Why Can’t Canada Have A Facebook-Scale Going Public Event?

Big IPO valuations don’t sneak up on small companies.

The idea that any startup could IPO valued at a $100 billion was ludicrous, until Facebook. Several other IPOs and buyouts followed at similar eye-watering valuations. Skeptics, and I started out in this camp, see these events as symptoms of a dangerous bubble.

Then you hear Jos Schmitt, CEO of Aequitas, make a sound argument for Facebook’s extraordinary valuation.

Even more surprising, Schmitt makes a compelling case for why Canadian startups are chronically undervalued, and how to change that.

Schmitt was Michael Cayely’s guest for an April 14 2014, Startup Grind Toronto fireside chat. Once again Willdeboer Dellelce hosted in fine style. The Toronto-based law firm is a specialist in startups.

Schmitt has a unique perspective. His bio says “25 years of experience in the financial services industry with expertise in market infrastructure, across asset classes and across geographies.”

In concrete terms, Schmitt knows stocks, bonds, and other interest-paying investments. He has developed deep insight into why people trade them, how the trading markets work and what tools they use to do it – wherever in the world that people trade.

In June of 2013 Schmitt took on the role of CEO of Aequitas, a company dedicated to creating a new Canadian stock exchange. More importantly, Aequitas is creating a new platform for trading private securities focused on improving the liquidity of small- and mid-cap companies.

Ask Schmitt what holds back Canadian tech startups and he acknowledges the usual suspects. Talent-finance-revenue are indeed problems, well documented by IT Business Canada in its ongoing coverage of PWCs annual Report on Emerging Canadian Technology Companies.

But Schmitt sees a systemic root cause. “The ecosystem is not working well. It’s not a lack of smart people, good education or people with good ideas. We don’t lack capital in Canada. There’s a lot of it. It’s that it keeps going to other places and not into the world of entrepreneurs.”

Schmitt says there are two important gaps for small- and mid-cap companies. The gaps are in mentoring and liquidity.

“There is still a lack of mentorship, people helping entrepreneurs to find their way in a world which is quite complex. It’s great to be a champion in a certain area (of tech). But how do you fund it? How do you take it to market? How do you develop a distribution channel? How do you acquire clients? How do you manage a company? Lots of items of that type are still missing.”

Schmitt believes there are now a lot of initiatives to address the mentorship gap. Time and persistent execution should close the mentorship gap.

Lack of liquidity, says Schmitt, is still a problem. “There is an enormous funding gap as soon as you get above $2m to $3m. To look at companies in a simple way, you have starting it, building it and growing it. ‘Starting’ is when you define it. ‘Building’ is when you really develop your product and find your first clients. Once you get to ‘grow it’ there is no money in Canada.”

This stunts the growth of companies. That harms entrepreneurs and employees. Governments fail to get a decent return from their investments in education and early-stage tech company supports. It hurts the Canadian economy as a whole.

So, says Schmitt, entrepreneurs are faced with three alternatives. Many choose to “exit very early. Yes, you get a little bit of money out of it. But you miss the enormous opportunity to build a really great company. With all the opportunities it could represent for you as a founder and also for the entire economy in Canada and for employment.

“The second alternative is that people just go to the US and find an investor there. The ecosystem there is much better.” An extreme example is Facebook. Instead of jumping from Series B to IPO, Facebook traded on private markets, and maintained focus and control while building up its valuation.

“The third one (alternative) is that people go public far too early in their life cycle. You should still be focused on growing. Developing your business. Making sure your products are working well.”

When you go public too early, “suddenly you’re exposed to a world where you face quarterly results, enormous reporting needs.”

Companies pay penalties in both the short and long term. Publicly listed small- and mid-caps, says Schmitt, “are probably spending 20% – 30% of their time and cash (on reporting), which is enormous.” If such companies could trade on private markets these costs would plummet to just “a few percentage points.”

In the long term, “you are publicly traded and you don’t have that many investors who are that interested in you,” says Schmitt. “You become a company that trades 500,000 shares a week. No liquidity. No liquidity becomes an orphan company. You need funding afterwards, people will say ‘wait a minute – this is not a liquid company, I’m going to want a discount.’ ”

How does your experience compare with the picture painted by Jos Schmitt?


CTO’s Ambivalent Attitude To Tech Works Awfully Well

“It’s a little weird but I have an ambivalent attitude about tech.”

Deciding to build your cool new tech with immature tools can lead to problems.

Deciding to build your cool new tech with immature tools can lead to self-inflicted wounds.

This was one of several surprising insights from Bohdan Zabawskyj, serial startup CTO. He was Michael Cayley’s guest for a March 27 2014 Startup Grind Toronto fireside chat. Willdeboer Dellelce and Shopify – both startups once upon a time – sponsored.

Zabawskyj deflects praise. “I characterize myself as an entrepreneur helper, I’ve never made the leap and started a company on my own.” But his track record as serial CTO speaks for itself. He played a key role in shaping the success of Clearnet, Rypple and Redknee. He’s at it again with Mercatus. And he still finds time to advise half a dozen more startups.

So how does Zabawskyj employ his tech ambivalence? In his experience, a high level of risk is inherent in a startup. So, “if you’re trying something new, stay away from the bleeding edge.”

Startups need to build, test and iterate on the core value generator ideas as fast and often as possible. It’s an inherently high-risk activity. Why add to the risk by using new development tools? It makes finding talent, which is already hard, much harder. Mature software development tools come with much larger communities of experienced developers startups can draw on.

“I’ve never seen perfect technology, architecture or code,” says Zabawskyj. “Chances are you’ll re-code half a dozen times before you achieve product-market fit.” It’s key insight into how he manages the tension within the Agile methodology. Re-writing code to improve functionality or boost performance is not waste. It’s refactoring.

Another lesson Zabawskyj learned in the startup grind is deep respect for soft skills. “I often think the ‘T’ in CTO stands for ‘therapy.’ A lot of it (the CTO role) is human and process issues. How to find people and build culture.”

Zabawskyj warned Startup Grind-ers to build their plan around the strengths of their people, and to protect them from their weaknesses. For example, there’s one of the biggest headaches of software development: scheduling. Even among the best coders, their ability to predict how long it will take is limited. “Human estimation falls apart after two to three days,” says Zabawskyj.

In a follow up interview I asked Zabawskyj to reflect on his career in light of the Fraser Institute’s recent proposal to replace lost Ontario manufacturing jobs with resource extraction jobs.

The Huffington Post challenged the Institute’s claim that that solution is “to unleash [Ontario’s] private sector on its northern resource frontier.” The Post notes that 5,100 jobs might be created by one of the Ring of Fire mining projects 500 km northeast of Thunder Bay. And those jobs are “two per cent of the 255,000 jobs lost in Ontario manufacturing in the decade between 2002 and 2012.”

Because tech tends to create more employment and value from less capital, Zabawskyj sees tech as a better job creating strategy.

He said that when Salesforce.com bought Rypple it was valued at about $60 million. That’s more than four times the $14 million in capital invested by Angels and VCs.

At a capital cost of $2.25 billion for the Ring of Fire chromite mining project, each job it creates will need $440,000 of capital. That, Zabawskyj notes, “is a pretty big angel investment round for a startup”.

“Look at Redknee. It was started with a $70,000 investment by the four founders. It’s now valued at north of $500 million and employed 500 people worldwide when I left in 2010, half of those in Canada.”

The value tends to stay in Canada. Even when Canadian tech companies are acquired, the jobs tend to stay here. So do the taxes paid by these employees. The main market for the chromite mined in the Ring of Fire is Chinese steel mills.

And tech is creating far more opportunity than existed when Zabawskyj was a newly-graduated engineer just a few decades ago. “Back then the only choices available were telecom, manufacturing and resources. If you wanted to do something interesting you had to leave. That’s not the case anymore.”

Big Data Needs Designers Not Technologists

Yet another example of why design is as important as data.

Yet another example of why design is as important as data.

“Data can give you an uplift or a depression, but the fundamental trajectory is not set by data. Design is the most important function.” That was the surprising message delivered by Google Ventures’ Anish Acharya to a packed StartupGrind Toronto gathering in September of 2013.

Acharya knows whereof he speaks. He and co-founder Jeson Patel launched and built the successful social gaming company Social Deck, then sold it to Google. Acharya was drafted to be the product manager for Google+ and saw it through launch. He is now a Google Ventures partner.

Roger Ehrenberg of IA Ventures also noted the urgent need for design excellence, in a recent ITBusiness article on the flow of investment into big data startups. “What I see, especially in this space, it tends to draw brainy people but [it’s] not necessarily the most people-oriented, so entrepreneurs develop something cool that not that many people want… a tech founder also has to be a product manager.”

Despite Google Venture’s big-data DNA, Acharya says the focus of its investments is actually on “companies that have a culture and a rigor around data that is thoughtful, not on data per se.

“The interesting opportunities in big data are not in the capture of it – there’s some in management –but the interpretation of it. Making sure that every stakeholder and every decision maker who needs to see the data does, and what it means.”

Our attitudes about data may need to change. “We grew up in a system that emphasized Calculus over statistics. Calculus is closed solutions and statistics is probabilistic” says Acharya. “That’s one of the reasons many of us had to spend some time understanding statistics… As a business community we’re getting better at that.”

On the practical level, Acharya says the challenges facing companies outside the Valley often come down to product leadership and community. He’s in a position to know. Social Deck was based in Toronto but he and Patel invested a lot of time cultivating the Valley VC community.

“It’s tough to find the maturity of product leadership in Toronto, on the consumer product side in particular,” says Acharya. “You need to invest in mindshare presence in the Valley. They have a culture where they constantly interact with each other.”

That said, Acharya notes “the tactics we used in the App Store to drive distribution are not geography specific. So there’s no reason a company from Toronto can’t be a break out in any of these segments.

The next Startup Grind Toronto Fireside Chat is with Jos Schmitt, CEO of Aequitas on April 14, 2014.

This is a guest post by Geoff Foulds, CMO of AffiniD, a startup based in Toronto and San Mateo.