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Why We Might Want to Learn From the US Industry

An American Model for The Canadian Venture Industry Presentation to The Toronto Venture Group Presented by Robin Louis President, Ventures West President, CVCA February 9, 2005. Why We Might Want to Learn From the US Industry. Net Horizon Internal Rates of Return (31-Dec-03).

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Why We Might Want to Learn From the US Industry

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  1. An American ModelforThe Canadian Venture IndustryPresentation toThe Toronto Venture GroupPresented byRobin LouisPresident, Ventures WestPresident, CVCAFebruary 9, 2005

  2. Why We Might Want to Learn From the US Industry Net Horizon Internal Rates of Return (31-Dec-03) Sources: CVCA, NVCA

  3. Possible Causes for Differences–Not Covered Today The Canadian Macro Environment • Small, historically resource-based economy • Low R&D expenditures by Canadian companies & low government military-related R&D Technology Companies in Canada • Foreign to the US market • Relatively immature technology communities • Costs lower than Silicon Valley but higher than India • Lack of experienced people • Lack competitive technology

  4. Issues in the Canadian VC Industry Today • The industry is young • The industry is small • Available VC is spread over too many deals • Few Canadian funds are able to do large financings • Our investments are not big enough • Our wins are not big enough • We have insufficient focus on building portfolio company management teams

  5. Cumulative $ Raised # VC Firms The Canadian VC Industry is Young • Young firms don’t have a long track record to “cushion” current mistakes • LSVCC annual fund raising – need to avoid big visible failures • Leads to risk aversion–small investments, early exits, few home runs Sources: Macdonald & Associates, NVCA, Thomson Venture Economics

  6. The Canadian VC Industry is Small Canada % of US • Relative size –– ½ of the US • Absolute size –– 5% of the US

  7. Available VC is Spread Over Too Many Deals • Even with “over allocation” of $ to early stage, too many early stage deals are funded • Too few $ left to fund companies at later stages Investment – Canada as % of US (1998-2003) Average Deal Size Sources: Macdonald & Associates, NVCA, Thomson Venture Economics; PWC MoneyTree

  8. Average Deal Size is Too Small in Canada • Companies are funded to survive, not to succeed • Exits before the companies are “ripe” Early Stages Later Stage Sources: Macdonald & Associates, NVCA, Thomson Venture Economics

  9. Few Large Financings in Canada % of Total Number of VC Financings

  10. Who Can Participate in Large Financings in Canada? • Assume Can$ millions One early stage round 5 Two later stage rounds 20 Total raised 25Meaningful participation is 40% of the syndicate or $10 million • Portfolio diversification requires that an investment not be > 10% of the fund so need $100 million fund minimum

  11. There are few Large Funds in Canada • There are only about 12 funds in Canada > $100 million Median Fund Size

  12. US Investors in Canadian Deals – Big $ % of Canadian Financings With a US Investor

  13. US Investors in Canadian Deals – Big Wins % of Canadian Exits With a US Investor

  14. Bigger Exits in the US VC Exits in Canada and the US (2000-2004)

  15. US – Focused on Management Team Performance • Anecdotal evidence is that US investors are: • More demanding that milestones be met • More willing and quicker to change management • Total CEO changes: • US Top Tier 64% • US Other 48%

  16. Management Teams • We all know that investing in an “A” team is key • The management task in Canada is at least as difficult, if not more difficult, than in the US so management is even more critical here • The following data was collected by ghSMART based on 100 interviews of management candidates for venture backed companies in Canada, and 3,000 in the U.S. • Process is a long (3-5 hour) interview to assess the candidate’s suitability for a position which is defined by a “scorecard” that sets out the key things that the candidate has to accomplish • Candidates are rated A, B or C based on suitability against the scorecard

  17. CEO Ratings Similar, Others Not % of A Players

  18. Key findings CanadaUS Scorecard More aggressive & focused (numbers, timelines) Invest in B teams 78% 25% CEO evaluation only 70% 20% For pre investment dd 90% 25% Time to remove a poor ? 9 mo. performing CEO

  19. What To Do IssueSolution Industry is young Let time pass Industry is small Grow: - Industry overall - Funds - Fund sizes $ spread too thinly Focus: - Fund fewer companies - Make bigger bets

  20. What To Do (cont’d) IssueSolution Big fundings in the US - Comparable fundings in Canada- Build partnerships – syndicate US VCs create “home runs” - Focus- Fewer, bigger bets- Fund well- Don’t sell early Need “A” management teams - Don’t compromise – “A” players - Focus on whole team, not just CEO- The job of building the team starts when the investment is made

  21. Build on our Advantages in Canada • Technology excellence recognized worldwide • Telecom – Ottawa • Software – Waterloo • Pharma – Montreal • Fuel cells – Vancouver • Lower costs (particularly R&D) in Canada and close (geographically, time zones, language) to the US market • Best educated population in the world • Lower valuations in Canada than the US – no surplus of VC funding • Home grown, successful examples – RIM, Cognos, Nortel, Ballard, Angiotech, Sierra Wireless, Hummingbird, Open Text, QLT, Biochem Pharma, Newbridge, Creo, JDS, PMC Sierra …

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