JOHN RUFFOLO THE PITCH ASK A PRO - Life on Planet Word · 2015-05-08 · kpmg.com MARCH 2012 BIZ 12 JOHN RUFFOLO Companies need more long-term funding THE PITCH A pizza maker’s

kpmg.com MARCH 2012 BIZ 12

JOHN RUFFOLOCompanies need more

long-term funding

THE PITCH

A pizza maker’s gangbuster growth

ASK A PROShould you start paying suppliers in renminbi?

THENEXTMILLION.COM

APRIL 2015 | $5.99

THENEXTMILLION.COM

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APRIL 2015 | PAGE 1THENEXTMILLION.COM

YEARNING FOR YIELDFarmers Edge’s Wade Barnes runs a tech business in a decidedly non-tech industry. Investors are clamouring for a piece of his business

HOW I DID IT PAGE 05 Reading time: 5 mins

PIZZA PERFECTIONFamoso Neapolitan Pizzeria is not your average pie joint. Rapid expansion and a buy in from frozen yogurt royalty have translated into 1,500 per cent growth

THE PRODUCT PAGE 07 Reading time: 5 mins

THIS ISSUE AT A GLANCEHere’s what we’re talking about inside

ENTREPRENEURS AND THEIR INVESTORSWe got business owners and their funders together. Find out what they had to say about each other

FEATURE PAGE 13 Reading time: 15 mins

COVER STORY Reading time: 12 mins

After raising $1-million online, this speaker company needs more money 08 4 mins

Here’s how to make sure your seasonal business stays afloat 09 4 mins

Should you be buying and selling in renminbi? 10 5 mins

Here’s another financing option: go public 18 15 mins

Your all-in-one financing guide 26 10 mins

Canada needs more later-stage funding 28 8 mins

PAGE READING TIME

Show me the money. Companies can’t grow without cash. How can your business get funding? We got four entrepreneurs together to talk candidly about the ins and outs of financing. Go to page 22

CONTENTS

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PAGE 2 | APRIL 2015 THENEXTMILLION.COM

PUBLISHERSDennis Fortnum, Peter McNeill and Kristina Valentini

EDITORBryan Borzykowski

ART DIRECTORErik Mohr

CONTRIBUTORSSarah Barmak, Brenda Bouw Vivian Chen,

Jennifer D. Foster, �omas Fricke, Claire Gagné, Diane Jermyn, Teri Kirk, Daniel Merick, Brian Miske,

Sunil Mistry, Margaret Mulligan, Matt O’Grady, Diane Peters, Chelsea Robinson, Graham Roumieu,

John Ruffolo, Michael Watier, Warren Wheeler

GLOBE EDGE

Teena PoirierDIRECTOR, CLIENT ENGAGEMENT AND GLOBE EDGE

Simon BeckSENIOR EDITOR, CUSTOM CONTENT GROUP

Liz MassicottePROGRAM MANAGER, GLOBE EDGE

Isabelle CabralPRODUCTION CO-ORDINATOR, THE GLOBE AND MAIL

�e Next Million is designed and produced by �e Globe and Mail Custom Content Group on

behalf of KPMG Enterprise.

All Correspondence:KPMG LLP

4100 Yonge Street, Suite 200, North York, Ontario, M2P 2H3

[email protected]

Printing and pre-press by DM Digital+1

DISCLAIMER: The information disclosed herein is intended to provide only general guidance with respect to the various matters dealt with and is not an

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person or persons may have.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

ABOUT THE NEXT MILLION

M is the Roman numeral for one thousand. There was once a time where no single letter held greater value. It wasn’t until centuries later that appeared. means one million. But as impressive as

that sounds, we see it as the basis for something bigger still – your business.

You’ve made it through the hurdles, pushed past the naysayers and proven your ideas can work. You already know what it takes to be an entrepreneur. It takes a special boldness, creativity and drive. You’ve made it. Now it’s time to grow it. The Next Million, we highlight the

success stories of entrepreneurs like you. Stories that will inspire you from the first million to the next – and each one after that.

You’re the entrepreneur. We’re KPMG Enterprise.

More VC Money Canadian venture capital investments are on the rise. According to Industry Canada, investments climbed by 26 per cent year-over-year in the third quarter of 2014

Private equity, venture capital, institutional, crowdfunding, strategic partner – if you’ve picked up a piece of business literature in the past �ve years, there has likely been an article about how to take your business to the next level with one of these funding methods.

�is dialogue is expected because the �nancing opportunities for Canadian businesses have ampli�ed over the last decade. According to the Canadian Venture Capital & Private Equity Association, $41.2-billion in private equity was invested in Canadian companies in 2014 alone. Further, success stories like Hootsuite, Radian6 and Shopify continue to stir up investor interest south of the border. �ere is no doubt that the opportunity is there – but what are the options available, and how do you identify the best path for your business?

At KPMG Enterprise™, we frequently encounter this question from our clients. �e answer is case-dependent, but there is a common misconception that valuation, and valuation alone, determines the funding source. �ere are a number of variables that can help identify a solid investment on both sides of the table. One that is often overlooked is alignment of vision and timeline. It is also important to make sure that the investor and the company’s values align. �ese are only two examples of the many factors to consider when deciding what approach and investors are right for you.

In this issue of �e Next Million, you’ll hear from Canadian entrepreneurs and private company owners – and their investors – about how they knew it was (or wasn’t) the right deal. �rough exploring di�erent corporate �nance options, from capital markets to gov-ernment funding, we hope these stories and the advice shared provide valuable insights into selecting the right funding partner for your business.

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Find your funding matchSelecting the right method and investor for your business’ future

FORTNUM

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745373

581

487 455 508

2690

500

1,000

1,500

2,000

Millions of U.S. Dollars Q1 Q3Q2 Q4

367 385

2012 2013 2014

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PIZZA PERFECTIONFamoso makes a mean pie

VIRAL CAPITALMass Fidelity’s online windfall

SUMMER SALESHow to run a seasonal business

KEEP YOUR COMPANYWhat to do when you don’t want investors

Wade Barnes uses technology to help companies map out where to plant their crops.

STARTExpert tips, inspiration and ideas for growing

your business

YEARNING FOR YIELDIt’s not just social media sites and nifty gadgets that tech investors love. �ey also want a piece of Farmers Edge’s crop-boosting technologyBY CLAIRE GAGNÉ

No industry is immune to technological innovation, not even the centuries-old agriculture business. In 2005, Wade Barnes and his partner, Curtis MacKinnon, founded Farmers Edge, now one of Canada’s leading precision agronomy companies. It uses satellite imagery and big data tools to help farmers manage their crops more e�ciently. �is past November, Farmers Edge landed a deal from the same venture capital �rm that has backed Amazon.com, Electronic Arts and Google. Barnes reveals how his company is shaking up the “ag” world, and why he has so many suitors.


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Before I started Farmers Edge, I was a farm boy working as

an agronomist – a soil and crop scientist – in the crop inputs business. I was working a lot of long hours. My partner and I, Curtis MacKinnon, decided to start a business in the emerging �eld of precision agronomy. We imagined working with a few local growers and having time to go hunting, play hockey and do all the things that good red-blooded Canadian boys want to do.

Instead, we saw pretty massive growth in the �rst two or three years, all through word of mouth. One farmer would say to another, ‘I’m doing something really interesting here, and I think it’s helping me grow more grain. You should talk to these guys.’

When we work with a grower, we gather information from satellite imagery, weather stations that we install and from a device that we put in their farm equipment that monitors everything they do. Once we’ve gathered the information, we can tell our grower when the best time is to put an application of fungicide or herbicide on the �eld. We can help with harvest timing and grain storage. �e best part is, the farmer doesn’t have to be a tech genius to make this work.

By 2010, people were seeing agriculture and technology as a really interesting thing. I was

getting phone calls all the time from potential investors. We ended up securing an investment from a British Columbia-based group that was already focused on ag technology called Avrio.

�en in 2012, Monsanto acquired a company called Precision Planting. Suddenly, major players in the agriculture business, who previously had no interest in what we were doing, were showing interest. I thought: If Monsanto is willing to buy a company very similar to Farmers Edge for US$210-million, we needed to raise more capital and get ready to grow, or we’d be overtaken.

We hired an investment banker and went through almost a year-and-a-half-long process of securing an investor. We wanted someone who could be viewed as independent, but knew the importance of big data and technology. We landed one of the most prestigious venture capital groups out of Silicon Valley, Kleiner Perkins Cau�eld & Byers. �ey were looking for a company that had scale, a solid technology portfolio and a business that was willing to embrace the power of big data. �ey’ve helped us craft our vision, they’ve talked to us about what we need to do with big data and how we need to change the company to adapt to the future.

We won’t say how much the investment was for. We want big players like Monsanto and Bayer CropScience to be guessing how much dry powder Farmers Edge has. But it was a signi�cant

amount. We’re going to grow really quickly. We have a lot of capital to deploy on research and development, and growing the business – and that’s what we’re going to do.

In the beginning, we worked with roughly 20 growers with about 25,000 acres in total. Today, we touch and feel close to four million acres. Next, we’re going for global domination.

We have a big push in the U.S., we’re doing a joint venture in Brazil, and we have a joint venture in Australia. We’ve always had a very signi�cant presence in Eastern Europe, but now we want signi�cant growth on a per-acre basis globally and also want to keep bringing out new tools that farmers can use to better manage their crops.

�e funny thing is, I’m the CEO of an agriculture technology company, and I am as far from a tech guy as you could get. Everyone laughs at me because they say, “Wade, you can hardly run your email.”

On the other hand, MacKinnon is a bit of a MacGyver. He was very gifted when it came to GPS monitoring and on-board computers and software. In the beginning, I did a lot of the agronomic work and the sales, and he did the technology side of it. �at foundation is still with us today.

But we still haven’t found time to do the fun stu� we wanted to do.

The challenges of going publicEvery year, numerous companies seek �nancing by listing on stock exchanges. But going public won’t necessarily bring a windfall. A recent KPMG survey asked business executives what they felt were the biggest challenges for a company currently �ling for an IPO. Here’s what they said.

HOW I DID IT

BY THE NUMBERS

Vitals

Wade’s Tips

Farmer’s EdgeWinnipeg

Founded in 2005

130employees and growing

* Show your customers your value. We’ve learned that there’s a 20-minute rule – we’ve got 20 minutes to make our technology work in the farmer’s field, or they’ll go back to what they normally do.

* Protect your customer’s data. We consider ourselves the gatekeepers of their information and we’re very respectful of that relationship.

* Even if you’re getting a lot of calls and having lot of meetings, you’re still far from closing an investment deal. Even if you go all the way to the end with an investor, it can be very difficult to finalize an agreement.

23%COST

19%INVESTOR APPETITE

23%FINANCIAL REPORTING

26%DISTRACTIONS CAUSED

BY THE IPO PROCESS

9%OTHER


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THE PRODUCT

Justin Lussier was on a post-graduation backpacking trip across Europe when a food craving led to a business idea that would shake up the fast food pizza market in Canada.

It was 2005, and Lussier and his soon-to-be wife noticed a lineup outside Pizzeria Sorbillo, a restaurant in Naples, Italy, home of the authentic Neapolitan pizza. As they got closer, they saw pizza being

cooked in less than a few minutes, and customers were gobbling it up. “Gourmet pizza in a minute-and-a-half?” Lussier recalls. “It sounded too good to be true.”

Seconds after �nishing his meal, he found the nearest pay phone and called his friend and co-worker in Edmonton, Christian Bullock. “It was the best pizza I had ever had,” he said, describing

the hand-stretched thin crust, mouthwatering �or di latte cheese and fresh tomatoes.

Lussier went back to Edmonton – he worked at a bar Bullock had opened a few years earlier – but the Italian pizza experience left a mark. He thought that something similar could work in Canada.

To get the ball rolling, he, Bullock and childhood friend Jason Allard started meeting

Pizza Perfection Justin Lussier’s Neapolitan pie joint was a hit when it �rst opened, but no one could have anticipated just how much growth was to come BY BRENDA BOUW

to �gure out the best way to open a Neapolitan pizza-serving restaurant. He also travelled to Los Angeles to study at a branch of the Associazione Verace Pizza Napoletana, an international organization that promotes the culinary art and tradition of the Neapolitan pizza.

In May 2007, armed with a small business loan and some of their own investments, Lussier and his partners opened their �rst Famoso Neapolitan Pizzeria location in downtown Edmonton. Customers were blown away by the pies made with Caputo 00 – the gold standard of pizza �our – and Campania tomatoes, both imported from Italy, and covered with �or di latte whole-milk mozzarella, cooked for 90 seconds in a 480 C (896 F) oven, which was also brought in from Italy.

�e restaurant was a much bigger hit than they could have imagined. �ey now have 26 restaurants in a number of major Canadian cities, while revenues have grown by more than 1,500 per cent between 2008 and 2013. Lussier’s goal is to open 10 new restaurants a year.

�ey expanded so rapidly thanks to a sizable investment made by Serruya Private Equity, a venture capital group that oversees the investment activities of the Serruya family, the group behind frozen yogurt chain Yogen Früz. �e Serruyas heard about the restaurant in 2011 and made their investment a year later. It was the perfect partnership, says Lussier, as they had decades of retail franchise experience behind them.

While Lussier wants to continue opening new locations, he’s knows that if he expands too rapidly, quality could su�er. “We want to make sure that we maintain a great reputation and don’t jeopardize that,” he says. “Sometimes that means you have to grow slower.”

THENEXTMILLION.COM APRIL 2015 | PAGE 7



Sunil MistryPARTNER, KPMG ENTERPRISE�e two best avenues for Mass Fidelity are likely government funding and banks. �e Scienti�c Research and Experimental Development Tax Incentive Program (SR&ED) is cash back to it. As well, Export Development Canada (EDC) assists companies trying to sell and export products outside of Canada, while Futurpreneur Canada matches accredited angel investor money.

Many companies that have been around for �ve years or more don’t want to dilute their equity and would rather grow at a slower pace by getting government funding and an angel investor or a bank line for a few hundred thousand dollars. �ey can go to any bank and see what they’d be willing to lend on, especially if they’re getting accounts receivable. �ey could use that as a security for a line of credit or a term loan, depending on their balance sheet.

Brian MiskeCHIEF MARKETING OFFICER, KPMG LLPGrowth appears to be eminent for Mass Fidelity, but it should recognize that while growth is a good problem to have, not all growth is good. Is it pro�table, sustainable and scalable?It needs to develop a cash-�ow strategy that’s aligned to its vision of where it can take the company’s products and services. Having a steady �ow of cash fuels this vision and will identify what to scale. It also needs to make a list of one-time and ongoing expenses and �gure out how much money it will need to operate on a day-to-day basis.

It needs to develop a strategy to help them focus on setting its investment priorities, as well as to measure its progress. Set out methods, costs, targets and schedule, and be �exible. Horizon planning is a phased approach: near-term (three to nine months), short-term (one to two years) and long-term (two to �ve years).

Viral capital After raising nearly US$1.3-million online, stereo maker Mass Fidelity needs more money for marketing DIANE JERMYN

Late last fall, Mass Fidelity – a Toronto-based audio company – was ready to tell the world about the Core, a compact wireless Bluetooth speaker system, which can stream music from any smart device with “better than stereo” sound. While the company formed in 2009, most of the last �ve years were focused on product development. For this bootstrapped business to actually sell its device to consumers, however, it needed to get the word out about its product. In order to do that, though, it needed about $48,000.

Rather than turn to an outside investor for marketing money, the company asked the public for cash via Indiegogo, one of a handful of sites that allows businesses to raise money online directly from potential consumers. No one could have predicted what would happen next. �e idea was so well-received that it ended up raising nearly US$1.3-million.

While Mass Fidelity set a new Canadian crowdfunding record, the company is hardly rolling in cash. It spent 10 per cent of its cash on trade shows and hired some sales reps in Europe, the Middle East and Asia Paci�c. Some of that money has gone toward marketing – including a $35,000 video it produced for the Indiegogo campaign – but most of it is earmarked for production and shipping to people who preordered the speaker online. Orders are still growing rapidly – people can buy their speakers on Indiegogo’s site or elsewhere online – but Mass Fidelity’s co-founder, Neil D’Souza, says it needs more money to expand internally and increase its marketing budget. He has had productive meetings with venture capitalists, but he wants to seek alternative sources of funding, such as government grants, before giving up part of his company.

He hopes demand and name recognition from the fundraising campaign will allow him to grow the business fairly quickly. “What we’ve done on the online and marketing side is very small-scale compared to what we could do,” he says. “�e next step is deciding how to grow in the next three to 12 months. Should we take on a strategic investor and give up equity or continue to look at alternate sources of funding, primarily for production?”

THE PITCH

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�e Elmhirst Resort in Keene, Ont., is open 365 days a year, but nearly half the 340-acre site’s revenue comes in during June, July and August. Co-owner and general manager Greg Elmhirst is constantly challenged not only to keep the resort’s summer programs popular, but also to lure in visitors during the cooler months of the year. Tapping into wisdom passed down from the three previous generations of Elmhirsts – dad Peter still owns half the biz – Greg shares his thoughts on how to master seasonal ebbs and flows BY DIANE PETERS

HOW TO

STAFF SMART

In winter, spring and fall, the resort still needs manpower for a wide range of tasks, so Greg makes sure his team of 43 — it swells to 55 in summer — are never idle. “We have a core of year-round sta� and as much as possible we try to cross train them to work in di�erent departments,” he says. Front-desk and o�ce sta� will pitch in for large banquets and during busy housekeeping days. No one minds: it keeps the work varied and year-round sta� appreciate the regular hours.

TRY NEW THINGS

To lure visitors all year, the

resort added a restaurant in 1981, then an indoor pool, outdoor pool and riding stables in 1996 and a health club a year later. It also keeps trying new promotions, such as the fall Wild Women Weekend, which it introduced in 2005 and includes target shooting and horseback riding. When the resort opened a spa in 2010 – it’s run by Greg’s wife, Martina Linde, a massage therapist – the women’s weekend started selling out. “We found out it just needed a little bit more indulgence,” says Elmhirst.

BE SUSTAINABLE

Ecological initiatives at the resort are good for the

land and for marketing, but they also help keep year-round costs down. Elmhirst installed two new biomass boilers last winter, which will lower heating bills, and more shoreline plantings will slow erosion and save time and money during spring maintenance.

TRACK IT

Seasonal businesses must closely track cash �ow to help them get through the quieter months, says Elmhirst. He also looks at data over the last �ve years – the number of rooms booked, for instance – to inform purchasing for the future. One thing he will not

adjust, though, is the number of summer hires. “If I look ahead and there’s a lean week, then I deal with that through a sales and marketing plan to �ll rooms.”

STAY IN TOUCH

Elmhirst’s customers only visit once or twice a year. �e resort is well-stocked with comment cards, but to �nd out what visitors want all year long – and to circulate info about resort promotions – he now cultivates a strong social media presence on Facebook, Pinterest and Twitter. “It’s a business where you can very de�nitely be left behind,” says Elmhirst. IL

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Q: I don’t want to take financing from investors, but I still need money to grow my business. What can I do?

A: �ere’s money in Canada for virtually every business – without giving up ownership.

Funding sources that don’t require an entrepreneur or owner to give up ownership fall into two broad categories: capital markets (private sector solutions) and government markets (public sector solutions).

One private sector source is corporate strategic investors. Many invest in early stage companies that are building solutions strategic to their own. For example, if you’re designing a mobile app, BlackBerry might be interested. While “corporates” may not write a cheque – preferring to wait and see whether your product “has legs”– they might o�er you space. Other bene�ts of corporate strategic investors go well beyond money, as they are often your best path to market credibility and take-up.

For companies with products, revenue is a second �nancing source, opening up lending markets and serving as security for loans. For example, royalty-backed loans can be an alternative to giving up shares.

A third approach to private �nancing is non-equity crowdfunding, which has emerged as an immensely popular way to raise money without diluting ownership. Product promises and incentives, such as advance sales of a prototype, become the basis of your appeal to the crowd, rather than your company’s stock.

Government or public sector �nancing sources are often overlooked, yet, in Canada, provide approximately $30-billion in support for business each year. Grants account for the vast majority of this funding, while tax credits and vouchers, which often provide free services from universities and colleges, are other instruments used by governments to �ow funding and support to business. Canada has more than 4,000 of these business support programs, none of which require giving up ownership in your company. In sum, Canada has a rich array of

funding sources for entrepreneurs and business owners that leave your ownership untouched.– TERI KIRK, PRESIDENT AND CEO OF THE FUND-ING PORTAL INC., TORONTO. THE FUNDING PORTAL IS A WEB-BASED SERVICE THAT HELPS BUSINESSES SECURE PRIVATE AND GOVERNMENT FUNDING.

Q: I do a lot of business with China. What is the renminbi (RMB) trade hub I’ve been hearing about and, how will it help my business?

A: Basically, the Canadian RMB trading hub lets Canadian companies conduct currency exchange and trade operations between the RMB (the o�cial currency in China) and the Canadian dollar (CAD) directly, rather than going through an intermediary currency.

Being able to directly trade in RMB with your Chinese counterparts would certainly reduce your currency risks. Presently, most trade transactions with China are settled in U.S. dollars (USD), exposing Canadian businesses to both USD/CAD and USD/RMB foreign exchange �uctuations. RMB trade should also reduce transaction costs by removing multiple currency conversions. If you have U.S. or other foreign competitors, that would help level the playing �eld.

It’s also friendlier to your Chinese customers and suppliers who increasingly want to do business in RMB, a rapidly growing international trading currency. Plus, your Chinese counterparts will be more open to o�ering a discount and accepting better payment terms if you remove their exchange risks by trading in RMB. A global survey by HSBC in 2014 found that more than half of Chinese businesses would o�er Canadian importers discounts of up to 5 per cent if Canadian banks could convert Canadian dollars directly into Chinese currency.

Canadian �nancial institutions will also be able to o�er a wide variety of RMB-dominated �nancial services or products, so you might be able to invest into an RMB bond with surplus RMB cash from your RMB trade. Chinese investors will certainly appreciate the option to invest in Canada directly in RMB, thereby giving Canada a competitive advantage in encouraging investments coming from China (the world’s second-largest economy).– VIVIAN CHEN, PARTNER, TAX, KPMG LLP

Angel Investments AccelerateNeed financing? Consider turning to Canada’s angel community. They’re investing more money every year. Here’s where investments went in 2013, according to the National Angel Capital Organization.

Keep your company

ASK A PRO

199investments were made from 29 angel groups, totalling $89-million.

2,100investors from across Canada bought into businesses in 2013.

$28-million

went into the information and communication technology sector.

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Businesses secure $2.6B under government funding programs in single quarterBy Karen Fournier

When searching for funding, government programs are not always top of mind for business owners and entrepreneurs. Yet businesses secured $2.6 billion from government funding programs in 2014 alone.

In fact, data compiled by The Funding Portal demonstrate that in the first three quarters of 2014, federal and provincial governments wrote cheques valued at more than $10.3 billion to support business.

Manufacturers faired particularly well, with incentives for this sector alone reaching $439.7 million in Q3 — an increase of 5% over Q2. Manufacturing projects that received the largest cheques focused on job creation and R&D.

While government funding levels across all regions and sectors dropped by almost 27% from $3.6 billion in 2Q2014 to $2.6 billion in 3Q2014 — a substantial seasonal adjustment — companies were well served by capital markets during the quarter. In fact, venture capital investment reached $745 million in 3Q2014, a 26% increase relative to the same quarter in 2013, largely attributable to investments in Canada’s thriving tech and life sciences sectors.

“Government funding markets or ‘incentives’ should complement and balance out capital markets as a matter of public policy and, this quarter, you can see those objectives in action,” said Funding Portal CEO Teri Kirk. “Overall, government funding levels declined as venture capital increased. And, sectorially and regionally, funding flowed to manufacturing in Ontario during a difficult period. Now, we are seeing some shift in government funding to the mining and resources sectors, and to Western Canada, to address downturns in those sectors and regions.”

CLEANTECH + ENERGY

$87M Government

$17M Venture Capital

MANUFACTURING

$440M Government


TECH + DIGITAL MEDIA

$290M Government


HEALTH + LIFE SCIENCES

$359M Government


$107M37M

$235M

$236M

$69M$69M

$11M$31M

$6M

$252M

$39M

$145M

Northern Region

Atlantic Region

$531M$$190M

$175M

$1.25B$

Total Government Awards$2 58 Billion

$10.31B Year-to-Date. *

Total Venture Capital Deals

745 Million$1.64B Year-to-Date

$ **

www.thefundingportal.com*Aggregated by The Funding Portal**Published by the Canadian Venture Capital and Private Equity Association

Funds Invested By Quarter

Canadian Funding TrendsQ3 2014

THEFUNDINGINDEXTM

How to secure funding for your business

Use the interactive infographic at thefundingportal.com/fundingindex to learn more about funding for your region or sector

Businesses can use The Funding Portal to order a custom FundingSources report on the best sources of funding for their company, register their profiles within the Portal’s MyFundCard network, or apply to post their offerings on the Capital Markets Board. More than 17,000 businesses use the Portal every month to help them secure funding.

Learn more about how to use the Portal to raise funds in capital markets at thefundingportal.com/capitalmarkets

APRIL 2015 THENEXTMILLION.COM

SPECIAL INFORMATION FEATURE


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www.avantesecurity.com1-866-428-2684

AVANTE KPMG FULL PAGE H_06.indd 1 2015-03-19 11:47 AM



FEATURE


It’s not often that investors and executives open up about how their relationships and their �nancing arrangements came to be.

To shed some light on the investing process, �e Next Million got four business owners and their investors on the phone together to

talk about �rst meetings, delivering dollars and whether or not they’re still working with each other today

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so that we could live extremely well.”Because Poulin had kept such a keen eye on the bottom line, he wasn’t looking for an

investor when Arsenault called. But the venture capitalist was determined. He eventually convinced Poulin that more money meant he could grow even larger. “For a year I was building trust with Joe, in terms of getting him to know how iNovia operates and who I was and the value that we can bring to the table, beyond cash, that could help the company expand,” says Arsenault.

His persistence paid o�. In September 2012, iNovia injected $5-million into the company, and Arsenault was put on Luxury Retreats’ board. Poulin relented, because he came to realize just how valuable it could be to have a venture capitalist in his corner. While he did consider pitches from other people, he chose iNovia because it was the one he felt most comfortable with. “�ey had the right balance between the o�er, as well as advice and guidance when needed,” Poulin says. “�ey said, ‘Hey, we’re going to help you build a good team and connect you with the right people.’ �ey didn’t say, ‘Hey, why don’t you move your business to San Francisco because it’s better for me, the investor?’”

Arsenault and Poulin continue to work closely together, talking weekly about everything from talent acquisition to �nances. While Arsenault says he’d ultimately love to up his stake in the growing company, “the bad news for us – or good news for Joe – is that money is still not an issue for the company.”

As for what’s next, Poulin says he’s in no rush to sell out. “When I was a kid, I remember always telling my dad when I was in the car, ‘One of these days I want to see one of these delivery trucks with my logo on it.’ Maybe it’s not going to be a delivery truck now – that’s old-school business – but I take a great sense of pride when somebody goes and raves about our brand. To me, I just want to build this so that I’ve nailed it.”

PLAYING HARD TO GET Chris Arsenault wanted to invest big bucks in Joe Poulin’s company. The problem? The CEO didn’t return his calls

WHAT DO YOU DO if you have millions of dollars that you desperately want to give to somebody and they just don’t want it? �at was the problem facing Chris Arsenault. In 2010, Arsenault – managing partner at Montreal-based venture capital �rm iNovia Capital – wanted to buy into a growing tech company, but the young CEO he was court-ing wanted nothing to do with him.

�e story starts a year earlier, when Arsenault organized a retreat in Mont-Tremblant with his Young Presidents’ Organization chapter. �e forum had booked a villa through a local website called Luxury Retreats, an upscale counterpart to Airbnb with various “concierge” options thrown in. “We had the choice of having full service, having a chef or not, or just having the empty building,” recalls Arsenault. “It was my �rst experience, and I said, ‘Let’s �nd out who this company is.’”

When he got home, Arsenault did some research and liked the company’s low-volume, high-margin booking business model. He was also impressed by how the entrepreneur behind Luxury Retreats, Joe Poulin, had managed to self-�nance his company for more than a decade. Poulin launched it at age 17 in 1999, and today it generates about $100-million in annual rental revenues. Arsenault, who was intrigued by the burgeoning shared space market, knew immediately that it was a business he wanted to be a part of.

However, Poulin didn’t want help. While he took a small investment from an angel in 2007, his plan was to continue growing his business on his own. So when Arsenault called Poulin – several times – the budding entrepreneur never phoned back. Eventually, he got a friend of Poulin’s to make the connection and the two �nally met for lunch.

Poulin, now 33, started his business with a handful of villas in Barbados. Luxury Retreats now has 2,000 properties in more than 50 destinations. �e average rental is about eight nights, and the average price is around $13,000 a week. All of that growth was �nanced from the company itself. “I never took a high salary. I didn’t dividend out cash,” he says. “We were trying to build something big and not just build something

JOE POU LIN

CHR IS A R SENAU LT



SUPPORTING A SECOND ACT In 2007, Jones Soda’s founder said goodbye to his beverage business, but he wasn’t ready to retire just yet. Instead, he and an investor decided to turn around a troubled operation

IF ANYONE KNOWS a thing or two about what it takes to grow a successful business it’s Peter van Stolk, the founder of Jones Soda, one of the iconic “alternative” soda pops of the 1990s. �e Edmonton native ran the Seattle-based company for just over two decades, but in 2007 he decided to call it quits. “I didn’t want to sell sugar water anymore,” says the now 51-year-old. “I was feeling that there was something better out there.”

�at “something better” was Spud, an on-line grocer that brings organic fruits, veggies and other items right to people’s doors. While living in Seattle, where Jones Soda was headquartered, he became aware of the Vancouver-based retailer. He also saw a huge market in online grocery stores. In British Columbia and Alberta alone, $21.4-billion in groceries are sold annually, he says. Online represents about 1 per cent. “It’s a tiny, tiny, tiny per cent,” explains van Stolk. “In the U.K., it’s 7 per cent. Every percentage is ginormous: if it moves up to be 5 per cent of the category, it’s huge.”

�e food and beverage industry veteran was thinking about buying the company – which was su�ering �nancially – but he wanted to learn more about the online grocery industry before making a move. Van Stolk went to New York and met with the founder of Fresh Direct, the largest online grocer in the United States. When he returned home, he started putting together a business plan for the recapitalization of Spud, which had taken a hit thanks to an ill-fated plan to expand stateside. In 2009, two years after leaving Jones Soda, he presented the plan to Paul Richardson, the CEO of Renewal Funds (a venture capital �rm that invests in social and environmental-focused operations).

Spud �t in perfectly with the company’s mission and vision. “�e �t with Spud was the stress on organics, the stress on local [and] the carbon savings on an organized delivery,” says Richardson. “Instead of having 60 cars going to a supermarket, you have one truck do a route.”

Also key, according to Richardson, was the

fact that Spud had a scalable model that didn’t require huge amounts of capital to grow. “We liked Peter, we liked the mission �t and we believed in the �nancial viability,” he says. “We were excited by the new energy that was going to come into the company.”

In July 2010, van Stolk, backed by Renewal Funds and a handful of smaller investors, took control of Spud. �e new lead shareholder and CEO – he owns 20 per cent of the company – �red the entire executive team and rebranded the company. (SPUD originally stood for Small Potatoes Urban Delivery, but van Stolk determined that the acronym was “uninspiring” and changed it to Sustainable Produce Urban Delivery.) He focused on improving the customer service experience, boosting the quality of produce and increasing the number of SKUs available. He also started to pull out of the U.S. to refocus attention on the growing Canadian market.

Beyond providing the �nancial support that made recapitalization and reorganization possible, Renewal – which has invested more than $1-million in Spud to date, giving it 10 per cent of the company – provided the moral support and guidance that’s allowed the business to double its sales from $15-million annually in 2010 to more than $30- million today. It’s now Canada’s largest online grocer. Renewal is also helping van Stolk �nance his new “omni channel” strategy, which includes �ve “healthy food” cafés in Calgary and Vancouver where Spud products are sold.

�e partnership works, explains van Stolk, because Renewal is focused on the long term. “�e companies that create value for their stakeholders are companies that have a strategy and can execute that strategy,” he says. “It may take a year. It may take 14 months. You see the New York-style of venture capital, which is like ‘take your arm o� and leave it on the door.’”

Richardson puts it more diplomatically. “We would rather have something that we’re con�dent is going to build over time. �e typical model is ‘two �y, eight die.’ In our portfolio, all of our companies grew their revenues last year.”

PET ER VA N STOLK

PAU L R ICH A R DSON



FUNDING A PASSION PROJECT Boris Wertz was eager to invest in Kyle Vucko’s company, even though there was no actual business to buy into

THERE TENDS TO BE two types of investors: the “rational” ones who pony up because they’ve crunched the numbers and analyzed the risk; and the “true believers” who know the market, have lived the market and, evidence notwithstanding, trust that things will somehow work out in the end.

Boris Wertz is both of those investors wrapped up in one. �e 41-year-old is a veteran of Vancouver’s tech scene, having built online book retailer AbeBooks into a $100-million-a-year company. (He sold it to Amazon.com in 2008 for an undisclosed sum.) Since then, he has developed a reputation as a savvy venture capitalist, managing through his �rm Version One Ventures a $50-million fund that’s invested in some 45 early stage tech companies across North America.

Wertz, however, wasn’t in the VC business when he met Kyle Vucko in 2007. �e young University of Victoria business student had developed a business plan for a school business competition that aimed to bring quality tailored suits to the masses at an a�ordable price. It was similar to how AbeBooks leveraged an online marketplace to bring rare or out-of-print books to buyers around the world. What eventually became known as Indochino would deliver quality tailored clothing from China to fashion-savvy-yet-price-conscious consumers from Vancouver to Vienna.

�e budding entrepreneur was introduced to the soon-to-be full-time investor through Vucko’s business mentor at university. At the time there wasn’t a company for Wertz to consider, just a wide-eyed business student with grand plans. “Because it was so early, there was no business you could really look at,” recalls Wertz. “�e only ‘product’ to invest in was the founders, the strength of the founders, and what you thought they could do with that idea.” It was Vucko’s passion and strong product vision that convinced Wertz to invest.

As an angel investor, Wertz’s initial investment was $40,000. “It was proof of concept money – that’s how Boris framed it for me,” says Vucko, 29. He was told to go build a website, �nd tailors and prove that

there was a business here. “�e fact that he had some belief in what we were up to got me very motivated,” he says.

Over the next several years, Wertz and Vucko worked closely together, with Wertz sitting on the Indochino board and helping to make introductions to other venture capitalists, including Munich’s Acton Capital and Seattle’s Madrona Venture Group, which would become pivotal in the company’s success. He also helped introduce Vucko to new hires, including the company’s current chief technology o�cer.

But more than that, Vucko’s �rst angel investor – Wertz subsequently participated in two further �nancing rounds – has been instrumental in shaping the ethos of the company. He’s also made sure that the business owner knows that it’s okay to make mistakes. “�e phrase I remember from him was, ‘You’re going to make a lot of mistakes. I’m mostly here to make sure you don’t make any fatal ones,’” he says.

All of the help has paid o�. Indochino now has 100 employees in both Vancouver and Shanghai, and 120,000 customers in 130 countries around the world. While Wertz isn’t involved as much as he used to be – he stepped down from the Indochino board in April 2014 – he’s still making introductions and giving advice. “I think this is the normal trajectory for early stage investors,” he says. “At some point you transition out, and other guys who have much more money than you take over.”

K Y LE V UCKO

BOR IS W ERT Z



A LITTLE HELP FROM MY FRIENDSWhen Devon Wright couldn’t raise funds from banks and VCs, he turned to the people who knew him best

TO DEVON WRIGHT, friends and family are more than just the people you see on the weekends or call up for a chat. �ey’re also the ones who’ve helped him turn a small business into multimillion dollar success.

�ree years ago, Wright and his friend and former Ivey MBA classmate, Matt Hunter, were working in �nance on Bay Street. On evenings and weekends they’d spend their time touring Toronto’s bars with their indie-electronic band, Natural Animal. In time, the band developed quite a following, but the more they grew, says Wright, the harder it became to stay connected with their fans.

To rectify that issue, the duo did something very unmusic-like – they built a rudimentary wireless router, which allowed them to communicate with their mobile-connected fans. �ey could o�er people free tickets and other forms of recognition right at the show. Soon, venues were asking to keep the router, seeing the value in having a way of tracking patrons. By June 2012, Wright and Hunter had quit their day jobs to focus on the venture full time. �ey also brought in a third partner, Chris Gilpin – another Ivey classmate, then working at Apple – to help build the technical side of the operation.

�en came the tricky part: raising the money required to move beyond the pilot stage and start producing and marketing this plug-and-play platform to retailers, restaurants and the like. Wright approached banks, venture capitalists and the BDC, but the response to his pitch was skeptical. He recalls, “�ey said, ‘�at was great, but what about LTE and data? Why would anybody need to use WiFi?’” Wright realized that he would have to take another route. “I called every single person I’d ever met, basically, and I ended up getting 35 friends and family to invest over $1.1-million.”

One of those investors was yet another Ivey classmate, Ryan Freeman. Freeman had been working in the Netherlands for Accenture when Turnstyle launched, but he had been keeping track of the venture from afar. When he returned to Toronto in the summer of 2013, he reconnected with Wright and Hunter. Over beers, the conversation turned to business.

Freeman says that for him the decision to invest “in the tens of thousands, but less than

$100,000” was purely a �nancial one. “I didn’t do this because I wanted to support my friend.” However, the fact that the two were friends – and could speak openly and honestly with each other – did help to cement the decision. “He was totally comfortable expressing his true level of passion and emotion for the project,” says Freeman. “And an entrepreneur needs passion.”

Taking money from loved ones can be tricky. �ese are people who you see at birthdays and holiday dinners, after all, and it’s not always easy to separate business and pleasure at those gatherings. “�ere de�nitely has been tensions,” says Wright. “�ey expect a lot from me, especially around updates on their investment.”

Overall, though, the experience is positive. �is arrangement has actually pushed him to become a better person. He wants his investors to see him as someone they can trust as an executive, not just as a friend. “�at’s pushed me to bring professionalism to my life outside of work,” says Wright. “I’m waking up earlier, committing to earlier nights and making social sacri�ces. It’s helped me grow as a person and as an executive.”

He’s also realized that separating the professional and the personal isn’t as big of a deal as some people make it out to be. Freeman agrees. “One pieces of advice I got from a couple of mentors is that it’s important to separate business and pleasure. But from my perspective, one of the telltale characteristics of a great entrepreneur is that they live and breathe their business,” he says.

It would be di�cult to keep things separate even if he wanted to. Of the 35 friends and family who invested in Turnstyle, about 10 are actively involved in the company. Freeman has become one of the business’ most trusted advisors.

As the world of WiFi technology has taken o�, so have Turnstyle’s fortunes. In May 2013, the company counted four employees, today it has over 20. �is January, Turnstyle received $1.5-million from an institutional round of �nancing.

While this new investment does dilute Freeman’s take in the company, he’s “quite happy” with how it turned out. And if he didn’t approve? Freeman would have said so. “What makes going out with Devon so enjoyable,” he explains, “is that even though we’re talking about business and it’s a di�cult conversation, it’s an easy conversation. You can give the critical feedback.”

M AT T HU N T ERCHR IS GILPIN

DE VON W R IGH T



Steve Chung may be American, but he’s hoping that Canadian investors will buy into his company. In January, the entrepreneur—standing in his San Francisco office—

listed his company on the TSX Venture Exchange.

FEATURE

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To say that Steve Chung has had a big year so far is an understate-ment. On January 5, the San Francisco-based entrepreneur

took his mobile tech start-up, Frankly Inc., public. Unlike most of his peers, though, he didn’t IPO on the NASDAQ or the New York Stock Exchange. Instead, the 36-year-old Korean-American CEO decided to take his �rm public in Canada, on the TSX Venture Exchange (TSX-V). “It’s de�nitely not the well-trodden path,” admits Chung of his Canadian IPO.

Chung isn’t the type to follow the herd. Within a year of starting – he launched the business in February 2013 – he had received US$22-million in venture and private capital fund-ing, but Chung wanted more. An IPO, he thought, was what he needed to grow Frankly, which is a software company that allows developers to add mobile chat capabilities to their existing apps. It also makes its own free messaging app, Frankly Chat.

Going public on the NASDAQ, which only admits �rms with a high market capitalization, wasn’t an option yet. �e TSX-

V, Canada’s junior exchange, has a lower listing threshold. Chung was also wary of a traditional IPO, which demands compa-nies spend a lot of money without knowing whether they will actually be able to list or not. He went public using a reverse merger with a capital pool corporation, a lesser-known model unique to the Canadian public markets that allows �rms to gauge investors’ interest in their shares before going through the �ling process.

Essentially, it allowed him to check the market’s appetite before having to spend big dollars on advi-sory fees. �e demand was there – his company ended up being three times oversubscribed on its expected amount raised. When it did list, it raised US$23-million and had a market capitalization of US$60-million just over two weeks after going public.

While Chung could have continued pounding the pavement for VC money, he �gured out that there are other ways to raise funds. For many companies, an IPO seems like a major step. While it does mean reporting to more shareholders and being

FEATURE

PLAYING THE PUBLIC

MARKETSLooking to raise a lot of cash? �en consider an IPO

BY SARAH BARMAK

The main draw of an IPO is, needless to say, the

prospect of fast access to capital. Another reason to list? It gives current investors a way to exit.

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scrutinized in public, it can be a great help to growth. Last year was a big year for IPOs, with 273 companies listing on U.S. exchanges, the most since 2000.

On the �ip side, an IPO can be an expensive, stressful and time-consuming process that often ends with an anticlimax – a stock that underperforms and falls �at. Many private com-panies stay private and become well-respected leaders in their sectors without ever considering an IPO. So how can �rms know whether going public is the right move? Once they do, how do they determine where to list and how?

Pros of going public�ere are several things that will make an IPO attractive to small and medium-sized companies that have already received seed �nancing from friends, family or angel investors. �e main draw of an IPO is, needless to say, the prospect of fast access to capital, says CFA Society Toronto board member Ron Schwarz, an independent portfolio manager and consultant who is also former head of Canadian cash equities for CIBC World Markets.

In many cases, pursuing more private capital is no longer a good option. In most cases, VC companies want a seat at the board and a big say in company direction. Chung, who already raised millions, already had two shareholders on the board – from South Korean mobile company SK Planet, a major Frankly investor – and didn’t want anymore cooks in the kitchen. “�at noise at the board level can be distracting,” he says.

Another reason to list is for those existing shareholders. Many want greater liquidity and a way to exit from their investment. While those annual reports can be a pain to create (though much of that information already has to be compiled for VCs and other shareholders), it can be used as a way to burnish your reputation with customers or become a tool of employee engagement.

Chung’s drive to take his company public when it was barely two years old was, in part, a shrewd calculation to attract Silicon Valley talent with stock options that would grow. “Let’s put it this way,” he says. “�e upside is much more limited the later a tech company goes public. We have the liquidity and public validation of the strike price that’s justi�ed by a market valuation, but we’re early and young enough that there’s plenty of room to grow.”

Listing can also be attractive because public market valua-tions are often higher than private ones. In other words, the stock price can rise after an IPO, and that’s a big draw for the company’s owners and shareholders who would have initially bought in at a lower price, says Schwartz. However, that can be a trap if companies don’t live up to investor expectations after going public.

IPO downsides An IPO isn’t for everyone. Schwartz says Canadian companies that want to list on the TSX proper should have at least a valua-tion of $100-million. Any lower than that and they risk getting “orphaned in that micro-cap world.” However, there is still some appetite for smaller companies, which is why the TSX-V exists. No matter where you list, though, you want to make

FEATURE

sure that investors will pay attention. Many companies spend between $500,000 and $1-million

on �nancial reporting and �ling fees. Frankly spent more than $1.5-million because of cross-border issues with Korea, the U.S. and Canada. Staying private may also be a wise personal �nancial decision for a business owner. �ere might be �nan-cial bene�ts for majority owners of companies, such as paying yourself dividends that are more tax e�ective for an individual.

While launching an IPO may mean you don’t have to put another VC on the board, listing could result in handing over some of the decision-making to pension funds, institutions or an activist investor who owns shares. It’s also harder to make short-term moves that could result in long-term gains. “When you’re private, you might make a decision that will cost you in the near term, but will help you take four steps forward in the long term,” says Schwartz. “When you’re public, it’s a harder pill for your shareholders to swallow to say, ‘I’m going to take a million-dollar hit this year, but, trust me, that will get me $4-million in 18 months.’”

Another di�cult aspect of going public is the pressure. Public companies are put under the microscope from Day 1, when the expectation to hit or exceed valuations is intense. Even Twitter, which had a public o�ering in November 2013 that gave it a $25-billion market capitalization – bigger than S&P 500 �rms such as Kellogg’s and T. Rowe Price – had its IPO dubbed a “failure” by Forbes because the stock opened at US$45.10 and closed at US$44.90, a loss for investors who bought and held it to the end of its opening day.

When Joanna Weidenmiller (centre) needed to raise funds, she listed on Australia’s capital markets.

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Where to listFor companies that do want to take the IPO route, there is no one-size-�ts-all path to stock market success. Joanna Weidenmiller, CEO of San Francisco-based cloud computing �rm 1-Page, took an even more unusual route than Chung. She listed her company on the Australian Stock Exchange (ASX), becoming the �rst Silicon Valley �rm to do so. Unlike the NASDAQ, which requires listed companies to have a market cap of around US$200-million, the ASX’s threshold is around $5-million, although the auditing and reporting requirements are the same.

It also costs a little less to list on the ASX, and the foreign marker can eventually be a stepping-stone to the NASDAQ, says Weidenmiller. It’s an unlikely path taken by an unlikely CEO. Weidenmiller overcame childhood dyslexia to even-tually teach herself to code in her 20s, learn Chinese and founded a company that had a US$150-million market capi-talization as of mid-January 2015.

�at being said, most companies do take the traditional “front door” route by �ling a prospectus, engaging an under-writer such as a bank or investment �rm to assess share price value and arrange the initial sale and meeting with potential investors in what’s known as a “road show.”

�e multicity or multicountry tour of pitching to investors can be onerous for managers, but it’s also exciting. For about two weeks, executives meet with more than 50 potential investor groups and deliver a presentation about why people

FEATURE

should invest in their business. To be successful, investors should come

up with a short story that gets to the point. �at’s easier said than done for CEOs who live and breathe their com-pany, says Craig Armitage, senior vice-president of TMX Equicom, a subsidiary of the TSX. He’s often called on to guide companies through this process and help �rms translate their prospectus into a tight 25-slide presentation that cap-tures the essence of the company’s story. �ey’ll also train management person-nel, running practice pitch meetings where they pose as prospective investors

and ask them questions about how they intend to grow the company.

Weidenmiller says she met with 140 to 160 investors over two weeks when she took her company public. “We did three road shows, which allowed me to build relationships with investors,” she says.

For some Canadian companies, the Toronto Stock Exchange (TSX) is a stepping stone to the NASDAQ or the New York Stock Exchange, but the TSX is a major playing �eld in its own right. It’s the third-largest stock exchange group in the world by equity capital raised in 2012 and 2013, according to the World Federation of Exchanges, and it’s growing. Trading volume rose 5 per cent in 2014 com-pared to the year before.

Some companies too small to list on the TSX can follow in Frankly’s footsteps and list on the TSX-V. Many TSX-listed companies were once TSX-V companies. “It’s a nice gradua-tion platform,” says Chung. “�at dynamic doesn’t exist in the U.S.”

Spend your cashWhat do companies do with the money that they’ve raised? It can go to many things, including daily working capital, funding new projects, hiring sta� or even making an acqui-sition. Weidenmiller used her new resources to buy another company in her space, not to mention buying out some of the VCs that had invested in her prior to going public. Chung says having cash on his balance sheet simply allows Frankly to be more responsive to a fast-changing market. “�e big-ger issue is you’ve gone public; now you’ve got to execute the plan you put forward to people.”

Chung points out that companies in certain sectors in Canada might be better suited to list than others. With our market so heavily weighted to resource stocks – a sector that’s been having trouble lately – companies in health care, technology or other non-commodity industries might be wise to list as people are looking for new places to invest.

It also helps to be a forward thinker. Investors like short-term results, but success in the public sphere works only if the entrepreneur has a long-term plan. “You need to know where you want to go three to �ve years from now,” says Schwartz. When a business goes public, “you’re not manag-ing the business by the seat of your pants anymore.”

For companies that do want to take the IPO route, there is no one-size-fits-all path to stock market success.

However, you will need to file a prospectus, engage an underwriter and meet with

potential investors.

PHO

TO B

Y LI

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AFA

LIA

/SA

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CISC

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OLA

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ROUNDTABLE

“If you raise money once,

you raise money three times.”

We brought four entrepreneurs together to spill the beans on everything �nancing. When’s the right time to accept money? How do you pick

the right investor? When is it time to exit? Our panel of business owners tell all

BY BRYAN BORZYKOWSKI

DM151434_Pg22-25_KPMG_APR_2015.indd 22 2015-03-18 1:16 PM

APRIL 2015 | PAGE 23THENEXTMILLION.COMTHENEXTMILLION.COM

ROUNDTABLE

BB: You’ve all taken money at different stages. How do you decide when’s the right time to receive funding?

CC: My phone frequently rings o� the hook from private equity venture capital. I �nally went to one of those meetings and when I walked out my advisor said, ‘�ey need you way more than you need them.’ So it wasn’t a good move. VCs generally want out within �ve years, and I my business is a longer-term investment. However, it was when I decided that it was time to do acquisitions that I brought on a �nancial partner to share in the �nancial risk.

BB: What’s it like to give up part of the company after owning it all yourself for so long?

CC: It’s like a new marriage. At �rst you’re euphoric. You just want to be together. �en you have to learn how to trust each other. For me, I won’t compromise my integrity for anybody. If you tell me it’s all about making a buck, we have a problem, because health care isn’t just about making a buck. You have to learn how to trust each other.

BB: Phil, you received money from the start? Why?

PL: We went in with the mindset that funding is going to help accelerate our product and our growth. We’d give up a piece of the pie, but it was then our job to grow that piece of the pie as quickly as possible, otherwise you’ll be left with a much smaller pie. Of course, there was risk and we knew that from the get-go. We knew our vision would probably change along the way and we accepted that. And it did. Part of the strategy was to bring on people who o�ered more than just money and who could bring in di�erent points of view, because we were going into uncharted territory. �ere were times where things didn’t go the way that some investors wanted it to and we didn’t get them on following rounds. But then we found other investors who saw our vision, and some of the moves we made turned out to be the right ones. Ultimately, it’s the management team who have to live with these decisions.

MM: People get it wrong with their understanding of why they’re raising money, what the timing is for them and the overall expectations being aligned. We almost raised $300,000 for a third of the company a decade ago. It would’ve killed us. We would be out of business now. We just wouldn’t have had as much to show people now. Ultimately, we weren’t ready. I didn’t know enough about my business, let alone managing investors.

AD: �e absence of outside capital bought you time to �gure it out?

MM: �at’s right. But sometimes presence of outside capital buys you time to �gure things out because if you don’t have certain things in place, then you’re in trouble. What (I mean) is that’s really a personal decision. You have to look within yourself and ask, ‘What is right for me?’ Here’s how we made this decision [to take $30-million]. I have two co-founders and we try to ask ourselves at a gut level, ‘What do you want?’ �ere was a time when we were too afraid outside in�uence would distract us,

The Entrepreneurs

Philippe LeBlanc, co-founder and CEO of Flixel, a digital technology company that enables photographers to create “ living photos,” still pictures that incorporate some video-like moving parts. LeBlanc started the company three years ago and immedi-ately raised $250,000, even before having a

product. “It was done on the strength of a presentation,” he says. �e cash allowed him to build the �rst version of his product and custom-ers soon followed. He’s raised more money from venture capitalists since. He also counts Tyra Banks as an investor.

Connie Clerici, president and CEO of Closing the Gap Healthcare Group, a compa-ny that o�ers health-care services to people in homes, workplaces, schools and hospitals. Clerici started her company 25 years ago with a $10,000 bank loan. She deferred her salary for seven years. While she had met

with the occasional venture capitalist, she had no desire or need to take money. Only �ve years ago, when she wanted to start acquiring other companies, did she bring on board a business partner, who had money to invest in the business. “Now I don’t have to carry 100 per cent of the risk,” she says.

Mike McDerment, co-founder and CEO of FreshBooks, a company that creates and sells online invoicing and billing software to small businesses. He and his two co-founders started the company because they were frustrated with the lack of good invoic-ing software on the market. �ey initially

funded it with money made from a consulting business they owned, but they also maxed out credit cards and lines of credit. While they took some money from family and a few angels, they refused to take VC funding until this year. In June, though, they did raise $30-mil-lion from three di�erent partners.

Adam Deremo, co-founder and managing partner of Awake Chocolate, a company that creates and sells chocolate bars with as much ca�eine as co�ee. He and his two co-founders came up with the idea in early 2011 and by the spring they had a physical product. �e founders invested $100,000 of their own

money to pay for trademarks and the prototype, but they also raised more than $1-million between 2011 and 2012 to help pay for space and inventory. �ey’ve since raised another $1.5-million, including some money from David Chilton, who invested after their appear-ance on Dragons’ Den. “We have an awesome working relationship with him,” says Deremo.



ROUNDTABLE

but now we know what we need to do [with the money], and it’s about scaling the business. A lot of people think that raising money is success. �ey think it’s the �nish line. �ey think they’re raising money because somebody else wants them to build a product, but that’s not true. People are investing to get three to 10 times their money back.

AD: For us, the decision has always been around the struggle of having enough capital to grow the business versus the desire to own as much of the company as possible. With that in mind, we have a very speci�c and clear purpose every time we take money, whether it’s debt or equity. Mike’s right – the idea that outside capital is the �nish line is misguided.

BB: So did you give up control of your company?

AD: We own a little less than half. �e rest is owned by a group of individual investors, but we’re the largest shareholder by far, which, I think, helps. We also have the right to control the board. We found a group of investors who were really comfortable with allowing us to make all of the operational decisions.

BB: How important is it for the investor to bring expertise and advice?

CC: You have to have mentors. I have a group of advisory board members [who are not investors], and a group of personal mentors. I can just pick up the phone and say, ‘What do you think?’ We don’t always agree, but we all share the same values and constructive debates are a part of being great.

AD: We’ve had some experienced advisors, including family members. One of the partners’ families is pretty savvy as far as investing goes. �ey have lots of experience in this area and they were able to help us not make mistakes early on. Also, through good, old-fashioned networking we’ve been able to �nd investors who can contribute things beyond just money.

MM: I feel like I’m upping my game. I have that next level of leadership around me and I like that. I get some very concise and good questions. But some aren’t sharing day-to-day advice. I met with one investor and she said that she’d be perfectly happy if she didn’t hear from me between board meetings. We’d meet quarterly and that’s it. She is always around when I reach out or if I have a question, but ultimately she doesn’t want to be running the business. She wants to �nd people who have a business to back, and we’ve built our business up to a point where we’re all aligned.

PL: Mike, what happens next? Do you IPO in a number of years or go for an exit? �ere’s obviously an assumption of, ‘When am I going to get my money out?’

MM: We built a business to a scale that a�ords us options, and I don’t want to drill in on one particular option. We have a point where we choose to do that. I’m focused on building a company that has options, and everyone at the table knows that. �e focus is on building a great, enduring company, and that’s

something that will have options no matter what.

CC: You can’t underestimate the value of options. Everybody asks you about your succession plan all the time. What is your plan? When are you getting out? It’s something that has to feel right for you. You don’t want to stay at the dance for too long, but it doesn’t mean you have to sell. You could still be the majority shareholder and continue your life. You can’t devalue yourself. �at’s one thing I have learned. But there does come a time when there might be somebody better than me to lead the company.

MM: �ere are a lot of entrepreneurs who sell and they think that’s success. �en they wake up two weeks later and go, ‘Oh my God! What have I done?’

CC: If you make enough money to live on, then that’s success. It’s not selling your company. �at can be just icing on the cake.

PL: To add to what you were saying, having options becomes interesting if you get it to a level where you have a sustainable business. You don’t have to go public. You don’t even have to exit to another company. You can start getting private equity �rms, buy out shares from people who want to be bought out. �ere are all di�erent ways to crystallize your investment.

“Then they wake up two

weeks later and go, ‘Oh

my God! What have I done?’”



ROUNDTABLE

PL: Mike, what happens next? Do you IPO in a number of years or go for an exit? �ere’s obviously an assumption of, ‘When am I going to get my money out?’

MM: We built a business to a scale that a�ords us options, and I don’t want to drill in on one particular option. We have a point where we choose to do that. I’m focused on building a company that has options, and everyone at the table knows that. �e focus is on building a great, enduring company, and that’s

something that will have options no matter what.

CC: You can’t underestimate the value of options. Everybody asks you about your succession plan all the time. What is your plan? When are you getting out? It’s something that has to feel right for you. You don’t want to stay at the dance for too long, but it doesn’t mean you have to sell. You could still be the majority shareholder and continue your life. You can’t devalue yourself. �at’s one thing I have learned. But there does come a time when there might be somebody better than me to lead the company.

MM: �ere are a lot of entrepreneurs who sell and they think that’s success. �en they wake up two weeks later and go, ‘Oh my God! What have I done?’

CC: If you make enough money to live on, then that’s success. It’s not selling your company. �at can be just icing on the cake.

PL: To add to what you were saying, having options becomes interesting if you get it to a level where you have a sustainable business. You don’t have to go public. You don’t even have to exit to another company. You can start getting private equity �rms, buy out shares from people who want to be bought out. �ere are all di�erent ways to crystallize your investment.

BB: What do you look for in an investor? How do you know you’ve found the right person?

AD: In our case I think it boils down to three things. One is the level of trust. I would never like money to change hands with somebody I didn’t trust. I wouldn’t be able to sleep at night if that happened. �e second thing is that I want somebody who can bring more than just a cheque. Don’t get me wrong – people who write cheques are awesome and totally necessary, but a dream investor is somebody who can help make you better with things that are not just money. �irdly, there needs to be a mutual understanding on the governance of the company. It was a dilemma for us that we needed money to get the company going, and we were able to manage that by �nding a group of investors who were comfortable having a voice, but also knew that we had the �nal say. It took us a long time to �nd them.

BB: So there were investors who wanted a more final say?

AD: �ere were plenty of people along the way who said ‘I would love to put money into your company, but I need a seat on the board.’ We thought about it and said, ‘�at’s not really how we’re set up here.’ We do have a board and it has outside members, but they’re people

who wanted on the board. And the company is still majority-controlled by us.

PL: We’ve had a lot of angel investors along the way, but the way I look at it is that every situation is unique. I see what someone needs to do to make a deal and then we evaluate. Is it good for us to take that type of deal or not? Is that value going to make us better or not? In some cases, it was a perfect situation where we brought them in and this is what everyone was expecting and this is what was delivered. And we would have done things di�erently in other situations.

BB: So, now what? You hear about big companies that always seem to be getting investors. Do you start the process all over again now?

MM: I have a theory: If you raise money once, you raise money three times. �at seems to be how it is. Granted, I come from the technology space, but you have a plan, and there are times when you want to be more aggressive so you raise more capital. Or maybe you want to build a product. We have enough capital for 24 months of development and then we have to raise another cheque.

BB: So you’re already thinking about the next level?

MM: I think anyone who’s not is foolish.

BB: But for 10 years you didn’t take any money. So, why does the next one come that much sooner?

MM: It’ll probably be more opportunistic. �ese things are going at such and such a pace and scale, so why not raise more? We’re growing a really large business, and $30-million just isn’t that much money. It may sound crazy, but these are pretty capital-intensive businesses.

BB: Do you ever say, ‘I’m done? I don’t need more?’

PL: It’s about speed and opportunity. In the tech world, the big �sh can eat the small �sh really fast, and if you’re not growing, then things can become really di�cult. You can quickly become a feature as opposed to a business. If you stick to just being a feature you’ll eventually get swallowed up, but maybe you can turn that feature into a business. �at requires accelerated growth from customer base revenue and/or investment dollars.

CC: I think it depends on the stage in your life. I’m not getting any younger and there comes a point in your life when you start to think about succession. I don’t need another investor. Growing this business was never all about money, but rather it was doing what was right and what was needed. I’m in a place where I don’t have to sell to retire – I’ve also enjoyed having a double income family – but I am developing a succession plan that encompasses my family and my advisors.

“I can just pick up

the phone and say,

‘What do you think?’

We don’t always agree,

but these people are sounding

boards.”


TEARSHEET

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You are a Canadian entrepreneur, with a software solution you’ve tested to the

point that you’ve won over your vital �rst Canadian customers. You are working hard with your team to take the lessons learned from those clients, re�ne your product and business case, scale up to new customers and generate income.

You’ve worked hard to reach this point. You made it through the early start-up stage by bootstrapping with assistance from friends and family. Next, you found some seed capital and then you completed your “Series A” round, where return-seeking investors provided funding for you to establish your product and market �t. To fuel your growth, you are ready for a “Series B” round, probably involving institutional investors.

I have good news. In terms of the availability of Canadian-based risk capital, as statistics from the Canadian Venture Capital & Private Equity

Association show, we’re in a much stronger position than right after the nuclear winter that followed the 2001 dot-com crash. Today, the domestic venture capital that you need is likely within reach. �e number of players in the Canadian VC space, with an interest across the various levels of start-up development, is growing. Since about 2011, Canada’s investment community has seen the rise of accelerators, “Super Angel” investors, micro VCs, additional federal and provincial VC funding vehicles and so on, plus OMERS Ventures, where I work.

If I could change one thing to improve the overall outlook for this hypothetical Canadian entrepreneur, it would be to draw the interest of more Canadian VC funding toward the critical Series B stage. �is is where entrepreneurs who are ready to take an existing product to the next level need funders who can deliver multi-million dollar cheques – at least $10-million, in most cases.

In OMERS Ventures’ case, we’ve participated in recent Series B or later rounds for Hootsuite, Shopify, Desire2Learn, Wattpad and BuildDirect, all great Canadian success stories. From an investor’s view, Series B is key because that’s where you �nd big returns on dollars invested. At the venture capital arm of the OMERS pension plan, investing in start-ups at all levels of development �ts well with our broader enterprise strategy and our goal of delivering strong and sustainable pensions to OMERS members.

Series B is interesting for another reason. It’s the stage where a start-up’s access to some substantial measure of patient domestic capital becomes vital. Why? Because if a start-up ends up relying

solely on foreign VC funding, what often results is the early sale of the company and an exit by the entrepreneur – before the start-up hits that rapid-growth stage. (�is isn’t a uniquely Canadian problem, by the way.)

I hasten to add that OMERS Ventures is a proud co-investor alongside various top American VC funds. However, in my experience, if Canadian start-ups are not backed by patient Canadian funding at this crucial point in their development, we can expect more early sales – it’s an uncomfortable truth. And that shrinks the pool of Canadian start-ups that are able to grow to the point of reaching their initial public o�ering (IPO) and launch into the stock market.

Why are IPOs important? In addition to generating returns for early stage investors, every successful Canadian IPO will mean more risk capital for the next generation of entrepreneurs. �is can foster a stable Canadian IPO market that, over time, can help spawn new Canadian tech champions similar in size and impact to Nortel and RIM.

I am a realist, and I know these IPOs will not happen by accident. With additional homegrown Canadian investors taking up positions in the overall VC ecosystem, particularly at the B stage, the ecosystem as a whole should become much more sustainable – not to mention supportive of entrepreneurs, their innovative ideas, products and future IPOs.

Seeking Series BIf we want to build long-lasting companies in Canada, we need more later-stage funding

ILLU

STRA

TIO

N B

Y ER

IK M

OHR

RUFFOLO

JOHN RUFFOLO HAS DEDICATED

HIS 25-YEAR CAREER TO FOSTERING

INNOVATION AND GROWING CANADA’S

KNOWLEDGE ECONOMY. HE IS THE

CHIEF EXECUTIVE OFFICER OF OMERS

VENTURES, THE VENTURE CAPITAL

INVESTMENT ARM OF THE OMERS

PENSION PLAN.


“If I wanted to do business in China,

because of the international network I’ve

built up and the folks that I’ve met through

YPO, I could easily pick up the phone

and call a member in China and say,

‘Hey, I’m thinking about visiting, could

you introduce me to a couple of people?’

And it would literally be that simple.”

Corey Miller

CEO of Miller TirecraftNova Scotia

YPO member since 2008

YPO: The World’s Most Powerful Network.

Uniting 22,000 peers from more than 128 countries, for 65 years

Young Presidents’ Organization has been the network that matters most to business leaders.

YPO IN CANADA 1,504 members

18 chapters

US$191 billion total revenue and

257,600 total employees

MEMBER TYPE:

Get connected today at www.YPO.org.

Professional Managers 28%

Entrepreneurs 45%

Family Business Operators

27%

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JOHN RUFFOLO THE PITCH ASK A PRO - Life on Planet Word · 2015-05-08 · kpmg.com MARCH 2012 BIZ 12 JOHN RUFFOLO Companies need more long-term funding THE PITCH A pizza maker’s