A Life around Startups: Fun, Frustrating and Financially Fascinating

1. A Life around Startups: Fun, Frustrating and Financially Fascinating

2. Overview • VC experience • Accountancy/Consulting experience • Rules of Thumb/Bitter Experience

3. VC Experience • Analyst with Yorkton Securities and Raymond James • Primaxis Technology Ventures • JV of Royal Bank of Canada and British Technology Group • StartingStartups (later Axis Investment Fund) • LSIF

4. Consulting Experience • Scientific Research & Experimental Development Tax Program • Ontario Interactive Digital Media Tax Credits • Industrial Research Experience Program • Corporate Finance – NOT!

5. Success factors • Management • Operational systems • Technical smarts • Cash

6. “Don’t Let the Pigeon Drive the Bus” • Key to success was a good management team • Past success was best indicator of future success • Crashed fighter jet analogy • Mad scientists shouldn’t be put in charge of the money, just as you wouldn’t put an elephant in charge of the peanuts.

7. Don’t trust anybody/be trustworthy • Handshake deals are worth the paper they are printed on. • Paper everything with suppliers, customers, employees, partners, lawyers, accountants, spouses, children, etc… • At the same time, in Ottawa, word gets around very, very quickly about unethical and/or untrustworthy behaviour. • e.g. certain unelectable ex-Premiers of Ontario

8. Work on your presentation skills • In written and verbal communication: • Tell them what you are going to tell them • Then Tell them • Then Tell them what you just told them • In verbal communication • Then get them to Tell you what you just told them • Simplify: NO JARGON. • Useful for customers, suppliers, employees.

9. Write it down • Proper documentation in company development is very important • Tax compliance • IP protection • Management continuity (i.e. being run over by a bus)

10. Find good advice, then take it • Get references for a good lawyer and accountant. • If you don’t like them, walk. • When they give you advice, take it. • Don’t try to do everything yourself. You can’t. Instead, build a great ecosystem of consultants, suppliers, customers, etc…

11. When they are passing the hors d’oeuvres, take two • When raising capital, if an investor offers to give you more money then you want, TAKE IT. • Cash is the most rare resource at the moment • Don’t worry about dilution • 50% of something > 100% of nothing • Currently, don’t waste time raising private investment

12. Admit mistakes • People are smart. “Spin” never works and will cost you more effort in the long run. • Customers and investors worth keeping appreciate honesty.

13. Be flexible • Portfolio companies which still exist are managed by smart guys and girls who can, and did a lot of different things based upon core IP (or in some cases, not based on core IP).

14. Check the ego at the door • Related to the previous two points • Hire people better than you • Don’t use your company as a tool to look important. • Having a tee-shirt that says “I won” really isn’t worth that much. • “People fight so hard because the stakes are so low.”

15. Cases A: “Mad Scientists with too much money, zero business sense” • MCo: • Great nanofiltration technology, applicable to food, oil&gas, etc, etc.. • Recruits great board, all resign when CTO gets in unwinnable fight with CRA • Saves $1500 by doing books internally, costs $5000+ to fix (3 years in a row!); risks IRAP and SRED • Will NEVER be able to attract external funding or sales • HCo: • Exceptional computer scientists at earliest stages of WWW development • Blow startup money on 3 companies from chasing wrong markets from expensive, fantastically furnished offices, and ruin all marriages in process

16. Cases A: “Mad Scientists with too much money & zero business sense” (continued) • GCo • World class theoretical manufacturing modeling software • Revenue stalled at $400K/yr; won’t take on CEO to address sales, despite all sources of advice telling him to.

17. Cases B: “Mad Scientists with (close to) zero business sense, and recognize this” • 20Q.net: • 20 year old Artificial Intelligence technology, applicable to games • CTO partners with excellent CEO and “retires” to lab. • CEO does marketing deals with Mattel, Burger King, Digital Chocolate, etc.. • Didn’t waste time attracting external capital. Rely on royalty deals. • BTI Photonics • Attracted seed VC in 2001. • Still going, albeit with different management, technical leadership, investors, customers, etc…

18. Cases B: “Mad Scientists with (close to) zero business sense, and recognize this” (continued) • Research in Motion • Jim Balsillie: easily distracted, very litigious, massive ego • But great CFO Dennis Kavelman + lots of hor d’oeuvers • Dalsa Corp • University of Waterloo spin off • World class CCD and CMOS vision technology • CEO/CTO/Professor Savvas Chamberlain relied on excellent CFO and COO • Magna vs Linamar • Stronach clan: Massive egos, easily distracted, Class B shares (see comment about trustworthiness) • Hasenfratz clan: Frank and daughter Linda. Great leaders. Modest, smart, hardworking

19. Cases B: “Mad Scientists with (close-to) zero business sense, and recognize this” (continued) • Elliptic Semiconductor • IP designers for semiconductor security market. • Original partners included senior sales exec from Newbridge • Formed strong ecosystem with fabs, large semicos, telco equipment manufacturers. • Early royalty sales, with up-front design fees, lessened need for external capital • ICo • Systems integrators for robotic cutting systems. • CAGR of 250% • Doing what their accountant tells them • Hiring a COO very soon.

20. As a result: my portfolio • Bank stocks/oil and gas/utilities. Dividends are great. • Every tech stock has been a 100% write-off, even those that are still operational! (i.e. cram down rounds) • Except for RIM (0.0001% of portfolio), (which I am waiting to blow up).

21. Q&A/Thank you! Kevin Goheen, PhD, P.Eng. kgoheen@mclartyco.ca