e-trends

If you build it, they will fund it. Maybe Stories from the funding trenches

Ideas by themselves are worthless without the ability to execute. And that ability is what attracts money.

Even then, the real secret to business success is not the cash itself, it’s finding the right people to invest in your idea, said Ben Bittrolff, chief financial officer at Cyborg Trading Systems, which makes automated trading software for the financial services sector. Built and designed by Bittrolff and two other derivatives traders, the company started with a $100,000 angel investment five years ago. It generated revenue within the first year.

They snagged $2 million in VC funding from New York investors last spring with an assist from the Canadian Digital Media Network, a national collaborative and support entity for entrepreneurs, which hooked them up with a beachhead space in Manhattan.

“Going to New York was huge for us,” he said, “because it’s a world financial services hub. We would have had to go eventually, but we were able to go early. It allowed us to scale up and scale down without getting tied up in leases. We had no idea how much space we’d need or for how long.”

Bittrolff said the real gold is in the mentoring and networking investors bring to the table, so it’s better to get the relationship off to a good start. “The money is out there, but you’re going to be married to these guys, literally, so you want to get to know them,” he said. “So it’s not just any VC, it’s the right VC, and there are a lot of different ones out there, ones that want to fold you into another portfolio a year down the road and don’t tell you that.”

The investor search is like dating. “We’d sit down and say, ‘Why don’t you tell us about you and, if we like you, we’ll tell you about us.’ You spend a lot of time dating but you don’t, and you shouldn’t, take the first dollar offered to you.”

The money is out there

Indeed, there is enough money out there. “Companies are still getting funding,” said Steve Currie, vice-president Venture Services at Communitech, responsible for the new $30 million Hyperdrive, a program that introduces companies to a network of investors with a goal of going from seed money to Series A financing in 24 months.

“The VC community may be smaller than it was but the good companies get funding.”

Getting that funding is the trick. There are many ways to turn off investors, from having no revenue, no feedback from potential customers, over-estimating the market, being too complex or simply being oblivious to the competition.

Getting the right investor on-board is about the basics. First, they want to see something that has commercial viability and can be easily conceptualized.

“We would only explain parts of it, so it didn’t get too complex,” Bittrolff said.

Next, investors like teams, because that suggests bench strength, but they also want a team leader to take the beating if deliverables aren’t met.

“The question is also how long have you known each other and can you work together,” said Michael Litt, CEO of Vidyard, a secure Web video platform aimed at companies that want control of their content and audience beyond what sites like YouTube can deliver. A serial entrepreneur still in his twenties, he has two partners and warns the stress of a start-up can fracture even the strongest relationships. “We’ve already been through a founder breakup.”

Having revenues also kindles interest, Litt said. Vidyard started as Redwoods Media, making video content for clients before shifting to building a platform and shifting clients to the new model.

Litt and his team won a coveted spot at the Y Combinator, Silicon Valley’s top incubator, and from there caught the attention of YouTube co-founder Jawed Karim, who ponied up $1.7 million.

Litt is no stranger to the world of entrepreneurs. His former Waterloo housemates Rahul Bhagat and Eric Migicovsky first thought up a smartwatch that connects by Bluetooth to an iPhone or Android device. They, too, struggled to find money and Migicovsky’s efforts in Silicon Valley came up empty.

“It was being built in China and there wasn’t a lot of quality control and that’s what investors saw,” said Litt. Migicovsky turned to Kickstarter, a crowdsourcing site. They sought $100,000 to make 1,000 watches and got $10.3 million from 69,000 investors. They sold 85,000 watches and Pebble was born.

“There are always new ways to get money and that’s one of them,” said Kevin Tuer, managing director of the Canadian Digital Media Network. “I think a lot of gadget makers will look at the crowdsourcing option.”

That Y Combinator connection pops up again for another Waterloo start-up, Tenthbit, whose Pair app for iPhone and

Android allows couples to privately share pictures and text instantly. It was founded by a quintet of grads who met at the University of Waterloo’s Velocity accelerator and created Maide CADRemote, an iPhone app that lets users control 3-D modelling software during presentations.

Building on that success, they created Pair and won a spot at the Mecca of incubators, Y Combinator, where showing off their app on a demo day resulted in 50,000 user downloads.

Since they were making an app aimed at consumers, their numbers weren’t strong but their story carried the day, said cofounder and CEO Oleg Kostour. “I spent hours and hours that week telling the story to myself, practicing over and over,” he said. Partner Jamie Murai agreed: “It’s not like we were selling an enterprise app where we could tell them how much money they could save. We had to make an emotional connection.”

The demo triggered a stampede of interest from investors. “We went from office to office to office for a week in San Francisco,” Kostour said. “We wanted to strike while the iron was hot.” They raised $4.2 million from more than 15 investors who are hands off, he said. “If we have an issue or problem we ask them or they’re really good at sending ideas or links to us,” he said. “It helps that some of them are using the app too.”

Their experience has taught them many things, but the most important thing, said Murai, is to focus on the product and the user experience.

“Some people think start-ups are all about business and taking meetings,” he said. “It’s not. Ignore the BS, the meetings and conferences and focus on the product and customers.”

Celebrate failure

Accepting failure is part of that focus on product and customers. Thomas Edison famously said: “I haven’t failed, I’ve just found 10,000 ways that won’t work.” Sadly, that failure-is-good spirit is rarer in Canada. “We don’t celebrate failure as they do in the United States,” Currie said. “We don’t tuck our tails between our legs, but it’s not the same.”

Still, there are investors out there who get it, and while Cyborg went to the United States for funding, that doesn’t mean there isn’t money here, it’s just not always available in the right places, said John Ruffalo, president and CEO of OMERS Ventures, the $55-billion VC fund carved out of the pension giant. OMERS and U.S.-based New Enterprise Associates recently invested $80 million in Desire2Learn, an e-learning platform.

Money feeds the supply chain, he said, and if there’s no money for start-ups or if angels fade out or if VCs keep their hands on their wallets, good companies at critical stages of their development stall. “We’re looking to invest in the $10-million and up range,” Ruffalo said. OMERS has signed 10 deals worth $100 million since opening in October 2011. “We’re looking for companies that are ready to explode out of the pack and need capital to get them out of the stratosphere.” For a while, he said, VC and angel money dried up after the recession, but it’s trickling back, especially over the last 12 months.

Bryan Watson, executive director of the National Angel Capital Organization, agreed. The angel community has stepped up and last year invested $82.4 million in 134 deals with its members, with average funding of $614,000, up $172,000 from $442,000 in 2010.

“We have one funding of $3.4 million,” he said, noting the average angel play is rising. “This is very much a back-to-theroots trend, because before VCs this is how companies were funded, through individual private investors.

Ruffalo said the federal government, too, has set aside $400 million for entrepreneurs, but ultimately he calls that a temporary fix to smooth over residual air pockets left in the money pipeline. “Ultimately, this is a private sector problem, not a government problem,” he said. “Government should do what it does best: get universities to fund programs for entrepreneurs. That’s what we need; entrepreneurs to stimulate the private sector or visas for start-up companies to bring in talent they don’t have.” B

Money, money, money

The Canadian Venture Capital and Private Equity Association said VCs invested $438 million in 135 companies in Q2 this year, up 17 per cent from 2011, with slightly more companies (six per cent) getting money. For the first half of the year, however, investments were down three per cent at $725 million, mostly because Q1 was soft and dragged the numbers down.

Money never comes easy, even if you’ve been around 20 years

Does success guarantee funding? Not always. Ask Gary Hedges, president and CEO of RTI Cryogenics, a Cambridge-based maker of a turnkey cryogenic technology that turns waste tires into fine rubber crumb.

Last year, it made second place on the Deloitte Fast 50 list with revenues of $23 million, up 46,278 per cent from five years ago. The self-contained systems cost about $13 million a pop and RTI is trapped in a classic loop after 20 years in development and business. It can’t get funding because it doesn’t have enough orders and it can’t get orders because it hasn’t got the funding to chase them.

“This recession is hurting a lot of people,” he said. Adding to his frustration is a bad experience with tire kickers who signed a deal for two plants but then reneged because their funding flopped.

Innovation the Ceridian way

The president of Ceridian Canada shares the secrets of its success through innovation

Evolve or die, because resting on laurels will cripple a business in the face of today’s relentless local and global competition. This underlies the need to be constantly innovating, says Dave MacKay, president of Ceridian Canada.

In fact, the heightened degree of competition—in some cases from start-ups using the Web or cloud services to ramp up and get into distribution cycles quickly—is what helps keep MacKay excited and focused on innovation.

“I’m having the most fun I’ve had in business in a long time, because of the level of competition,” he says. “It’s responsible for the acceleration of cycles. It’s ‘game on,’ and you

have to be listening to customers and out there watching for new entrants to the market.”

Never stop innovating

From the smallest start-up to the largest enterprise, businesses must foster a culture of innovation like that found at the human capital solutions leader.

“We really focus on making innovation part of our lifestyle,” he says. “It needs to be in the DNA of the company.” To do that he says Ceridian embraces a certain amount of risk. After all, failures lead to breakthroughs, lessons learned and rewards.

“You’ve got to listen to and engage your customers all the ” time. They bring up great ideas for innovation.

—Dave MacKay

Campaign and this year’s start-up hopefuls, already have a healthy culture of innovation, MacKay urges them to keep it by maintaining funds for more blue-sky projects, and retaining their “innovative essence” for the life-cycle of the company.

Mind the mobility push

Mobility isn’t just the future, it’s here and now and changing the way everyone does business, MacKay notes. As such, it’s important for businesses to factor mobility into their product development efforts.

Here again, Ceridian’s efforts have been all about its customers: their changing dynamics and the Bring Your Own Device (BYOD) issues they face. The company saw the opportunity to free customers’ employees from the constraints of their desktops.

“Mobility really helps with employee engagement. Young people in retail, for example, want to get on their mobile and have access to schedules or trade shifts, whenever and wherever they are,” MacKay says. “So that was a big push for us.”

Many of Ceridian’s customers are also embracing mobility through its payroll for smartphone app, which lets customers complete payroll, but also hire, edit and terminate employees and generate records of employment, all from the convenience of a smartphone app.

MacKay similarly stresses the importance of ensuring solutions are developed with the cloud in mind. As well as providing the flexibility customers are demanding, offering Software-as-a-Service (SaaS) allows frequent updates and incremental feature improvements without the need for customers to install upgrades.

“We try to celebrate good failures.”

While Canadian entrepreneurs, like the winners of last year’s Alpha Exchange Innovation

Dave MacKay

president of Ceridian Canada

Don’t do it alone

MacKay also stresses the importance for businesses to tap into and engage with their customers habitually, as Ceridian does, in order to drive and direct development. Ceridian uses multiple touch points to keep connected with customers and understand their needs, from inperson meetings to cloud-based networking.

“You’ve got to listen to and engage your customers all the time. They bring up great ideas for innovation,” he says.

Through its own innovation effort Ceridian has itself evolved to provide a full spectrum of products from simple payroll through to managed human capital solutions, available on cloud, mobile and desktop platforms.

The partnership with its customers has been a cornerstone of Ceridian’s success. As its customers grow, Ceridian grows with them, and better understands their needs. MacKay says Ceridian’s customers see the company as a virtual extension of their businesses; one that scales with them, minimizes stress and provides them with greater degrees of confidence.

“It’s amazing how invested in your success your customers are, because it translates into products and services that lead to their success.”

Start-ups boosted

Winning recognition in the Backbone Innovation Campaign helped these entrepreneurs win new business

There have been occasional losses, but 2012 was a year of mostly wins for the winner and runner-up of the Backbone Innovation Campaign. After impressing judges at the live pitch-off during the Discovery 2012 show in Toronto last May, winner EidoSearch and runner-up TitanFile started seeing immediate benefits.

“We were able to leverage the attention from the campaign to get more clients. It helped establish us,” said Milan Vrekic, CEO and co-founder of Halifax-based TitanFile. The company also used its winnings to assist in patent filing. David Kedmey, president and co-founder of EidoSearch, said the pitch-off gave the company further opportunity to practice and perfect its message.

Both companies are looking forward to more challenges and even bigger successes in 2013.

EidoSearch

EidoSearch helps professionals in the financial industry conduct queries against complex data without the need for time-consuming programming. Its solution, primarily delivered on a Software as a Service platform, helps business professionals ask one-off questions (“When is the last time the market was like this and what happened?”) as well as supporting “quants”—quantitative analysts who perform deep analysis.

2012 milestones

“We doubled our customer base,” Kedmey said of 2012. “That was a big milestone for us.” In addition to that growth, EidoSearch expanded its breadth, targeting customers in new areas of financial services. It’s like a checkerboard, Kedmey said, with marquee customers in new areas leading to additional prospects in those same spaces. They also help the company guide product development. “There’s nothing better than a paid customer to shape your development plan.”

The company also more than doubled its team. The majority of hires were out of Ryerson University of Toronto, where the company’s lab is housed and where CEO and co-founder XiaoPing (Steven) zhang is a professor.

EidoSearch also achieved numerous product milestones over the year. For example, it expanded its packaged data sets, enhancing the power and speed with which searches are made; it also improved the user interface to make it easier to ask a greater variety of questions.

Lessons learned

The single greatest lesson learned in the past year was to better define its customer base and its messaging, Kedmey said. By understanding the customers and knowing the potential audiences, communication can be more targeted and effective. “We kept getting this consistent message from very experienced entrepreneurs in the financial industry,” he said.

“To that end, you might have 10 great things to say but, if you know your audience, maybe only one of them is relevant. You could be working against yourself talking about the others.”

EidoSearch more than doubled its team this year. Co-founder Xiao-Ping Zhang is in front, with cofounder David Kedmey behind his left shoulder.

The TitanFile team: partner Milan Vrekic, second from left, and partner Tony Abou-Assaleh, far right

Kedmey said another important lesson was around the evolution of management practices as the company grows. “Managing a team of seven is going to be different than three, or than a team of 20.”

Looking ahead

“Take what we did in 2012 and add a multiplier to it,” Kedmey said.

The company wants to at least quadruple its customer base this year. “We’ve reached a point where if a customer isn’t signed, it’s in our pipeline, and now the focus is on closing them. It’s a virtuous cycle, because already our new customers lead to some great leads. Other people in the business are hearing about the powerful things you can do [with the software].”

Kedmey hopes to double the team again by the end of 2013, ramping up sales and marketing, and to move its offices into the Ryerson Digital Media zone in downtown Toronto. In addition, he intends to build a stronger foothold in on-premise enterprise software, allowing firms to use their own data for even more powerful analytics.

TitanFile

TitanFile helps SMBs transfer confidential and large documents using military-grade encryption. The company’s solution organizes security around people and context, not files and systems, according to Vrekic.

2012 milestones

The company had a successful year of recruitment, funding and product development. Vrekic said building on the legitimacy and exposure gained from its involvement in the Innovation Campaign, he put together a banner team.

“It helped us attract really great people to the team,” he said. Adding talent allowed him and co-founder Tony Abou-Assaleh to focus on business strategy.

In October, the company received $1.1 million in financing from members of the First Angel Network, which it is using to enhance its product and expand into U.S. markets. Last year, TitanFile released a new version of its product that allows customers to add messages to transferred files and create channels for sending messages, along with numerous other improvements, all making it more focused on relationships rather than merely cloud-based storage. Lessons learned

“The number one lesson for us is to never put anyone or anything between me and the customer,” Vrekic said, adding that he maintains an open-door policy and all customers have a direct line to him. In addition, when appropriate, he directly connects customers to development.

Related to that, he said it was important to learn to listen. “We tend to talk to people who validate what we think,” he said. “It’s important to learn to hear what the customer is telling you and not what you are trying to tell them. It seems so simple, but it’s really not.”

For example, when the company released the new version of its product, Vrekic learned a big lesson around resistance to change. Despite various improvements, including unlimited storage, customers were slow to make the upgrade. The company had to spend more time with those customers, and set up webinars, calls and even in-person meetings to facilitate the change to the new system.

“We knew we had to make a commitment to help with the change, but we underestimated how much.”

Looking ahead

“This will definitely be a make or break year for us,” Vrekic said. “And it’s about breaking into the U.S. market.” To that end, the company has identified three tradeshows it will be attending to reach its audience of legal firms and professionals.

Vrekic would like to see his team continue to grow and, most importantly, he wants to compensate them better. “The biggest reward for me is knowing that someone can pay their mortgage because of the work they do with us.” He’d also like to open a Vancouver office in order to recruit top talent there.

By the end of 2013, he hopes TitanFile will be the big name in file sharing in the legal industry. “We’re on our way there in Canada,” he said. “The U.S. is going to be tricky, and it’ll come down to finding the right partner. We understand that we cannot do everything on our own.” B