VentureBlog has a insightful post about VCs who think they know it all... as if they don't For all the early stage investors out there, take a moment to read the whole post.

David Homik writes:

VCs like to think that they are marketing geniuses. We really do. We meddle more in the marketing of our portfolio companies than any other area. If you have a chance to sit in on a startup board meeting, you can see this in action. The CFO gives a finance update and a few cursory questions are asked. The VP of Engineering talks about development and board members sit around the table nodding appreciatively. Then the VP of Marketing gets up and suddenly everyone around the table has a point of view. Poor VPs of Marketing. Their role at board meetings is to be diplomats and pretend that we investors are marketing geniuses. Frankly, the reason investors have so many opinions about marketing is that we can fake it far more convincingly than in other areas of the operations -- faking it when it comes to scalability issues, or which technical standard to endorse, or revenue recognition for term licenses, etc. is a lot harder. But show us a proposed product name, web page layout or advertising slogan and we are full of suggestions.

What has become clear to me over the years is that great marketing is not purely about science. It is not purely about art. It is not purely about intuition. It is a powerful combination of art, science and a little bit of luck (perhaps driven by intuition). I have incredible respect for marketers who can combine both disciplines with a little bit of intuition to deliver results. Despite my natural VC tendencies to meddle in marketing's affairs, I will do (...read more...)

Angel investment in the U.S, is surging while early-stage firms in Canada go begging. Accorsing to Red Herring, Angel investments in the U.S. rose 15 percent to $12.7 billion.

Angel headcounts were up as well, with 130,000 investors making bets, up 3 percent from the year-ago period. Despite those increases, more dollars chased fewer deals than the prior year: A total of 24,500 ventures received angel funding in the first half of 2006, down 6 percent from the first half of 2005.

If U.S. Angels are looking for deals maybe they should shift their focus north of the border. I know more than a few firms who would embrace them.

PricewaterhosuseCoopers released a recent survey of Canadian companies. They announce:

The vast majority of Canada's private companies are forecasting growth and expansion. However, according to the latest PricewaterhouseCoopers (PwC) Survey of Canadian Private Companies, as organizations crest the wave of a buoyant economy and grapple with labour shortages they are failing to address their challenges or measure key performance indicators. At the same time they are placing increasing demand on existing workers and have few plans for future management or ownership succession. This overall lack of preparedness is threatening their growth and expansion prospects.

Seventy-nine percent of the 534 Canadian business leaders who participated in this year's survey are expecting their business to improve over the next 12 months. The main reasons cited for their optimism include an increase in sales (61%), entry into new markets (42%), development of new products (33%) and the buoyant economy (32%). However, there are signs of regional differences with more companies in Western Canada (particularly Alberta) expecting business to improve a lot.

Jill McCubbin of Market2world sent me this notice for OCRIradio.com's latest interview.

OCRIRadio.com is kicking off its 2006/07 season with "The Big Money Show". Co-hosts Jeffrey Dale and Nathan Rudyk interview Andrew Waitman from Celtic House and Ted Anderson from Ventures West for both an Ottawa and national perspective on the state of both high tech companies and capital formation.

Produced by market2world communications in cooperation with OCRI, the podcast's RSS feed is feed://www.ocriradio.com/podcast/ocri_radio.xml, or you can direct your browser over to http://www.ocriradio.com for blogs as well as the podcast.

So far in 2006 venture capital (VC) financings are down in high tech Ottawa, but employment is up. What gives? Join co-hosts Jeffrey Dale, President and CEO of OCRI, and Nathan Rudyk, President of market2world communications inc. as they talk to two of Canada's top venture capital leaders and one of the city's most revered entrepreneurs to find out where the big money's going, and how Ottawa must position itself to attract more of it.

Dale and Rudyk interview Andrew Waitman, Managing Partner of Celtic House, Ottawa's largest venture capital company with offices in Toronto and Gloucester, England; and Ted Anderson, President of Ventures West, one of the largest and most successful VC companies in the country with offices in Vancouver, Toronto, Montreal, and now in Ottawa. The two men control more than a half billion dollars in their latest funds.

The hour-long September podcast of OCRIRadio.com also features an interview with Dr. Michael Caughey, OCRI's founding President in the 80s, creator of the Technology Venture Dinners in the 90s, a renowned entrepreneur, and now board member on several Ottawa tech companies. Rounding out the podcast's guest list is Stephen Daze, Executive Director of OCRI's Entrepreneurship Centre and organizer of the Oct. 10th-12th Ottawa Venture and Technology Summit.

Past guests on (...read more...)

What drives returns in the US VC industry (and, maybe by extension, Canada's VC industry)? Peter Rip, Managing Director, Leapfrog Ventures has a VC oriented blog, Early Stage VC. This week he published a three part essay on what he describes as "Venture Capital 2.0." Rip provides some interesting insights into the financial mechanics of the VC industry:

Success begat success in the venture business. Since venture investments have had payoff characteristics like options, i.e. limited downside and infinite upside, the key to the business has been "deal flow." Deal flow is about seeing as much of the total distribution of deals, to generate a larger set of 'long tail outcome' candidates. Success made IT venture capital business a first-order Markov process, where the probability of the getting the next hit was enhanced by having a previous hit, precisely because of the desire of all entrepreneurs to affiliate with "known winners."

Limited partners (LPs) are investors in venture capital funds. We raise money from them, just as companies raise money from us. We tell them our credentials and, to a lesser extent, our business plan. LPs usually have to make stronger commitments than VCs with even less data. A VC who loses confidence or interest in a company can choose to cease new investments in that company. The result is often that their investment gets diluted, perhaps massively, but it still remains. A LP who loses confidence in a VC fund technically still faces a legal obligation to continue meeting their capital calls. At best, they face losing all their capital. At worst, they have no choice but to throw good money after (perceived) bad.

Historical performance can only take you so far. One needs a theory of future drivers of returns to select among venture capital managers. Being yet-another-top-half-IT fund (...read more...)

According to Patty Tascarella of the Pittsburgh Business Times, US corporate venture investment is at its highest level since 2002.

In the second quarter of 2006, corporate venture capital investment reached its highest level since the first quarter of 2002, according to a new report by PricewaterhouseCoopers and the National Venture Capital Association based on Thomson Financial data.

Corporate venture capital is defined as operating corporations investing directly in portfolio companies, either on a sole basis or alongside traditional, independent venture capital funds. These corporate entities are in some cases referred to as strategic investors.

During the three months ended June 30, 2006, corporate venture capital groups participated in 195 deals or 22.2 percent of all venture capital deals completed. These deals represented $602.5 million or 9.2 percent of all dollars that venture capitalists invested in the quarter.

I wonder how Canadian companies compare. Are our corporate treasuries as healthy and are they willing to take five to seven year risks ?

"The uptick in corporate venture capital activity suggests that large companies are currently in a position to look to the future and take some risks as it relates to new technologies," Mark Heesen, NVCA president, said in a statement. "The overall commitment to venture capital investment by corporations has ebbed and flowed over time. It is always a tug-of-war between short term earnings pressures and long term product vision. For many companies, it is often difficult to stay the course of investment, which could last 7 to 15 years."

Even if Canadian companies are in the position to increase venture investment, from a street perspective local start-ups remain overlooked.

I'm at the Rotman School of Management this morning to hear Dean Roger Martin's talk on the subject of Ontario's prosperity gap. What drives it? Why does intensity vary between Canada and the US? The Institute for Competitiveness and Prosperity today released its report: "Time on the job: Intensity and Ontario's prosperity gap."

The topic may be somewhat dry compared to our usual discussions on Web 2.0 and venture capital but the topic may give our readers some insight into why Canada's VC community is underperforming. I'll be back with an update shortly.

Update 1: Why over the last generation has Ontario underperformed the North American mean in terms of prosperity? That is the driving question behind Martin's work. Our prosperity gap compared to the mean is about $6,000 or 12.6% of median GDP per capita. In real terms for consumers out there, this gap means we have $5,100 less disposable income.

The big difference between the US and Ontario workers isn't with the poor who tend to have only two weeks off a year in both countries. The difference lies with the wealthy who, in the US, take almost 3 weeks off but in Ontario they take 7 weeks off. Union leaders have always known about this (my aside).

Martin, by the way, says never believe anything you read in newspapers or see on T.V. about economics statistics - NEVER!! Why? Because reporters don't have the time to get it right. He says, for example, fewer people are working part-time today in the US than in the past. So much for common sense.

Update 2: The value of an advanced degree in the US is far better than in Ontario. In other words, earnings for holders of advanced degrees in the US are about 25% higher than in Ontario.

It (...read more...)

Roger Martin, Chairman of the Institute for Competitiveness & Prosperity and Dean of the Joseph L. Rotman School of Management, will present the results of their research on Friday, September 8. The event will take place in the Fleck Atrium at the Rotman School (105 St George St, Toronto) Click here for a map. The presentation begins at 8:30 am with a discussion to follow.

Dean Martin will be accompanied by:

Arthur Donner, a leading economist who has led federal and Ontario task forces analyzing the issues of working time

Andrew Heisz, Statistics Canada, who has analyzed hours worked and other labour economics issues

Eleana Rodriguez, a Principal of Mercer Human Resource Consulting, a global leader for HR and related financial advice, products, and services

The event will be complete by 10:30 am. Coffee and light breakfast will be available at 8:00 am.

Space is limited. To register for this presentation, go here.

Robert Young of GigaOm wrote on August 21st that Apple should acquire YouTube and launch itself into one of the Net's top property owners. YouTube is now ranked as the 40th most popular web site and, for strategic reasons, Young feels it would be a perfect match with Apple's iTunes video distribution. Now everyone is joining the fray. Even the New York TImes thinks it's a good idea.

Now, I know I am beginning to sound like a broken record when I say this but the YouTube phenomenon was predictable. I promoted a version of the service beginning some 2 1/2 years ago, about a year and a half before YouTube saw the light of day. But this is Canada and our team (which had some serious manpower behind it) just could not get local investors interested in the project. After all, "where's the revenue model." Rumour has it that YouTube is on the block for one-billion dollars. Is that a good enough return Canada? If our moribund VC industry wants to emulate VCs south of the border, it has to be willing to take risks that are proportionate to the rewards and stop nickel-and-diming every good idea to death.

Not every deal has to beat the entrepreneurs down to chump change guys.

YouTube could have been Canadian. Why not? There is nothing to prevent us serving bits from Toronto equally as well as L.A. But, we missed it just like we've missed many other opportunities. Flickr somehow got through the morass. Lucky for them they were in B.C., closer to the U.S. west coast.

By Charles Plant
Q1 Capital

In December 2005, Cyrium Technologies, a Canadian company founded in 2002 whose strategy is to become a leader in the design and production of high efficiency photovoltaic solar cells, raised $3 million (all numbers in Canadian dollars) from BDC and Pangea Ventures. Meanwhile, in the US, Nanosolar Inc., a firm founded in 2001 to develop light-weight, flexible and easily adjustable low-cost solar electricity cells. had completed a second round of $22 million to follow on their first round of $8 million. These two companies, while not competing directly, operate in the same industry with similar objectives and similar development issues. The US firm, however, is able to develop its business with one key advantage: it has ten times the capital of the Canadian firm.

In 2005, Venture Capital companies in the US invested $27 billion in seed, early stage and expansion stage companies. In Canada, the total was $1.8 billion or 7% of the US total. On the surface it would appear that Canada lags the rate of US investment by only 3% based upon population; However, behind these numbers lies another problem. The US VCs invested in just over 3,000 companies whereas in Canada there were 639 companies who received funding or 21% of the US number. The Canadian investment was spread over a much greater number of companies proportionately than in the US.

The result of spreading the investment out over a wide number of companies is that the average Canadian company did not receive the same level of support as the average US firm. In the US, the average investment per firm was $8.9 million whereas the average Canadian investment was $2.8 million. By the time a company has received seed, early stage and expansion funding in the US, it has brought in (...read more...)

Gagglescape's good friend and co-founder of the unstoppable BarCamp (not BaseCamp as David Crow just kindly pointed out) movement, Tara Hunt, was on CBC radio this morning. The CBC's mid-morning radio show did a piece on the "long tail" phenomenon now manifesting itself on the markets of the world. For those of you who have been sleeping for the last two years or so, the long tail is the segment of the market that in traditional mass-markets was overlooked by big retailers.

Suddenly, because of the Internet and now its derivation, Web 2.0, long tail markets are economically viable - hell, even down right profitable.

One example that Tara and company spoke about was the music industry. In the past, the record industry promoted a few top stars whose sales drove the label's bottom-line. Someone like, say, Madonna, enjoyed huge mass market success. The market has fragmented. Long tail channels now allow ten bands to survive where once one got by. That means more choice for consumers.

Coincidentally, Yahoo ran a story today from Business 2.0's September issue. The title is ''The Smartest Companies to Start Now.'' Some are related to the long tail market:

Jim Breyer, partner, Accel Partners

WHAT HE WANTS NOW: Social-networking sites may be sprouting like weeds, but none yet operates as a bona fide marketplace, with members buying and selling their own creations as much as they blog, link, and post. Breyer, who sits on Wal-Mart's board, is interested in backing an international network for indie artists, musicians, filmmakers, authors, designers, and other creative types from dozens of countries. Ideally, the site would have the download and payment features to create what he calls a "micromarket" for members' wares.

WHAT HE'LL INVEST: $10 million.

Here are Time Magazine's 50 top web sites.
Every once in a while Time comes out with this list -- old media meets new. We are not sure if we agree with all the choices but it is good to see Canada's Drawn! at the top of the list.

Entertainment, Arts & Media
Drawn!
Jumpcut
Sundance Splinks
Wolfgang's Vault
Photo Muse
Podcast Pickle
Pandora
The 9
YouTube

Shopping, Lifestyles & Hobbies
Phone Scoop
Delicious Days
Not Martha
Shop Intuition
Kids-In-Mind
Mighty Goods
Zunafish

News & Information
The Morning News
Kevin Sites in the Hot Zone
Charity Navigator
Footnoted
Tailrank
Deadspin
Digg
The Human Clock

Staying Connected
MySpace
Google Spreadsheets
SingShot
Meebo
Dodgeball

Time Wasters
TMZ
Shockwave
Yu-Gi-Oh Groove
Cute Overload
Jackson Pollock by Miltos Manetas
Number Logic

Travel & Real Estate
Zipcar
Farecast
Kayak
Zillow
HopStop
CentralPark
Yelp

Web Search & Service
Accoona
Kosmix
Snap
Pixsy
Argali White & Yellow
Blurb
Seamless Web
McAfee SiteAdvisor

Friedman's The World is Flat, How Companies Cope, Lesson #7

Outsourcing isn't just for Benedict Arnolds. It's also for idealists.

Triple convergence, has, as Friedman insists, flattened the world. Information can access regional manpower capabilities in ways never before imagined. From an idealist's perspective, one benefit is the ability to enhance the lives of people in 3rd world nations.

Two ex-McKinsey employees started a digitizing company with typists in Cambodia. Those typists were paid twice the country's minimum wage, worked six hours a day six days a week, and went to school for the rest of their workdays. The company now employs 170 people in three offices.

"Our goal was to break the vicious cycle there of young people having to drop out of school to support families," says founder Jeremy Hockenstein. "We have tried to pioneer socially responsible outsourcing."

Friedman's, "The World is Flat," How Companies Cope, Lesson #6

The best companies outsource to win, not to shrink. They outsource to innovate faster and more cheaply in order to grow larger, gain market share, and hire more and different specialists -- not to save money by firing more people.

Friedman argues that outsourcing is a growth strategy. As noted earlier, anything a company can do to enhance its core competencies will benefit the long-term success of that business. Outsourcing then becomes a way to grow your business. Some CEOs, unfortunately, have taken a narrow view and used outsourcing to generate short-term profits at the expense of long-term corporate health.

That is a systemic problem more than an individual one though. Information technology became a panacea for many corporations. It was relatively easy to save money by investment in I.T. and this strategy became a standard tool to boost profits when, actually, the company was in a downward spiral. The very people a business might depend on for innovation and commitment to corporate well-being were decimated by often indiscriminate mass layoffs. The US auto industry comes to mind as an example.

Toyota and Honda used their much more cohesive employee social structures to reinvent the way cars are built. In response to the early days of the Japanese auto threat, US industries looked for efficiencies in I.T. rather than in understanding how to better compete with the Japanese. The US auto industry's latest dismal performance reflects the sad truth that, among other business performance issues, they never did understand lesson #6.

e-consultancy.com has a story on "Kiko" the Web 2.0 Calendar company that is putting itself up for sale on e-Bay for a reported sum of $50,000. While that in itself is interesting enough, the story gains traction when discussing the forces behind the funding of Kiko. It turns out that the company's funding came from a micro-cap investment by "Y-Combinator," a company that believes in the "Get scale, get business model, and get acquired," approach to building companies. Y-Combinator's web site begins:

Y Combinator is a new kind of venture firm specializing in funding early stage startups. We help startups through what is for many the hardest step, from idea to company.
We invest mostly in software and web services. And because we are ourselves technology people, we prefer groups with a lot of technical depth. We care more about how smart you are than how old you are, and more about the quality of your idea than whether you have a formal business plan.

Turns out that the management behind YC will throw a few dollars at almost any idea just to see what sticks - the shotgun spread approach to Web 2.0 investment. It will be interesting to see how successful the company is. e-consultancy.com writer, Chris Lake, does not think much of the idea:

Last month I threw a little mud at Graham, a notable entrepreneur, respected programmer and essayist, after he made some comments about a) geeks running businesses and b) there being no need to worry about a business model until a website achieves critical mass. I agree with Graham on a lot of things, but this sort of talk is downright dangerous.

I wonder if there are any Canadian VC firms taking this approach.