Equity Crowdfunding Comes to Ontario – finally!

Canadian-100-dollar-billsThis could be big, really BIG! For entrepreneurs and startup founders this could be a monumental change, potentially opening the floodgates onto the dry and barren land of seed funding. At the very least it should offer new options for cash-starved startups and early-stage businesses. The recently proposed (as of March 20, 2014) Ontario Securities Commission (OSC) new set of regulations provides for

“a crowdfunding exemption that would allow businesses, particularly start-ups and early stage businesses, to raise capital from a potentially large number of investors through an online platform registered with the securities regulators.”

More specifically, this ‘Crowdfunding Exemption’ would allow startups and SMEs to raise up to $1.5M per 12 month calendar year with investors being able to invest up to $2,500 per deal and up to $10,000 per year.

Why is this so important, then? The issue is that under the current Canadian securities laws, startups can only raise money by selling equity in their business to so-called “accredited investors,” who are strictly defined and typically include family members, angel investment firms or venture capitalists. Should you wish to raise funds from a broader circle of individual investors, your company needs to go through a process of stock listing on a publicly traded exchange that is normally prohibitive to a startup.

The advancements in internet technology, however, make it possible these days to approach and raise the required capital in small amounts from a much broader group of individuals. Why is this approach relevant? It all has to do with risk management and sharing. To illustrate the issue let me quote from my article recently published in The Ottawa Citizen.

“Let’s say I need to raise $0.5M for my startup. I go to you and ask you for the whole sum or just a $100K chunk. Even assuming you have the means, you are going to agonize at length over your decision. However, if I ask you to invest $10-15K, you will spend far less time worrying and be much more predisposed to take the chance. By employing this tactic, an entrepreneur will likely raise her $0.5M because the risk is shared among many investors and each of them does not risk that much.

This is exactly how I raised, some time ago, angels financing for ATMOS Corp. I brought in about 20 private investors, with each contributing between $10K and $25K. The beauty of this approach is that nobody is going to loose sleep and the entrepreneur gets his objective accomplished. In fact, this is the same principle in action that powers the IPOs and syndicated VC rounds albeit in a smaller scale. It works, therefore, use it.”

The key to increase seed financing in this country is to implement some practical systemic initiatives. People respond to incentives. If we want to encourage seed funding to enable entrepreneurship and startups we need to create incentives which reward financial risk taking. The OSC proposal is a good step forward to create a viable framework enhancing options for seed investing. The Canadian Advanced Technology Alliance (CATA) led by John Reid should be congratulated for spearheading the industry lobbying effort. Not to rest on laurels, the Angel Investment Incentives initiative should be advocated, advanced and implemented next. With these two in place we would have a really strong system platform to support the entrepreneurial startup culture in Ontario.
Nevertheless, some folks are concerned about a potential for fraud and taking advantage of un-sophisticated investors. Would you agree that the advantages outweigh the risks? What do you think?

PS
The Notice and Request for Comment is available for public consultation on the OSC website www.osc.gov.on.ca and the comment period runs until June 18, 2014.

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Start-up CEOs Attributes – Hard Lessons

If you were an experienced hang-glider pilot could you fly a Jumbo Jet? Of course, not. Surprisingly though, some folks hesitate when asked: would the reverse be true? Actually, in my younger days I was a glider (motor-less aircraft) sports pilot. It took a lot of professional training and practice to master that skill. Later on, after many years of being away from this sport, I went to a local flying club for refresher flights with an instructor. While spending a day at the airfield I bumped into another trainee, a former F-15 fighter pilot. I was awed: “Gee, it must be a piece of cake for you to fly gliders!” I said. Only it wasn’t. “Hardly anything from flying fighter jets is applicable, I have to un-learn a lot and develop entirely different skills – it really feels awkward.” 

NOTE from Paul: The guest post below is written by Bob Hebert and originally appeared on his site.

I spent time recently with a prominent venture capitalist who has reflected a fair bit on the talent issue in the start-up game.Our discussion focused to the importance of certain attributes for start-up CEOs and how easy it is to misjudge their importance. To this VC, start-ups are like clay of varying grades which, in the hands of talented artisans, sometimes become art of considerable value. The creative process by which that art emerges however is a blend of inspirational, improvisational, experimental and professional activities. The finished product often bears little resemblance to what was envisioned at the outset. The irony of the start-up game is that detailed blueprints get funded while decidedly non-linear alchemy is often where the money is at.

The art of managing start-ups is the ability to feign being in total control while figuring out the company’s technological and market sweet spot (in real-time). This requires the ability to manage stakeholder expectations, implement scalable processes, manage people etc while trying to stay alive on the marketplace autobahn. These are decidedly different skills which organizations nonetheless seek to find in one CEO.

Because execution skills are more linear and easier to evaluate in candidates than the entrepreneurial je ne sais quoi, and because start-ups and their investors are often overly optimistic about the compelling logic of the blueprints they have funded, there is a tendency to skew selection decisions towards execution and scaling skills at the expense of the more entrepreneurial skills required to position the company to be scaled.

The VC spoke of the painful experience of hiring one person who had an impeccable track record of building the Canadian subsidiaries of large US or international tech firms. Because the person had launched these subsidiaries from scratch, she considered herself a ‘start-up’ person. And because several of these firms had become runaway successes, she had the swagger of someone who attributed at least some of that success to herself.

However, as the VC came to realize, this person had never taken raw technology and built a company from it. She had never really contemplated or adapted business models, searched for markets for a new technology or developed ‘go-to-market’ strategies in no-name start-ups. Instead, this person had always been handed technologies with large referenceable accounts in hand, well developed positioning statements, messaging and collateral. Her job was always tactical and full-steam ahead execution. This was a totally different game.

The VC talked of how he has learned that CEOs must be akin to entrepreneurial scientists. They must develop hypotheses, experiment, validate via feedback, adjust, shift and go forward, fast. With so many potential paths before them, they benefit by an entrepreneurial nose that will draw them to where the real opportunity is, and they must move fast while adjusting just as quickly. While company building, execution and scaling are important, without these other abilities the CEO will pick a path and die of starvation on it.

About the Author

Robert Hebert is the founder and Managing Partner of StoneWood Group Inc., a leading executive search firm in Canada. Since 1981, he has helped firms across a wide range of sectors address their senior recruiting, assessment and leadership development requirements.

Venture Money In, Entrepreneur Out

The delicate relationships between founders and venture capitalists are rarely openly discussed and even less frequently have carefully laid down rules that protect both sides sensitive interests. Since nothing ever goes smooth in early-stage company, the reality of the situation calls to put in place measures which would allow to deal with unavoidable conflicts in a civilized manner while protecting interests of both parties. The article below illustrates these realities.

NOTE from Paul: The guest post below is written by Bob Hebert and originally appeared on his site. It is re-blogged here by permission.

A recent edition of Profit Magazine is headlined “Lessons from Canada’s Best Employers”. It features a collection of “highly successful” entrepreneurs regaling on how to create “loyal, turbo-charged teams” and great businesses.

Inconveniently, at least one of the featured entrepreneurs was removed from the helm of his business before the magazine hit the newsstands. A man of undeniable vision, this entrepreneur had proven adept at attracting and energizing a team of bright, young employees in the pursuit of that vision. He possessed the same evangelical abilities with customers who signed up in droves for his product offering. But as the business grew, the supremely confident entrepreneur proved less adroit in evolving the hands-on, micromanaging leadership style that served him well when the firm was small. This in turn had a negative impact on his ability to attract, manage and retain an executive team capable of scaling the business. Though strong revenue growth temporarily cloaked the costs of this churn, maturation clouds were on the horizon. Given enough time the young entrepreneur may well have sorted out the leadership requirements of a growing, more complex business. But time became a scarce resource the moment the entrepreneur pursued big-time U.S. venture capital to fuel the next stage of his firm’s growth.

While in the business of risking capital, venture capitalists take every step possible to de-risk their investment decisions. Each success and failure is analyzed and processed into lessons learned, best practices and playbooks for future investments. Proven leadership is valued over its alternative, and young, promising entrepreneurs are rarely more than a few missteps from replacement. This is especially true in Silicon Valley where a class of serial CEOs and executive teams provide a bench of standby replacement talent. With the costs of trial and error learning thus needlessly high, it took but a few execution errors for the Canadian entrepreneur to find himself unceremoniously dumped at the helm of his own company. It took less than 4 months for the entrepreneur’s new ‘partners’ to become his executioners.

Learning is an iterative process, a cycle of action, reaction, reflection, adjusted action and so forth.  Self-awareness lubricates the cycle either increasing or reducing the time for individual learning. Hubris is a decided inhibitor. Entrepreneurs who own their businesses outright have the benefit of time to learn from the trials and tribulations of growing a business. But for those who secure professional investors or go public, their time becomes enmeshed with others money and a compression effect takes place. Their trials must now be almost error free. For our young Canadian entrepreneur, an award winning company and glowing magazine articles could not protect him from these realities. The good news, if it can be called that, is that he now has time to reflect on the meaning of hubris, humility, personal development and resilience.

About the Author

Robert Hebert is the founder and Managing Partner of StoneWood Group Inc., a leading executive search firm in Canada. Since 1981, he has helped firms across a wide range of sectors address their senior recruiting, assessment and leadership development requirements.

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