pennies from heaven - emerging tech vc markets in western canada

8/9/2019 Pennies from heaven - emerging tech VC markets in Western Canada

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Pennies from Heaven - VC markets in Alberta, Canada

from Alberta Venture - http://albertaventure.com/pennies-from-heaven/?Itemid=1396

Long starved for funding, Albertas technology sector welcomed two new, $100-million venture capital funds this year. Its no Silicon Valley, but its a start

by Scott Valentine

John Murphy stares at the whiteboard and tries to make sense of it all. In baseball terms, Murphys baby, Aqua Screen Corporation, is in a tight game with limited reserves on the bench. With focus and luck, Aqua Screen could be sitting on ajackpot of cash and intellectual property in 18 months. Make one wrong move, and Murphy and everyone who trusted his vision will exit the game as losers. AquaScreens elevator pitch goes something like this:

Walkerton, Katrina, tsunamis . . . as a resource, water is becoming more valuable. At the same time, its getting harder to guarantee its safety against toxicit

y and water-borne infections. Aqua Screen offers a hand-held device that completes chemical and bacterial water tests in 20 minutes. The next-best solution takes about four days, making Aqua Screens solution about 99.9% quicker than the competition.

Thats often met with, So what? says Murphy, showing off his black-box prototype, a simple albeit impressive-looking gizmo with a slot for inserting a smalltest-tube and a little LCD display. Because hes been in the game as both an angel investor and an entrepreneur, Murphy has a unique feel for the venture-capital process.

Standing at the whiteboard inside Aqua Screens small office in Edmontons Enterprise 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 companys maturity: Novel Solution, Manufacture/Go to Market and Growth. Under each heading, he lists key elements for drawing VC interest at that stage.

Under Novel Solution, he lists a) Whats unique? b) Patent quality? and c) Legs, the much-coveted story value of an emerging technology firm. When the marketviews an emerging tech as a Novel Solution, the company cant draw much investment other than grants, scientific research and development (SR&D) tax credits andfriends-and-family money.

Under Manufacture/Go to Market, Murphy writes $600,000 to $1 million, Aqua Screens magic number to get its little black box to market. At this point, as the

venture straddles innovation and implementation, venture capitalists will startto become interested. However, most so-called angels want 51% of your company toeven come to the table. This is where a lot of tech startups fail, teetering onthe edge of scientific possibility and economic interest. One way or another,grins Murphy. In 18 months, something is going to go boom.

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Investing in emerging technology is a gamble; dont let anyone tell you differently. For several years, Albertas venture capital (VC) market has been near-dormant, attracting few serious players and producing even fewer big wins. The VC knock on Alberta has been that we are too conservative, too oil-centric and not serious enough about growing technology companies. During the 1980s, the provincia

l government attempted to fill the gap, but after some notoriously bad bets, itwithdrew almost entirely from the venture capital space. Today, with governmentcoffers flush, the pendulum appears to be swinging back again.


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Traditionally, Alberta has been the farm leagues of technology investment, says Shawn Abbott, a partner with iNovia Capital. The Montreal-based firms recentmove into Western Canada, setting up a small office in Enterprise Square, has been one of a series of sparkplug VC events in the province recently. With $107 million to spend, iNovias presence is a breath of fresh air, providing hope to otherwise 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 focusing on specific sectors, taking a controlling interest and never engaging a company without good legs. A good VC might pick a winner once or twice a year. Its afull-time job that requires tremendous energy and great expertise. Go into thegame against these guys half-heartedly, and theyll eat you alive.

The second big development this year was the creation of the Alberta EnterpriseCorporation (AEC).

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On June 11, 2008, Doug Horner, minister of advanced education and technology, stood stoically on a stage dressed in provincial trappings and waited patiently. Since the Alberta Enterprise Corporation (AEC) kickoff press conference ended 15minutes earlier, the 20 or so assembled media had been too busy harassing Ed Stelmach over the scandal du jour to ask him any questions. Its a shame; there wasa lot of good stuff in the press kit.

The AEC had just committed to $178 million in cash and instruments to reinvigorate Albertas lackadaisical technology market. The package includes $100 millionfor VC investment, $72 million in cash and services to shore up incubation and training and $6 million for youth initiatives. The AECs plan is to use private investment as an intermediary to hedge the provinces bets in the venture capital

game. The $100 million set aside for investment will be distributed fund to fund, passing off the risk for picking winners into more experienced hands. In other words, AEC will top off investment into select Alberta-based techs at the rateof 1:4, turning a $4-million VC investment into $5 million total. By supportingthat investment in young techs with complementary spending in infrastructure, business incubation tools and SR&D credits, the AEC hopes to foster company formation and innovation development at multiple touch-points.

Were getting a lot of feedback from places like Silicon Valley that they recognize were trying to do something different here in Alberta, says Horner. Theyunderstand that weve put some skin into the game and they get what that means.

The home front has been less supportive. Danielle Smith, director of provincialaffairs for Alberta at the Canadian Federation of Independent Business (CFIB), stated that Stelmach and Horner had launched Alberta into the next generation ofcorporate pork-barrelling, in a Calgary Herald editorial. Horner replied fromthe opposite page with a list of messaging points, then closed with, We were thinking about the future.

The questions Smith and others raise about the AECs business plan are valid. There is rampant VC competition from other markets, the Alberta governments previous track record as a tech picker is suspect, and it is worrisome that the AEC doesnt seem to have plans for smaller players. Horner admits there are risks butsteadfastly believes the AEC is on the right path for the future. The province

of Alberta is not going to retire, he says.

If Im a private VC and I put $100 million into play here, Im going to miss so


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me but I have a chance to find a great tech too. Many people in the technologyand investment sectors feel the same way, that, due to the long investment drought, the pickings for VCs are actually better here than elsewhere. iNovia certainly thought so.

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You have a little accident a slip and fall, a bit of a fender bender and endup in hospital. For no good reason, you pick up an infection . . . C. difficile, E. coli, something nasty. In North America, infections acquired while under medical care cause more deaths than breast cancer, heart attacks and car accidentscombined. Youre screwed, right? Never fear, Exciton Technologies, a graduate of the Northern Alberta Business Incubator in St. Albert, holds a patent for a chemical compound that exploits some unusual nano-properties of silver that can help. Just pray the company survives long enough to get its technology to market.

In Murphys Three-Column Continuum (patent pending), Exciton straddles Go to Market and Growth. Company leadership carries a big tool kit: one million in cash with millions more in the works, a United States patent, and a chief scientist, S

tojan Djokic, who understands Ag7O.sub.8X, so you dont have to.

Over the course of six years, we borrowed one million dollars from friends andfamily, says Rod Precht, Excitons CEO. I got a cheque from my aunt that I think was for five or ten thousand dollars and I thought to myself, I really believe I can go out there and do this. On the momentum of its patent execution, Exciton 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. Buta couple million isnt much in the life-sciences space and investors want results, so Exciton is considering bringing a liquid variation of its technology to market, 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. Wecan go to market pretty quickly. So the technology is there, the patent is there, but is there a VC in the house that buys Excitons clean-first, heal-secondbusiness plan?

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In the VC game, Shawn Abbott has been there, probably by private helicopter. TheiNovia partner says a good tech bet boils down to clear answers on a few questions. Is there defensible IP? A large, growing and fragmented market? Is there amanagement team that can go the distance? Where does this create financial value for me? This is the mantra of venture capitalists: memorize those questions,make $20 million on a nanotech play, learn the secret handshake and youre in.

Asked for his thoughts on Aqua Screen and Exciton (both of which iNovia is following but has made no investment yet), Abbott breaks down the two companies respective status in the VC food chain. Aqua Screen is doing all the right things.They just have to make a decision about the customer theyre going after, he says. Exciton has the expertise but I think theyd be making a safe choice goingwith the cleaning product as a bridge. As a VC, all I see is less risk, less upside. In other words, forget about turning a profit in the near term and focus your energies on the big score.

The sudden arrival of two of the largest VC funds in Albertas history illustrates 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 return on investment. And though it is privately managed, the iNovia Investment Fund II LPs investors are largely government-backed entities such as the universit


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ies of Calgary and Alberta, the Alberta Research Council, AVAC Ltd. and CalgaryTechnologies Inc. But there are important distinctions too. The AEC operates under provisions that limit its funds to use within specific sectors, in specific dollar ranges and only in the province of Alberta, whereas iNovia can invest wherever theres opportunity. So the AEC has a significantly different mindset to atrue VC.

Abbott says the Alberta governments plan for stimulating VC markets is a step in the right direction but seems skeptical. Ontario just put more than $3 billion into innovations and theyre fighting for their economic lives. Can Alberta really compete? he asks. I think the answer is no. Were really just looking fora base hit.

If Aqua Screen can stay afloat, Murphy may be able to double-down on an angel injection by negotiating matching funds from the AEC or elsewhere and get the startups brilliant black box out in the marketplace. Despite better intellectual property and capitalization status, Excitons future is no less tenuous. Bridge the money gap with a potentially dream-killing product entry or tough it out to swing 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 isnt really going to be calling the shots. The first of that $100 million wont make it to the table until spring 2009 at least and even then the AEC is going to be more back-seat driver than economic engine. For people like Abbott, who play the game every day, Albertas VC environment is just onemore opportunity to be studied for its potential return. If you dont set it up now, nothing is ever going to happen, he says. Its about growing businesses, not just picking them. Thats the game.

pennies from heaven - emerging tech vc markets in western canada

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