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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To Hang In or to Let Go? When to KILL your Startup

Horse dead

“When the horse is dead – dismount” is succinct practical advice sometimes attributed to the famous cavalry general Lord Mountbatten. No matter what its origin, the essence of it is clear: stop agonizing and procrastinating when something ends; the only thing left to do is to get off the horse and move on with your life.

The fact is, not every startup works out; in reality most of them fail. It is a fact of life supported by a mountain of stats data. And yet, it is extremely hard for most people to disentangle themselves from what usually was a significant personal emotional investment. The biggest hurdle to overcome here is what’s known as sunk cost fallacy. It usually goes like this: “We have invested so much (money – if you are financial investor, or life – if you are a founder), we worked so hard, we achieved so much, etc, etc that we cannot possibly let go.”

“If we could only get more funding or bring in better talent, we would succeed!” NO, you would NOT if you missed the market opportunity (assuming there ever was one), the customers are not buying, your team is burnt out and your investors look ready to kill you. Under these circumstances no amount of whip cracking will help; just get off the dead horse and move on to pursue better prospects in your life.

I have been recently involved with a startup whose story perfectly illustrates my points. The founders developed a business plan addressing an emerging market problem which, although initially nascent, appeared to be destined to become a major issue (and therefore a market opportunity) in about a year or so. Theirs was a chance to pioneer a new industry and get all the glory of it.

They managed to raise some modest angel funding that allowed them to toil for about a year initially, investing their sweat equity and some cash of their own to develop a product prototype. At this point they attracted a $2M seed investment from a Toronto-based VC fund.

The experienced founders executed well, built a strong development team and launched the first product before the year was over. Good product reviews arrived and a couple of early-adopter customer purchases materialized. The CEO was walking tall, receiving inquiries from top tier VCs such as Kleiner Perkins, Sequoia, NEA, etc. A substantial funding round appeared to be a sure thing. However, during the second year of operation sales were slow as the market was taking its time to develop. Consequently, venture capitalists were in no hurry to jump in and adopted a wait-and-see attitude.

With the high burn and dwindling funding prospects, the seed investors started to worry. I remember going to Board meetings and hearing remarks like: “We may have to do a reset”, “The only thing a VC can do is replace the CEO”, and such. Sure enough, the founder-CEO was asked to find her replacement and the expensive $60K headhunter-led search started.

When a company is still in the startup mode, searching for a winning business model, as opposed to being in the execution mode, replacing the CEO is rarely a good idea – unless, of course, the existing CEO is clearly incompetent. There is a major difference between a non-linear skillset of a founding CEO with his vision, passion, and commitment, and a hired-CEO with his usually linear execution skills. Such a change is a major and costly disruption in the life of a young startup. If nothing else, it takes about a full one-year business cycle for the new CEO to fully understand the realities of his business. In addition, with the departure of its CEO the company loses an enormous amount of the painfully accumulated company specific business experience.

With the new face put on the company, the VCs provided additional cash support by twisting some arms in financial circles to close a new investment round of $3.5M. With these resources in hand, the team embarked on the second-life journey. However, in spite of the new face, talents, cash and the energy, the market readiness has not changed. Fast-forward through a few heroic-effort but modest sales, high burn, etc and 3 years later the company is again running out of money.

At this point, everyone is exhausted and out of ideas for what to do next. The horse is dead but it is so hard to admit it! The sunk cost fallacy is raising its ugly head: we invested so much, right? It is so hard to admit a mistake and let go. Thus, the company is put in a dormant state: most employees laid off, the hired CEO stays part-time while pursuing other income opportunities, the original investors write it off mentally but still keep it on the books, the most recently sucked-in investor has no clue what to do so lets the ship drift, barely keeping the lights on for appearances just in case…

But wait, that’s still not the end of this story. After a year of this malaise, the original founder-CEO gets approached to see if he could step back in and see what could be done with the company. Another restructuring follows with $0.5M new funding to see what could be done. More heroic sales efforts come with some modest results but the market still isn’t there. Finally, all the key members of the crew quit to pursue better prospects in their lives but the controlling investor hires yet another expensive sweet talking miracle-maker who promises resurrection and the recovery of that sunken cost…

Technology startups are not mature proven-viability companies that could be “management engineered” and played with. They are essentially experiments in market or technology. Their founding premises and hypotheses need to be quickly tested and verified before large amounts of money are deployed. If the business model fails repeatedly, abandon ship no matter what the sunken cost is.

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.

How to Survive a Startup – Tips for New Team Members

It is hard to find more emotionally charged environments than at a newly forming startup. The excitement, passion, exuberance, uncertainty and fear create quite a potent mix. All of this makes the interpersonal team dynamics even more delicate than normal. Having been on both sides of this equation – as a founder and as a hired CEO – I can attest to difficulties in dealing with these challenges, especially since ego-related issues tend to be seen through one-way mirror. To help you deal with these, here is a post providing practical tips on what to expect and what to do to survive the experience.

NOTE from Paul: The guest post below is written by Jill S. Ram and originally appeared on her site. It is re-blogged here by permission.

If you’re an executive and you’re thinking of joining a startup, know what stage of a startup to join. If the company is in its first year or so, don’t expect to make significant changes. If you join after the company is somewhat established and mistakes have been made and learned from, you’ll likely be more successful from the outset. If the founder has stepped aside, well, by then, the company is likely not considered a startup anymore. It won’t be functioning like a big company yet, and it won’t have all the structure in place that it needs, but it will be run with more practicality and with less emotion. Timing is everything so choose it well.

Let’s focus on early-stage startups.

If you join in the early stage, remember this: Be wary of being the first in the role or in taking over the founder’s area of expertise. Some founders have a technology background, some marketing, some sales, some finance. Whatever his “baby” is, you will be under much more scrutiny if you are hired as his “replacement”. If you’re the first executive in the given role, make sure you understand what the founder thinks he expects of you, and forget about what you know you can and should accomplish – for now.

Reminder two: The founder is always right (especially true if you have been hired to take over the area of the business that he normally runs). Don’t argue endlessly. I’m not saying your ideas are wrong; I’m just saying that many of them won’t be adopted until the founder sees what you see. You may think you have been hired for your experience, your crystal ball, if you will, but it doesn’t matter what you see in that ball. You may know, emphatically, that some of the decisions being made are the wrong ones, but my advice to you is to go with it. The only way to survive is to get on the bus. Standing in front of it trying to get it to go left or right will only get you run over. It will be hard to watch the bus veer off course. Really hard. But you have to let it go there and end up in the wrong place. I know, you think you were hired to prevent that from happening. You were; just not the first time.

Hopefully, the bus will only be one stop short of where you thought it should be headed. Maybe it will end up in a completely wrong neighbourhood. But it has to go there for the founder to realize it was the wrong direction. He needs his own “aha” moment. That’s when it will click for him. And that’s where you come in. That’s when he’ll start trusting your crystal ball and you’ll be allowed to put one finger on the steering wheel.

There are endless analogies to better understand this concept. Here’s a simple one. Your friend’s wedding is about to take place and you know he’s choosing the wrong person. But he doesn’t see it yet. There’s nothing you can do to get him to see it, especially if he doesn’t want to. And why would he? It’s been working for him. Do you abandon the friendship? Of course not. You support his decisions and stand by him as he embarks on his journey. And when he has his “aha” moment and realizes what you’ve known all along, that’s your cue to step in. Not to say “I told you so”, but to help get him back on track.

Same thing with a true startup. Be there for them. Don’t sit there helplessly and wait for the accident to happen. Support the decisions that they think are right. Remember, it’s those exact decisions that got them this far. Your challenge is getting them to see that it’s not the thing that’s going to get them to tomorrow. But that doesn’t mean coming in with an axe and chopping out the rotting wood. Remember that it’s not completely rotten yet and it’s still acting as the foundation.

The question is whether or not you are able to support the founder’s decisions without compromising yourself in the process. If following his path leads you to doubt yourself or be continually discouraged, maybe it’s too early in the game for you. After all, you need to feel like you have some worth; that something you are doing is making a difference. Only you can decide how much patience you have.

With a true startup, you will find yourself going through these stages:

  1. Exuberance and passion – at the excitement of being a part of something so dynamic and exciting
  2. Frustration – at the things that aren’t done efficiently or correctly
  3. Excitement – at the idea of how much opportunity there is to help change these things
  4. Discouragement – at how those opportunities are being overlooked and how your skill set is being completely underutilized. What are you doing there?

This is when you have a decision to make. Here’s how to make it:

Ask yourself these questions: Have you seen any change since you started? Has anything new been adopted or is the founder stuck on doing everything the same old way? Is the company hiring the right people? People who are going to bring something new to the table. Were they hired to challenge the status quo or embrace it? Of all the decisions that are being made, do you agree with at least some of them? Are your values fundamentally the same as or directly opposed to the founder’s? Do you respect the founder? If you answered yes to most of these (where there were options provided, the “yes” would be to the first part of the question), you may want to stick it out, as you might be asked to use your crystal ball in the near future.

Remember that founders are concerned with one thing at the outset: the top line. So are their investors. Chances are, you will be asked to do things that, although they increase the top line, they may impact the bottom line (and the culture) negatively. This will be evident to you; not so evident to the founder who’s fixated on revenue. The investors will see your crystal ball as valuable, but only once they get their claws in the business – once they really start focusing on profitability. That will come soon enough.

The best advice is the following:

  1. Forget everything you learned working for a bigger company – for now. It won’t come in handy for quite some time.
  2. Study your environment. Don’t come in thinking you know it all. What worked at your last company might not work in your new one. Anyone can make observations and identify what’s missing. But you weren’t hired as a consultant. You were hired to help take the company to the next level, by implementing the right things at the right time. Heeding that latter part will be the difference between success and failure.
  3. Don’t knock what the company was built on. You will alienate yourself and be the cause of your own failure.
  4. Do what is asked of you, even if you don’t support it 100%. It may be a flawed course of action, but it’s likely not going to destroy the company. It hasn’t thus far.
  5. Get things done. Don’t take too much time doing it the “right” way. If you can get it done the right way without it taking longer than it would take to do it the flawed way, fine. But if doing it the right way means inertia, you will quickly cripple the company. If you accomplish nothing, you are useless to the company. The trick is to find a way to remove the rotten wood and simultaneously replace it with cement, all the while achieving the founder’s goals and the ones you were ultimately hired to achieve, even if unbeknownst to the founder. Balance is key.
  6. Pick your battles. Fight a good fight but know when to waive the white flag. The sooner you are able to gauge if something will be well-received or not, the better off you will be.
  7. Be agile. Be able to change directions on a dime.
  8. Listen. Really listen.
  9. Have patience.
  10. And last but not least, do your daily affirmations. You’ll need to remind yourself that you’re good. No one else will.
About the Author
Jill Ram is a Montreal-based Senior Tech Sector executive who specializes in cultural development and change management.
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