Pennies from Heaven - VC markets in Alberta, Canada

from Alberta Venture - http://albertaventure.com/pennies-from-heaven/?Itemid=139

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Long starved for funding, Alberta’s technology sector welcomed two new, $100-mil
lion venture capital funds this year. It’s no Silicon Valley, but it’s a start
by Scott Valentine
John Murphy stares at the whiteboard and tries to make sense of it all. In baseb
all terms, Murphy’s baby, Aqua Screen Corporation, is in a tight game with limit
ed reserves on the bench. With focus and luck, Aqua Screen could be sitting on a
jackpot of cash and intellectual property in 18 months. Make one wrong move, an
d Murphy and everyone who trusted his vision will exit the game as losers. Aqua
Screen’s elevator pitch goes something like this:
Walkerton, Katrina, tsunamis . . . as a resource, water is becoming more valuabl
e. At the same time, it’s getting harder to guarantee its safety against toxicit
y and water-borne infections. Aqua Screen offers a hand-held device that complet
es chemical and bacterial water tests in 20 minutes. The next-best solution take
s about four days, making Aqua Screen’s solution about 99.9% quicker than the co
mpetition.
“That’s often met with, ‘So what?’” says Murphy, showing off his black-box proto
type, a simple albeit impressive-looking gizmo with a slot for inserting a small
test-tube and a little LCD display. Because he’s been in the game as both an an
gel investor and an entrepreneur, Murphy has a unique feel for the venture-capit
al process.
Standing at the whiteboard inside Aqua Screen’s small office in Edmonton’s Enter
prise Square (the new downtown campus of the University of Alberta), he draws th
ree columns and labels them left to right with a different stage of a tech compa
ny’s maturity: Novel Solution, Manufacture/Go to Market and Growth. Under each h
eading, he lists key elements for drawing VC interest at that stage.
Under Novel Solution, he lists a) What’s unique? b) Patent quality? and c) “Legs
,” the much-coveted story value of an emerging technology firm. When the market
views an emerging tech as a Novel Solution, the company can’t draw much investme
nt other than grants, scientific research and development (SR&D) tax credits and
friends-and-family money.
Under Manufacture/Go to Market, Murphy writes “$600,000 to $1 million,” Aqua Scr
een’s magic number to get its little black box to market. At this point, as the
venture straddles innovation and implementation, venture capitalists will start
to become interested. However, most so-called angels want 51% of your company to
even come to the table. This is where a lot of tech startups fail, teetering on
the edge of scientific possibility and economic interest. “One way or another,”
grins Murphy. “In 18 months, something is going to go boom.”
*
Investing in emerging technology is a gamble; don’t let anyone tell you differen
tly. For several years, Alberta’s venture capital (VC) market has been near-dorm
ant, attracting few serious players and producing even fewer big wins. The VC kn
ock on Alberta has been that we are too conservative, too oil-centric and not se
rious enough about growing technology companies. During the 1980s, the provincia
l government attempted to fill the gap, but after some notoriously bad bets, it
withdrew almost entirely from the venture capital space. Today, with government
coffers flush, the pendulum appears to be swinging back again.
“Traditionally, Alberta has been the farm leagues of technology investment,” say
s Shawn Abbott, a partner with iNovia Capital. The Montreal-based firm’s recent
move into Western Canada, setting up a small office in Enterprise Square, has be
en one of a series of sparkplug VC events in the province recently. With $107 mi
llion to spend, iNovia’s presence is a breath of fresh air, providing hope to ot
herwise unheralded players in the information technology, life sciences and clea
ntech spaces.
Private VCs such as iNovia manage the risk out of picking tech winners by focusi
ng on specific sectors, taking a controlling interest and never engaging a compa
ny without good legs. A good VC might pick a winner once or twice a year. It’s a
full-time job that requires tremendous energy and great expertise. Go into the
game against these guys half-heartedly, and they’ll eat you alive.
The second big development this year was the creation of the Alberta Enterprise
Corporation (AEC).
*
On June 11, 2008, Doug Horner, minister of advanced education and technology, st
ood stoically on a stage dressed in provincial trappings and waited patiently. S
ince the Alberta Enterprise Corporation (AEC) kickoff press conference ended 15
minutes earlier, the 20 or so assembled media had been too busy harassing Ed Ste
lmach over the scandal du jour to ask him any questions. It’s a shame; there was
a lot of good stuff in the press kit.
The AEC had just committed to $178 million in cash and instruments to reinvigora
te Alberta’s lackadaisical technology market. The package includes $100 million
for VC investment, $72 million in cash and services to shore up incubation and t
raining and $6 million for youth initiatives. The AEC’s plan is to use private i
nvestment as an intermediary to hedge the province’s bets in the venture capital
game. The $100 million set aside for investment will be distributed fund to fun
d, passing off the risk for picking winners into more experienced hands. In othe
r words, AEC will top off investment into select Alberta-based techs at the rate
of 1:4, turning a $4-million VC investment into $5 million total. By supporting
that investment in young techs with complementary spending in infrastructure, b
usiness incubation tools and SR&D credits, the AEC hopes to foster company forma
tion and innovation development at multiple touch-points.
“We’re getting a lot of feedback from places like Silicon Valley that they recog
nize we’re trying to do something different here in Alberta,” says Horner. “They
understand that we’ve put some skin into the game and they get what that means.
”
The home front has been less supportive. Danielle Smith, director of provincial
affairs for Alberta at the Canadian Federation of Independent Business (CFIB), s
tated that Stelmach and Horner had “launched Alberta into the next generation of
corporate pork-barrelling,” in a Calgary Herald editorial. Horner replied from
the opposite page with a list of messaging points, then closed with, “We were th
inking about the future.”
The questions Smith and others raise about the AEC’s business plan are valid. Th
ere is rampant VC competition from other markets, the Alberta government’s previ
ous track record as a tech picker is suspect, and it is worrisome that the AEC d
oesn’t seem to have plans for smaller players. Horner admits there are risks but
steadfastly believes the AEC is on the right path for the future. “The province
of Alberta is not going to retire,” he says.
“If I’m a private VC and I put $100 million into play here, I’m going to miss so
me but I have a chance to find a great tech too.” Many people in the technology
and investment sectors feel the same way, that, due to the long investment droug
ht, the pickings for VCs are actually better here than elsewhere. iNovia certain
ly thought so.
*
You have a little accident – a slip and fall, a bit of a fender bender – and end
up in hospital. For no good reason, you pick up an infection . . . C. difficile
, E. coli, something nasty. In North America, infections acquired while under me
dical care cause more deaths than breast cancer, heart attacks and car accidents
combined. You’re screwed, right? Never fear, Exciton Technologies, a graduate o
f the Northern Alberta Business Incubator in St. Albert, holds a patent for a ch
emical compound that exploits some unusual nano-properties of silver that can he
lp. Just pray the company survives long enough to get its technology to market.
In Murphy’s Three-Column Continuum (patent pending), Exciton straddles Go to Mar
ket and Growth. Company leadership carries a big tool kit: one million in cash w
ith millions more in the works, a United States patent, and a chief scientist, S
tojan Djokic, who understands Ag7O.sub.8X, so you don’t have to.
“Over the course of six years, we borrowed one million dollars from friends and
family,” says Rod Precht, Exciton’s CEO. “I got a cheque from my aunt that I thi
nk was for five or ten thousand dollars and I thought to myself, I really believ
e I can go out there and do this.” On the momentum of its patent execution, Exci
ton was able to secure $1 million with good prospects of a few million more. So,
for now, Precht and Exciton have the speed they need to glide for a while. But
a couple million isn’t much in the life-sciences space and investors want result
s, so Exciton is considering bringing a liquid variation of its technology to ma
rket, packaged as a cleaning product for sterile environments.
“We want to build our R&D and sell technologies,” says Precht. With the cleaning
product in the works, a cash-flow positive month is just around the corner. “We
can go to market pretty quickly.” So the technology is there, the patent is the
re, but is there a VC in the house that buys Exciton’s clean-first, heal-second
business plan?
*
In the VC game, Shawn Abbott has been there, probably by private helicopter. The
iNovia partner says a good tech bet boils down to clear answers on a few questi
ons. “Is there defensible IP? A large, growing and fragmented market? Is there a
management team that can go the distance? Where does this create financial valu
e for me?” This is the mantra of venture capitalists: memorize those questions,
make $20 million on a nanotech play, learn the secret handshake and you’re in.
Asked for his thoughts on Aqua Screen and Exciton (both of which iNovia is follo
wing but has made no investment yet), Abbott breaks down the two companies’ resp
ective status in the VC food chain. “Aqua Screen is doing all the right things.
They just have to make a decision about the customer they’re going after,” he sa
ys. “Exciton has the expertise but I think they’d be making a safe choice going
with the cleaning product as a bridge. As a VC, all I see is less risk, less ups
ide.” In other words, forget about turning a profit in the near term and focus y
our energies on the big score.
The sudden arrival of two of the largest VC funds in Alberta’s history illustrat
es how tech funding is dependent and competitive at the same time. Each works to
foster companies with the potential to grow and both are ultimately seeking ret
urn on investment. And though it is privately managed, the iNovia Investment Fun
d II LP’s investors are largely government-backed entities such as the universit
ies of Calgary and Alberta, the Alberta Research Council, AVAC Ltd. and Calgary
Technologies Inc. But there are important distinctions too. The AEC operates und
er provisions that limit its funds to use within specific sectors, in specific d
ollar ranges and only in the province of Alberta, whereas iNovia can invest wher
ever there’s opportunity. So the AEC has a significantly different mindset to a
true VC.
Abbott says the Alberta government’s plan for stimulating VC markets is a step i
n the right direction but seems skeptical. “Ontario just put more than $3 billio
n into innovations and they’re fighting for their economic lives. Can Alberta re
ally compete?” he asks. “I think the answer is no. We’re really just looking for
a base hit.”
If Aqua Screen can stay afloat, Murphy may be able to double-down on an angel in
jection by negotiating matching funds from the AEC or elsewhere and get the star
tup’s brilliant black box out in the marketplace. Despite better intellectual pr
operty and capitalization status, Exciton’s future is no less tenuous. Bridge th
e money gap with a potentially dream-killing product entry or tough it out to sw
ing for the fences as a major life-sciences play. Or go broke trying.
There may be room in the AEC vision for companies like Aqua Screen and Exciton;
however the province isn’t really going to be calling the shots. The first of th
at $100 million won’t make it to the table until spring 2009 at least and even t
hen the AEC is going to be more back-seat driver than economic engine. For peopl
e like Abbott, who play the game every day, Alberta’s VC environment is just one
more opportunity to be studied for its potential return. “If you don’t set it u
p now, nothing is ever going to happen,” he says. “It’s about growing businesses
, not just picking them. That’s the game.”