This piece is one of a series of high-profile Canadians commenting on the Canadian Chamber of Commerce's Top 10 reasons Canadian competitiveness is dropping.
Bruce Croxon is a lifelong entrepreneur and co-founder of online dating site Lavalife, which he and his partners sold in 2004 for more than $150-million. He’s now the managing partner of Round13 Capital (named for the fiercest round between Muhammad Ali and Joe Frazier in the famous Thrilla in Manila boxing match), which finances later-stage technology companies. He also dukes it out weekly on Dragons’ Den, CBC’s reality show about aspiring entrepreneurs who pitch their ideas to venture capitalists. We asked Mr. Croxon why Canada’s venture capital community is so timid – and how to fix it.
What were your experiences with the VC community in the early days of Lavalife?
I was fortunate, because in the late ’80s, I got into a business with incredibly high margins, and technology was still a pretty good barrier to entry, so we had a protected market and were making a lot of money. So the banks and the venture community as it existed – it was sort of in its infancy – were pretty receptive. It was more us saying we didn’t need the money than having to scrounge around. I think it was a pretty healthy environment for supporting early-stage technology companies, all the way up to about 2000, when the bubble hit. It was unfortunate in Canada that a lot of institutions and people came into that cycle very late – like, 1998 and ’99 – and their returns as a result were not good. We’re still in the hangover. And it’s just starting to come off the bottom now. So the valuations of companies are extremely attractive, but there just aren’t the funds to fuel them.
What impact is that having?
There are a lot of good companies that are having trouble getting funded beyond the seed stage. Two years ago, we didn’t even have the seed and incubation in place, but a lot of incubators have popped up in the past couple of years, and the angels are starting to get organized. But those are for very small cheques. Where there isn’t any capital is when companies are starting to get traction. In the last decade, we had a lot of companies that, because there has been a dearth of capital and the funds have been too small, we ended up selling too soon – usually to U.S. acquirers – or the VC companies have gotten crushed in the next round of negotiations, if deeper-pocketed players were at the table.
How are they getting crushed?
The winners are going to require more money, because if they’re good companies, you want them to grow as quickly as possible. So there’s inevitably another round of capital required, and the funds that have existed in Canada have been too small, in some cases, to come up with that second round. And it’s just a fact of life that if somebody is ready to play and you can’t match it, you’re going to have terms imposed on you that are less than desirable. And because the capital hasn’t been there, everyone has sorta looked around the table and said, “Well, I guess we might as well sell it.” And in many cases, those companies have gone on to do extremely well. The returns might have been adequate for Canadian VCs, but they could have been so much more if there had been more capital ready to deploy.
What does that mean for Canada from an innovation standpoint, when all these entrepreneurs are being sucked south?
I think it’s discouraging. I’m one of these guys who firmly believes that we can hold our own with any entrepreneurs in the world. The ones who survived 2000 are battle-tested. They’ve had a couple of exits, and they’re going at it again. But unless you have $3-million in EBITDA [earnings before interest, taxes, depreciation and amortization] over the past five years, you can’t get a sniff of senior lending at the Big Five banks. We looked like geniuses in the recession because we don’t put money out. We’re the envy of the world because we sat on our hands. To me, it’s deplorable that the banks make as much profit as they do and are somehow not recognizing that it was on the back of small business that allowed them to get there in the first place.