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Micro venture fund eyes small, high-tech firms

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After spending the early part of my career in the mid- to high-end of the Canadian private-equity market, it became apparent to me that the venture capital market was underserved, attracting limited interest among institutional investors.

In January, we launched Klass Capital, one of Canada's first micro venture capital funds focused on software companies. Our goal is to invest $1-million to $3-million per deal, deploying $20-million to $30-million of capital over a three-year period.

We could never compete with deep-pocketed investors willing to take big bets on pre-revenue business models, like Accel Partners, a Facebook investor, or Kleiner Perkins, that invests in Twitter. Instead, we have decided to look for niche businesses with significant industry expertise that might one day be attractive buyout candidates to the IBMs, Microsofts and SAPs of the world.

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What intrigues us about the technology-based business model is that it exhibits characteristics that private equity and strategic investors value. Software, hosted in the cloud, has become affordable to small and medium-sized businesses. Companies can build technology, find customers through the Web and social media campaigns, and sell monthly subscription fees to thousands of end users. This combination of factors results in businesses with sustainable and predictable revenue models.

It doesn't take tens of millions of dollars to build these businesses and speculate on technology. We can invest $1-million to $2-million in software companies servicing small to medium-sized businesses and quickly see results.

While we're a little behind the U.S. market, which has already launched more than 50 micro venture funds, the Canadian marketplace is ripe for opportunity. We have exceptional entrepreneurs with 'deep technology' – technology that is not easy to replicate and designed with an experienced development team with a significant industry understanding – who focus more on developing advanced products and less on sales when starting their businesses.

Unfortunately, this sector has been significantly underfunded for many years. Our universities, including Queens, Waterloo and the University of Toronto, have done an excellent job of incubating deep technology businesses with a talented pool of entrepreneurs, but there has been a shortage of venture capital available to help them.

It was not easy raising capital for our fund, especially in the beginning. We understood the challenges in going after institutional investors and decided instead to approach high-net-worth families, often headed by entrepreneurs themselves, in order to support our fund's strategy.

We identified our first investment opportunity, Nulogy Corp, early on, in February, leading a $3-million financing – $2-million of it from our company. It was founded by five Waterloo graduates now in their early 30s. It is a software as a service (SaaS) business model providing compliance, traceability and real-time metrics for the consumer packaged goods industry. It now deploys its software around the world with little to no competition.

This is not a typical venture play and Nulogy certainly isn't the next Twitter or Facebook. But it's a specialized company growing rapidly with a mission-critical product that is used in the supply chain for some of the largest consumer brands around the world.

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We expect to invest another $6-million to $7-million in two to three new companies by the end of this year.

There is no question that we are in the midst of a social media bubble, where all the darlings are found. However, we are doing our best to stay laser-focused on the less sexy but high-growth business model that will build value over time.

Daniel Klass is the founder of Klass Capital, a Toronto-based venture fund. You can follow him on Twitter at @klassCapital

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