the cornerstone of their investment strategy. As far as they’re concerned, these funds have nothing to lose. The combination of these factors has resulted in a sharp increase in valuations at the post-seed level (Gowalla, Blippy and Foursquare are glaring examples) and irresponsible behavior by venture capitalists on “hot deals” as documented in Fred Wilson’s post. Most of the venture funds currently investing have less than 2 years remaining to their investment period, which should translate into an important drop in available growth capital for startups over the next few years. That being said, with so much capital on the sidelines with nowhere to go, I suspect angels and financial institutions could pick up the slack, especially for the companies that have market validation, keeping the market at an equilibrium.

There is an oversupply of capital in the IT market and it should remain this way for the foreseeable future. In the IT market, companies like Google, Microsoft, Oracle, Cisco and Apple are sitting on record amounts of cash. Most of them are very profitable, still growing, have scalable business models and no debt. There is no reason for this situation to change in the short to medium term.

There is an important lack of talent supply in both the startup and IT markets and its unlikely to change in the short to medium term.

We live in a digital economy. The web is everywhere. It has become a key part of our lives and is becoming a cornerstone of each of our industries. Big web companies like Google, Facebook, Apple, Microsoft are engaged in an all out war for talent, as expressed by Eric Schmidt in a recent interview, that should last for years as they compete from web supremacy, but they are not alone. Consumer facing companies like Proctor & Gamble, Ford and Coca-Cola have started hiring as well. The same way they need warehouse, sales and customer service professionals, they’ll need web people as well to survive. This is also true for companies serving businesses. The demand for web engineering talent will come from every industry. This is nothing new. A McKinsey study published in 1998 coined the term, predicting that we would be engaged in war for talent for the next 20 years. On the entrepreneurial side, we now have dozens of startup factories like Y combinator, Techstars, Launchbox Digital, etc. that are helping engineers become entrepreneurs, producing hundreds of investor ready opportunities every year as a result. These accelerators also have the effect of stimulating entrepreneurship, driving talented engineers to leave their employer and start a company, resulting in the creation of thousands of companies for each hundred that make it into such programs. As the demand for great engineering talent continues to increase over the coming years, more and more will choose to start companies instead, capitalizing on low starting costs and continued excitement about the space, putting even more pressure on the supply. As a natural supplier of talent to the IT market, aspiring entrepreneurs and startups are now seriously competing with large IT companies as they need engineering talent to grow and succeed. I don’t see this lack of engineering talent supply issue to subside in the US until there is a major influx of talent in the system caused by new grads or immigrants. Obviously, the Startup Visa movement led by Brad Feld and Paul Kedrosky is meant to alleviate this problem.

What does this mean for you?

IT companies have two choices to meet their engineering talent needs: buy more startups earlier in their development or increase compensation for engineers to dissuade them from starting companies, joining startups, or leaving to a competitor. As long as engineering talent is their most important resource, it makes sense for large tech companies to spend more money in this area, whether through acquisitions with backloaded earnouts or by increasing salaries, bonuses and restricted stock grants. They have the cash and stock to do it. Both Google and Facebook have been active in this area, making dozens of talent acquisitions this year alone and in the case of Google, announcing across the board 10% raises. Even if the economy turns, I don’t expect this talent war to slow down much, as Apple, Google, Facebook and Microsoft have almost unlimited resources and are engaged in a turf war that none of them can afford to lose.

Entrepreneurs are well positioned if they have an interesting project and can recruit good people, although the amount of stock they will have to share to build their team may increase over the coming years. I don’t think the lack of talent supply in the ecosystem will have a huge impact on the cost of starting a company and getting to market validation as most engineers joining startups don’t do it for salaries anyway but for glory and the chance to work on a great project. Founding teams may get bigger to incorporate all the major roles that need to be filled from the get go. As long as they are offered enough equity to make it worth their while, good engineers should continue to join startups. On the funding side, capital sources will continue to outnumber good investment opportunities by a wide margin for a while. There is just too much money in the system at the early stage level. To protect against an eventual reduction in supply, especially at the growth stage, startups should remain capital efficient and try to get to market validation on $1M or less, and breakeven on $2M or less. Lean startups that are breakeven will also have a better chance of getting acquired, especially in tougher times. The best way for entrepreneurs to have options is to build a great team, ship great product, get happy customers and get to breakeven on as little money as possible. The world is yours if you can achieve that.

If you’re a web software engineer, the future is bright. Demand for good software and web engineers will outpace supply for years to come. We’re in a digital economy. There are hundreds if not thousands of markets that need to be reinvented using the new web, social, gaming and mobile paradigms. Companies large and small need to reinvent their business. There will be opportunities in startups, large web companies and traditional companies that can’t afford to let the web pass them by. As a web engineer, don’t be afraid to try the startup experience as you should be able to find a great job quickly if it doesn’t work out. Get involved in the open source community and stay current with the new technologies. Compensation should go up relative to other professions.

If you’re an angel, Super Angel or venture capitalists, things are about to get tricky, especially if you’re in an efficient market like Silicon Valley or investing in consumer web. Investors make money by investing in great entrepreneurs, bull markets, and inefficient markets where they have a competitive advantage. In general, the excess of capital in the market is driving valuations way up, making it difficult to generate a return. The talent wars should help maintain a steady stream of low valuation exits for years to come, but it’s hard for investors to generate consistent returns on those alone, especially as valuations are going up coming in. You need the big exits for the model to work.

Invest in great entrepreneurs. Great entrepreneurs will usually find a way to succeed. At times At times when there is excess capital, being able to attract them as an investor is gold. To do that, investors have to be friends with them, pay more or become more like services businesses to entrepreneurs. Most angel investors don’t have the time, resources or background to offer this on a consistent basis. Only a select few of super angels and VCs can. This is why prices are going up. Entrepreneurs have to be smart about maintaining terms at reasonable levels so not to create a misalignment of interest with their investors.

Beware of the bull market. Most of the returns from the VC industry for the past 20 years occurred during the bubble of the late 1990s. Over half of the VCs in business today built their track record on this period. The key was to go in and out at the right time. This is called momentum investing. It’s a viable investment strategy in public markets when you can get in and out at anytime, but not as a venture investor. We are currently in a bull market in the web world. Unlike 1999, our bull market is backed by fundamental economics like revenues, but it’s still overvalued. It’s hard to make money in an efficient market when you overpay coming in. You need someone willing to overpay on the way out. It’s all about timing. I look at consumer web in Silicon Valley as an efficient market. No one aside from a select few has any sort of competitive advantage and that number is shrinking. Some of the accelerators like Y Combinator and Techstars are also efficient markets. With more and more capital flooding the market, this problem is likely to expand to other geographical areas like New York, LA, Seattle, etc. and other segments like BtoB, SaaS and financial services over the coming months, and years. Don’t get me wrong, some people like First Round Capital, Foundry Group and Union Square Ventures to name a few will generate great returns in this space, but many will struggle.

Find inefficient markets in which you have a competitive advantage. . Both Mark Suster and Roger Ehrenberg have great recent posts on the subject. There are many smart and successful entrepreneurs outside of Silicon Valley. There are many other massive markets outside of the consumer web space that are ripe for disruption and have clear business models. Those geographies and market segments are not overheated yet. Competition for talent isn’t as fierce. The angel and VC communities are not as robust. Valuations are reasonable. Be the partner who will give them access to Silicon Valley, senior management, business partners, customers and potential acquirers. It’s hard work but more likely to succeed on a consistent basis. Focus on value as opposed to momentum. Success should come from within. A growing business with products and happy customers will always be valuable, in good and bad times. The talent crunch will spill into these markets as well, creating many acquisition opportunities. IBM, Intel, Cisco, Oracle, HP, Dell, EMC, etc. have been aggressive acquirers and this trend should continue.

Interesting times indeed.

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.

I agree with Paul Graham that the world of entrepreneurship and early stage investing in web, Internet, mobile, software, digital media, casual gaming and advertising, especially in San Francisco – Silicon Valley and New York, is going through a major change and that entrepreneurs are the main beneficiaries. For the time being, the balance of power has definitely shifted away from the VCs, the traditional power brokers, into the hands of a new group. We won’t know for years whether VCs, angels, Super Angels or an evolution thereof will win the funding war, but whoever wins will have to bend and kiss the ring of the new king who has already been crowned. Our world will never be the same.

As you all know by now, the costs associated with launching a new startup, building a product, achieving product/market fit and validating your business model is trending to zero on the back of major trends like open source software and frameworks, cloud computing and distribution platforms (social, search, mobile, and business app exchanges). Engineer entrepreneurs who can live with no salary for 3-6 months don’t need to raise seed funding. Y Combinator and Techstars have proven this model. As you can read in “Should Entrepreneurs Raise a Seed Round” entrepreneurs have a choice and I argue should only raise money to reduce their personal risk or accelerate their path to market validation in the form of new hires, networks, know how, etc. As an entrepreneur, once your business has achieved market validation, you hold all the cards and investors will fight for your business, especially in efficient markets like San Francisco-Silicon Valley and New York, although i believe that within the next ten years, most markets in North America should be there.

So what happens in a world where capital is no longer enough for investors to win the day?

Entrepreneurs have a choice. They can choose to bring an investor into their company, or not. Pros and cons in both scenarios, but it’s still a choice.

VCs, angels and Super Angels now have to fight for this business, and the competition will only increase over time. Over are the days of investors treating entrepreneurs badly because they can. These guys are dead. Over are the days of investors claiming to add value to startups when the reality is quite different. These guys will disappear as well.

There are three ways for investors to compete. Build a personal relationship with the entrepreneurs prior to a funding event, provide cheaper capital or provide value capital.

Building personal relationships with entrepreneurs is hard work. You can’t fake it. It starts with being a decent guy and treating people with respect. Having been successful also helps. You have to know and be known by a lot of people. Availability and experience are key. It’s better if you blog and go to startup events, big and small, and hang out with the attendees. Try to touch as many entrepreneurs and aspiring entrepreneurs as you can. The best investors either have been around for a long time and/or were part of successful companies and draw on these networks.

Cheaper capital can mean higher valuations, common shares, convertible debts with no caps, less vetos and restrictions, no board seat, etc. VCs with large funds can do this at the seed level if they’re buying an option for the next round, but I argue in this post and this post that entrepreneurs have to be careful about the alignment of interest when taking this capital. Regular angels can do this as well, but Super Angels have less flexibility as it would drastically affect their return profile.

Value capital, or smart money, is by definition more expansive for entrepreneurs but comes with additional benefits. These benefits can include strategic advice, access to networks, hiring support, business and corporate development support and access to capital, in good and bad times. A lot of investors claim to be smart money, but very few work hard enough and provide the kind of value that would warrant tougher terms. The social web makes it very easy for entrepreneurs to diligence investors and hold them to their proclaimed higher standard. Investors should be willing to provide value to entrepreneurs before an investment is made.

The early stage investors that will survive and thrive in this new age will treat entrepreneurs and their companies as customers. They have to become more like late stage VCs and buyout firms who invest in growing, profitable companies that don’t need financing. Most of these firms like TCV and Insight Venture Partners all have internal teams with deep functional expertise dedicated to the success of their portfolio companies including hiring, corporate and business development, sales, finance, operations, etc. They also have a team of analyst that reaches out to companies early in their lives and on a regular basis over time, building relationships that will often last years before an investment is made. Late stage VCs also offer entrepreneurs a valuable benefit: partial liquidity through a secondary sale of their shares. I’ve seen transactions where founders take as much as $100M of the table as part of a late stage round.

Most early stage VCs with funds greater than $150M have enough budget (2.5% times $150M = $4.25M) to do some of this. The bigger the funds, the bigger the budget. I predict that over the next few years, successful firms will spend an increasingly higher percentage of their budget on functional teams or advisory boards to better support their portfolio companies. Smaller VC funds like Real Ventures and First Round Capital and Super Angel funds are a disadvantage here because of their lack of budget. That being said, there are other ways to do this. Dave McClure for one has built a team of over 70 mentors and advisors to support his portfolio companies. Not sure how he compensates them but I’m convinced it’s not with cash. First Round has a fairly large team for a small fund, so I suspect that the partners are getting paid below market. We’re doing the same at Real Ventures, large team, mentors and advisors, and below market compensation. As for founder liquidity, I predict that we’ll see more of that as well earlier in the life of companies, but definitely not at the seed stage.

The Age of the Venture Capitalists began in the late 1960s, with Greylock Partners, ARDC, James Guzy, Sutter Hill Ventures, Venrock Associates and then Kleiner Perkins, Caufield and Byers and Sequoia Capital in the early 70s. The industry grew in power, influence and returns up until 2001 (except for most of the 80s), when the bubble delivered a fatal blow. From 2002 through 2006, the VCs that still had dried powder aggressively pursued more mature startups that were having a hard time raising money due to the pullback of many funds with major portfolio issues. During that period, VCs became financial engineers, with the rise of the double, triple and quadruple participating preferred, guaranteed returns, forgetting their roots and bleeding the entrepreneurs that had made them so successful over the years. They also pulled back from their bread and butter, seed and early stage investing, which except for the bubble years, had generated the overwhelming majority of the returns of the industry since the 60s. This bad behavior created an opportunity for a new class of investors to fill the void: Super Angels. Ron Conway, Jeff Clavier, Keith Rabois, Mike Maples, Peter Thiel, Reid Hoffman and First Round Capital were some of the pioneers of this new model. We can call the period from 2004 through 2010 the Age of the Super Angels.

With the cost of starting a company and getting market validation trending to zero, the balance of power has shifted again for good. It is not about the VCs, angels or Super Angels anymore. The rules have changed and we have a new king in town.

We have now entered the Age of the Entrepreneur.

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.

On the marketing side, there is now an entire industry of individual bloggers and corporate blogs like GigaOM, Techcrunch, AllThingsDigital and Mashable that is dedicated to covering startups and discovering the next big thing. In addition, startup coverage in the tech sector has gone mainstream. Most mainstream media companies like the Wall Street Journal, New York Times and CNN have multiple writers dedicated to it. You can make a creative video about your product, write a targeted email to a writer, get a friend who works at Facebook, Google, Apple , Amazon, AOL or Microsoft to send it to a few influencers, get your friends to tweet about it, etc. If the startup has a pulse and a decent story, it will get some coverage. Want to get some attention from a business development executive or get access to the marketing department of Procter & Gamble? Get on linkedin and find a path to the people through your network or write a blog about how your product will have a positive impact on their business and send it to them. Unless you live in Antartica and you’ve built an ice machine, you should get the attention you need to get your first customers. Once you have your first beta customers, if you can make them happy through iteration and get strong usage metrics, or even better, extract money from them, you have achieved market validation. At that point, assuming you’re in a decent size market, you have a viable business.

A great example of this is Tinychat, which has yet to raise a penny but has built a great business in the live communications market, one customer at a time. I’ve never met the guys, but my guess is they’re smart and driven, much like you.

So if most startups don’t need to raise money to achieve customer fit and market validation anymore, why should entrepreneurs raise seed money?

I’m not suggesting entrepreneurs should refrain from raising outside capital at the seed stage, after all, I invest in entrepreneurs and startups for a living. The point I’m trying to drive home is that as engineer entrepreneurs, you have a choice and should make that decision thoughtfully and carefully. Here a few reasons why entrepreneurs could choose to raise seed rounds:

1. Add a business partner
If you do it right, raising seed money could allow you to bring in an investor that will partner with you and help with strategy, fundraising, hiring and recruiting, corporate governance, finance, PR, ops, etc. This is what VCs and a few Super Angels claim to be doing and is easy for an entrepreneur to diligence. This is what I do for a living and what we do at Real Ventures.

2. Get to market validation faster
a. Funding will allow you to hire 1-2 engineers (or more) to complete MVP (Minimum Viable Product) and iterate towards customer discovery and product/market fit faster. Could be smart in a very competitive market;
b. Get access to investors’ networks to reach first customers (if you’re targeting enterprise) and business partners faster. Again, VCs and some angels can help with this, make sure you do your due diligence.
c. The funding is a story in itself, especially if you raise money from a known VC or angel, and is more likely to get you attention in the media
d. Some investors could help you achieve MVP and market validation faster with their expertise and mentorship programs. This is where accelerators like Y Combinator, Techstars and our own Founderfuel program come in. This is not about capital but about operational support. This is also what Dave McClure’s 500 Startups is all about.

3. Reduce the risks for founders and the business:
a. Raising outside capital at the seed level can help founders reduce their personal risk by limiting the reliance on their savings to build the business and by allowing them to draw a salary. I’m not a advocate of founders not drawing a salary unless they can afford it. You shouldn’t get rich on the pay, but the startup lifestyle is so demanding as it is, you don’t want money to add more stress to an already tenuous situation.
b. If you choose them well, investors will become partners in your business. I don’t mean partners in the sense that they’ll want to run your business. Good investors will care about you and your company, and assuming an alignment of interest, will work hard to help you grow as a person and business man, and help support your company. Building a successful company from scratch is hard. The more good people you have helping out the better. There can be a lot of value to that. This is why serial entrepreneurs often raise money early even if they could bankroll their companies themselves.

4. Prepare the next round
This one is up for debate as unless you achieve your milestones, your series A/B will be as difficult to raise whether you raised a seed round or not, although I would argue that if you’ve worked with a seed investor for a few months and they like the team, there’s a good chance they would give you more money if you show positive signs.

5. Stretch your runway
I’ve a few entrepreneurs do this over my career. They raise a seed round and run out of money before achieving the milestones. The seed investors like the team but are not willing to write another check until there are more proof points. The entrepreneurs decide to bootstrap and stretch the runway by not taking or reducing their salaries until they real the milestones.

I believe that when entrepreneurs look for capital, they should use this opportunity to look for a business partner as opposed to an investor. In fact, they should look at it the same way they do when recruiting a co-founder or adding a senior executive. The only difference is that the investor buys its stake in the company with money, and to a certain extent, the value they’ll bring to you and your business. For that reason, it is extremely important for entrepreneurs to diligence and spend quality time with prospective investors prior to closing. It is also important to make sure both parties share the same values and have aligned interests, which is why I prefer pure equity rounds. The other mistake entrepreneurs make when fundraising is they try to convey a story that will fit the investors’ investment strategy. In other words, they’ll tell investors what they want to hear. I’m not talking about lying here, but rather making adjustments to the vision or plan that will get the investors to the finish line. Bad idea. You may get their money, but you may have created a time bomb that is likely to blow up at a time when you’ll need your investor to be a true partner. You also run the risk of either party experiencing buyer’s remorse, which I don’t recommend to anyone. The vision is likely to change over time, but investors and entrepreneurs should start from the same place.

So here you have it. There are many reasons not to raise seed money which include: control issues, getting the wrong investors and dilution, but most of those are linked to the kinds of traits you don’t want as an individual: ego, lack of diligence, greed. Good investors won’t try to control your company and will let you sell when you believe the timing is right. It is your responsibility to know who your investors are before you take their money. You need to look at dilution as an investment. Is making that dilution investment as an entrepreneur increasing your chance of achieving a successful outcome. If that’s the case, it’s a no-brainer as only a select few get there. There’s been an increase in exits in the $5M to $30M range, so outcomes are not as binary as they were in the past, but we’re still in a situation where most companies won’t have outcomes that make entrepreneurs millionaires. The key for entrepreneurs is how money they raise to get to the next step. If you decide to raise a seed round, make sure you raise as little as possible (with a small buffer) to get to market validation. Once you reach validation, the world changes.

If you’re an entrepreneur in web, mobile, digital media, software, casual gaming, etc. and are considering raising a seed round, feel free to connect at js (at) realventures (dot) com.

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, Status.net, 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.

2- M&A is the new R&D and talent recruitment: The IT market is maturing. To maintain historical growth rates, midsize and large companies have to diversify their service offering. These companies have all been built under a different development and innovation model and cannot innovate at the speed that is required today. In addition, mobile and the web are now important parts of every consumer facing company’s business but they can’t recruit the young talent that would rather work in startups. They have to resort to M&A to acquire new product lines and talent through smaller acquisitions in the $5M-$100M range. Google alone has made more than 20 this year. Mark Zuckerberg, the CEO of Facebook, stated in an interview with GigaOM they have only made talent acquisitions so far in their short history.

3- The access/proximity to capital is not a competitive advantage anymore. Now that startup costs are getting close to zero, being in the valley and having access to capital is not a condition to success. What companies need is enough capital to get to market validation from people who can help connect them to funding, business development and corporate networks. This is what we do. Although most of the seed funding activity has come from the San Francisco-Silicon Valley area, other pockets such as New York, Boulder, Chicago, Seattle, Research Triangle, London, etc. have emerged. In Canada, Montreal, Vancouver and to a certain extent Toronto are booming.

4- The rise of the Super Angels is having the effect of increasing the size of the seed rounds in the US and drive Series A and B valuations to stratospheric heights. I believe this will have the effect of increasing the number of US VC funds that come to Canada for early stage investment opportunities.

Real Ventures will invest in web, mobile, software, digital media, social and casual gaming startups run by driven entrepreneurs. Like Montreal Startup, we invest at the seed level, between conceptualization and the validation of the business model, for companies that can get there with less than $1M, but preferably less than $500K. We’re based in Montreal, the best city in the world to start and run a startup, and as such, will spend most of our time looking at investment opportunities in a 250KM radius. We are working on setting up an accelerator for Montreal called Founderfuel that we hope to launch in the spring, so stay tuned.

We invest in entrepreneurs. We put entrepreneurs first. As entrepreneurs ourselves, we are active investors, helping the entrepreneurs we invest in get to validation and grow as individuals and business leaders. We provide entrepreneurs with the support structure of a VC firm but with the flexibility and personal touch of an angel. We believe in capital efficiency. Raising the right amount of capital forces entrepreneurs to focus on the minimum viable product and gives them more strategy and exit flexibility every step of the way. To me, it’s all about the alignment of interest.

I have spend the past few years looking for the project that would allow me to earn a good living while making the world a better place. Give more than I take. Real Ventures is this project. I get to meet and work with hundreds of entrepreneurs, exceptional individuals out to change the world. I get to support and participate in their success. It’s a very challenging but fulfilling profession.

Real Ventures is here and open for business so don’t be shy, it’s never too early to talk to us.

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.

I try to meet all the local entrepreneurs I can, listen to their story, and try to give something they can take home with them: free advice (beware as you get what you pay for!), introductions to partners, customers, investors, ideas, suggestion, etc. I do it for many reasons. I absolutely love it. Entrepreneurs are some of the most interesting people you’ll ever meet and I learn a great deal from these encounters. I also think it’s part of my job. In some ways, I consider it my duty to give back as much as I can and help the ecosystem. The more successful companies we have in our community, the more successful we will all be. Success breeds success.

But I can do more. We can all do much more. There is no reason why our local community, which is growing fast and is about to get a major influx of capital, cannot do a better job supporting its own. That being said, we live in a global marketplace and I’m not suggesting we should stop doing business with the rest of the world, or start supporting local companies that aren’t competitive, to the contrary. Supporting the local community means offering your time to beta test the product of your neighbor. It means testing and buying local when quality of product and service is equivalent or better. It means giving a local startup an opportunity to pitch their product to you. It means listening and providing constructing feedback to local companies when their products or services aren’t good enough. If we help each other out, we will collectively raise our game.

I believe the first step is to build a comprehensive list of companies in our web, mobile, digital media, software/saas, hosting/cloud, advertising and gaming industries.

I’m asking every CEO to fill out the form. Some of the information from the form will be available to the public on the page.

Local Startup Directory

I don’t think we should limit the term local to Montreal. I’m suggesting we expand it to incorporate all of Quebec and include Ottawa as well. As long as you’re a Canadian company, we’ll take you.

I’ve also created this facebook group names Local Startup Community Support open for the public for anyone who has an interest in supporting the local startup community. Maybe one day this group can be used to recruit beta testers, etc.

As we build the list, it will be easier to identify what is available from our local community and how we can help. It would be great to get your support on this initiative. I’m also open to suggestions on how to make this initiative a success. Please retweet and share with the local entrepreneurs you know. Together we can succeed.

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.

I jumped.

I ended up positioning the bike so it hit a tree on the sidewalk and not ram into a car. My left hand hit the ground first as I preceded to complete a roll on the sidewalk like one of the stars of Jackass. The forward speed ensured that every piece of my body that touched the ground (hand, wrist, forearm, elbow, and shoulder) lost its pound of flesh, but other than the lost skin, ripped jeans, a few bruises, and a scratched helmet (thank god I was wearing one), I was OK. No long-term damage. The bike was fine. My 17 inches Macbook Pro also survived but not without its bumps and bruises. The frame is tilted a little and I can no longer fit the network cable. I have to realize that for all intents and purposes, the network cable is now obsolete. In addition, I lost about 1.5 inches of screen space on the right side (it’s white) so I can’t see the date or time. My accident turned my 17 inches machine into a 15 inches. We’re now both battle tested. A bystander was nice enough to come check on me while I was putting the computer, cables and business cards, which I later learned went flying as I was rolling, back into my backpack. I then got back on my bike and headed to the party.

Startup Lesson: have your bike checked up

Now you ask, what does this have to do with startups?

My bike is over 10 years old. I have been using it to go to work for 2 years now, using the breaks to slow down that steep hill every time. I never had the bike checked. That’s not responsible. The bike is to me what a product is to a startup. It gets me to places. I should make sure it works before I use it. My bike accident reminds me of startups going to market with products that haven’t gone through a solid QA process. You can ride your bike to work if some of the gears aren’t working right. You may not get there as fast, but it won’t kill you. Similarly, it’s OK to go to market with a beta product not knowing whether customers will like it or not as long as you can iterate fast. You can’t ride a bike downhill with bad breaks and expect it to stop at a red light the same way you can’t go to market with a product that doesn’t work. Your business may not survive it or at a minimum it will experience a major setback. Get your bike fixed before you take it on a wild ride.

When I was 25 meters from the red light and couldn’t stop, I had to make a split second decision. These are the decisions you make with your gut. As Malcolm Gladwell points out in his book “Blink“, these are the decisions you make with your true self because you don’t have time to think about it and get your mind involved. I could have kept going and hope that: 1) my breaks would miraculously slow me down enough to stop at the light; 2) the red light would turn green; 3) no cars would be passing as I would be crossing; or 4) I would weave through traffic unscathed. The odds of any of these scenarios happening was probably around 20%. Not good odds, but much better than any new startup’s chance to be successful. The alternative was to jump to certain minor injury, pain and potential ridicule but avoid any chance of death or major injury. You can argue that anyone with half a brain would have made the same decision as I did because of the consequences of being wrong in this case: serious injury or death. That being said, I know people who would have taken their chances to avoid the guaranteed consequences of jumping (minor bodily harm and ridicule) or just to prove themselves they could do it. Such is the world we live in.

Startup Lesson: What would you do?

There are many parallels to be made between this situation and the startup world. Entrepreneurs have to take risks and make risky decisions on a regular basis. That’s part of the deal. No risks, no rewards. You can argue that risk levels have been considerably reduced these past few years, especially for engineer founders, now that startups can be built from scratch with time and sweat, but they’re still there. Some of the risks and decisions include failure, bringing in a partner, adding key members to the team, adding investors to the capital of the company, product, getting rejected by customers, not meeting customer expectations, bruised reputation, raising too much money, raising too little money, competition, personal life struggles, health problems, etc.

One could argue that the guy who takes his chances and stays on the bike is more likely to swing for the fences, regardless of the situation. This could mean: raise as much money as is available on the best possible terms with a complete disregard to who the investors are, take all the business you can win even if don’t know if you’ll be able to deliver the goods yet, stretching the truth to the limits of the acceptable to convince an employee, investor, customer or partner to do business with you, hire people with strong resumes with little background checks but get rid of the non-performers as quickly, drive the business towards a wall hoping that the wall will blow up before you hit it (in other words, expect your investors to write a check when you run out of money), make as much noise as possible and talk about yourself a lot, release and deploy your product in customer environments before its ready, etc.

On the other hand, the entrepreneur who decides to jump off the bike is more likely to play it safe and take the longer road to success. That means spending quality time with investors, partners and potential employees before committing to them, to make sure there’s a fit, raising just enough money to execute a predetermined plan and validate preset assumptions to keep your options open, working on plan B and C a few months before running out of money, always under promise and over deliver with investors, employees, customers and partners, QA your products before releasing them, only take on customers whose expectations you know you can meet, stay under the radar until you’re ready and let others do the talking, etc.

There are many types of entrepreneurs and many of them can’t be put in the two categories above, but I’ve met and worked with a few that do. I’ve experienced success and failures with both types in the past. I currently have both in my portfolio. The key to any relationship is to know who you’re dealing with, what their value set is and accept the individuals as they are, helping them focus on their strengths and compensating for their weaknesses. As for me, I’m glad I jumped and hope that my gut will lead me in the same direction next time.

What about you? What would you have done?

When the weather and my schedule permits, I like to bike to work. I work in Montreal, one of the best cities in the world. The city gets it name from the old French words Mont and Réal which translate to Mount Royal, the name of the small mountain at the center of the city-Island. I live on the south shore of Montreal and our wonderful bike paths give me a few options. I have two favorites. The first one (19KM) sees me heading east right on the south shore of the St-Lawrence River, under the Champlain Bridge and through the lock in St-Lambert where I cross. I then get on the Circuit Gilles-Villeneuve, home of the Montreal F1 Grand Prix. The circuit is opened from spring through fall for bikers and roller-bladers to enjoy. I then ride by the Montreal Casino, cross the Concorde bridge, ride by the funky looking apartments built for expo ‘67 and soon arrive in the heart of the city. The second one (35KM) sees me heading west and then north, again on the south shore of the river and through La Prairie and Ste-Catherine, two charming little towns. I cross a small bridge to get on a beautiful strip of land, right in the middle of the St-Lawrence River where I’m surrounded by trees and water on each side. This path takes me to Verdun and then Pointe-St-Charles through Iles-des-Soeurs, following the beautiful Canal Lachine, or to the Circuit Gilles-Villeneuve. Here’s a map of the bike paths in and around the city. It’s a beautiful ride and a great way to start and end the part of my days I spend in the office. Get’s me to break a sweat and oxygenate my brain and body. I can shower at the YMCA next to my office. The short way takes me a bit more than 45 minutes (5-10 minutes more than if I take my car during rush hour) while the long way takes me about 75 minutes. I usually try to take my bike 1-3 times per week. The bike days are my favorite.

As you can see from the map, Montreal is accessible by bike from just about any suburbs around it. In addition, Montreal drivers are pretty respectful of bikers and are used to it. Montreal was also the first North American city to deploy BIXIs, a great way to get around the city while being environmentally and health conscious.