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.
So what do we do?
We just have to keep beating the drum. I've been out on the road for nine months, meeting with institutions that have been in the space before and that are gun-shy, trying to convince them that this is as big a contrarian opportunity as they'll see. Because unless you think technology is going away, the valuations are, in my view, at a 20-year low, and this is the time to be getting in, not when everybody else starts jumping in.
Even during the tech boom, so many of these players came to the table late. Why are we just so much more risk-averse as a people?
I don't know – and I don't have a theory on it. There are pockets of us that are not like that. Maybe it's smaller egos. If you get to a certain stage, something needs to drive you beyond the making of money. I'm being driven by the fact that there's a gaping hole in the Canadian ecosystem. We lie awake at night when RIM goes down, because RIM's all we've got, right? And the reason RIM's all we've got is because we've sold all the other promising companies, because there hasn't been enough capital to go the distance.
What are you doing differently at Round13?
One of the typical things that VCs say is that we're not just about the capital, we're helping to actually grow your business. And I think that's a very difficult thing to execute on. So as a lifelong operator – this is my first time on the other side of the table – I said, how can we make that claim and actually have a chance of making good on it? We got 12 tech entrepreneurs who have started, run and exited tech companies in Canada to say, "Yes, I will write a cheque to the fund and, since I get approached all the time because of what I've done, I will send the deal flow over to you guys, and I'd be willing to help you on diligence and to help coach and mentor these companies." Part of our motivation is, look, we've got entrepreneurs here who don't need to move to Silicon Valley. Why do the Yanks have to get the returns on our brains? Why can't we keep the returns in this country?
How do you convince entrepreneurs to stay here? Because some of these guys are going to be pretty attracted to Silicon Valley, because they know there's so much opportunity down there.
They've gotta be convinced that they've got the support here, not only in terms of money, but connections. There are some great things being done at the early stage – MaRS, Ryerson University's got the DMZ, Grow Labs out in Vancouver. There's a lot going on with Waterloo angels, where entrepreneurs are starting to give back. They're looking for the next big win. People starting out have got a lot of second-generation experience to say, "Here's my cheque, but here are some of the mistakes that I've made – try to avoid them."
Is there anything the government should be doing?
Yeah! I think they're doing okay. The BDC and the EDC are very supportive. And the government is putting a $400-million injection into the ecosystem. Now, that's not enough money, but it's better than nothing.
How do you get people to commit larger chunks of money to later-stage firms?
I think you have to convince groups that venture should be able to hold its own versus other asset classes. Venture, by its definition, is a high-risk category, relative to buying bonds, GICs or late-late-late-stage private equity. But if you look back over 25 years, venture has been one of the best-performing classes; it's just that the past 10 years have been brutal. But the good news about venture, especially today, is that you don't need a huge chunk of what some of these pension funds have under management. You just need a small chunk to get going.
Especially in tech, companies aren't looking for $90-million in funding any more.
The cost of technology has come way, way down. So what you can get in equity in a company for the initial cheque, versus what valuations were in the bubble, is so much more attractive. What you can get done with the money is so much more, because the cost of technology has come down. What hasn't changed is, when you get a winner, you have to fuel that fire quickly and aggressively, because the cost of marketing is still the cost of marketing, whether you're hiring sales people or spending money online or however you're getting the word out – those are still significant cheques, so you need to have a certain size in order to support the growth.
What about Dragons' Den? Is the popularity of shows like this going to have any impact?
The thing that surprised me the most about Dragons' Den was hearing the number of families that watch the show – so kids starting as young as 8, 9 and 10 are starting to learn about things that I didn't have a clue about when I was that age. I think it's doing its part to breed a whole generation of entrepreneurs.
In terms of the deals you get, they're making a TV program, right? So I'm not saying it's the smartest way to actually do investments. What it does for me is, it gives me a platform. All of a sudden, because of a reality TV show, people have an interest in what I have to say – whereas I used to have to beg people to listen to me. It gives me a chance to spread the word about what it's like to be an entrepreneur. So if we're able to move the needle a little bit to say look, there's a whole generation of people who are now looking at you guys – banks and institutions – for leadership, maybe you create a publicity opportunity that wouldn't otherwise be there. It doesn't happen overnight, but if we're building a nation of small-business people, and Dragons' Den is helping do that, then eventually people will pay attention to us.
What advice do you have for entrepreneurs looking for capital?
Don't give up. It's the hardest thing to do right now. Taking it down a level, if you can get your idea off the ground using friends and family, who know you best, that's a very good sign to people you're trying to get interested in the next round – because who knows you better than your friends and family? If they're not willing to get behind you, then it just puts another question mark there. The other piece of advice I'd have is to try to get the idea to the stage where you've proven something, versus, "Here's my idea on the back of a napkin." Because those are the ones that are really tough to get behind. So get it to a stage where you've got something proven, because then you are going to give up less and raise more.
And what about VCs themselves – what do you say to them?
We are a country of small-business people who are worth backing, and I think we can take on the U.S. And I think that we may have suffered from an inferiority complex that we don't need, so keep supporting them.
This interview has been edited and condensed.
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Note: This version has been corrected. A previous version had the incorrect name for Ryerson University's incubator.