Hard Times for Start-ups: The market meltdown has made investors skittish about new ventures

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Five minutes. All he has is five minutes to pitch his product. “I’m Dr. Michael Wells and I am the CEO of Protevia Incorporated,” he begins. Standing in a spotlight’s glare on the Second City Theatre stage in Toronto, Wells is at a boot camp for start-up companies. His audience is made up of 100 hungry entrepreneurs and, hidden deep in the shadows of the stage, four people with buckets of money. Known as angel investors, these four are listening to the doctor’s pitch and will judge him on his presentation.

Words tumble out of Wells as he tries to explain two different technologies he believes will revolutionize the world of medicine. He talks about biotechnology and cardiovascular disease. The angels look confused and impressed in equal measure. “Diagnostic candidate,” intones Wells. “Inhibit biochemical pathways . . . oral delivery system.” Four minutes. Wells is losing them. He hasn’t said how much money he needs. The moneymen, however, perk up at his closing: “If you are patient, if you want to make money and if you want to help people, consider my company. Who knows? It may someday save your life.”

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Later, in their assessment, the angels are to the point: Wells’s expertise has convinced them to make him winner of the contest — but they didn’t understand a word. This is part of why Wells — even with a PhD in blood physiology, an MBA and experience in the pharmaceutical industry — shelled out $495 to attend a two-day workshop on finding funding for new ventures. And learning the perfect pitch is a reality for entrepreneurs looking for money in this new world of diving markets and cautious investors. Yes, there is money out there. But only by romancing angels or venture capital firms — and armed with a rock- solid business plan — can one pry open the investor’s wallet. “People thought they could think of something on Sunday night and get $10 million by Wednesday,” explains Brian MacDonald, executive vice- president of VentureDrive Inc., the Toronto venture capital network company hosting the boot camp. “Now we have to say to entrepreneurs, you are not worth that kind of money.”

Little more than a year ago, it was still silly season in the start-up world. A dot-com idea scribbled on a napkin would net millions from eager investors hoping for sky-high profits when the idea-as-a-company went public. “What we saw last year was a philosophy to go big or go home, and go big fast,” says Michael Corcoran, founder of CanadaStartups.com, a Toronto-based online resource for entrepreneurs. And Canada certainly went big. Despite market turmoil and soured investors, venture capital investment in Canada grew 133 per cent last year, to $6.3 billion in 2000 from $2.7 billion in 1999. According to the Canadian Venture Capital Association’s (CVCA) survey of 132 venture capital companies, money invested in Canadian companies increased by 50 per cent in the last quarter of 2000, while decreasing in the United States by 30 per cent.

But investors have sobered up. There is still no shortage of attractive new companies being created in Canada. “The unfortunate thing,” says Corcoran, “is nobody wants to hear about them right now.” Even though Canadians threw less money at the dot-com craze than their neighbours, they are taking heed of American disaster stories. Angel investors, who help shepherd start-ups through the early stages, and venture capital firms, which pick them up when bigger money is needed, are now extremely wary of new investments. Not only are they cool to high-tech ideas, but with less money fluttering about to finance the various stages, investors are focusing on nurturing their current portfolios. As a result, start-ups in all industries are suffering.

Two and a half years ago, Ang?le Beausoleil created an interactive computer character for what she says is an untapped market: preschoolers. With “love money” — a term used for initial funds from the pockets of Mom, Dad, friends and family — and two matching loans from institutions, Beausoleil founded ITP Entertainment Inc. in Vancouver to market her trademark, Ideas That Play. Unusually, she raised $400,000 in love money alone from 27 friends and family members. But while her product is now in 14 countries, has won 10 awards and made $110,000 for ITP in its second year, Beausoleil’s company doesn’t fall neatly into any funding category. She needs $2 million to take it to the next stage, and after two years spent looking for angels or venture capitalists, Beausoleil is resigned to finding a parent company to swallow up her brainchild.

Beausoleil believes the problem is that she is breaking new ground. “We don’t fit under the flavour of the day even though we are a warm and fuzzy investment,” says the 36-year-old Beausoleil. “We need the leap- of-faith-takers.” It is a sentiment echoed by entrepreneurs across the country. Philippe Laflamme, a 23-year-old computer engineer, co-founded Konova Solutions Inc. in Montreal last May to produce a sophisticated database searching system. “The thing that is frustrating is that we just need money,” he says. “It is harder and harder to get and it is the only thing stopping us. We’re spending 110 per cent of our time trying to find money.”

So what about it, venture capitalists? “Yes, it is harder to raise money,” answers John Eckert, managing partner at McLean Watson Capital Inc. and head of the CVCA. “But it is not that they are being punished.” In fact, industry players agree that this period of slowdown can only be good in the long run. True, the process takes longer, deal sizes are smaller and the amount of equity that new companies have to give up is greater. But, explains Stace Wills, founding partner of Calgary-based eMedici Capital Inc., “it takes a superior project to be able to attract money these days because there is a flight to quality.” In short, it is a buyer’s market. “But take heart,” adds Eckert. “If the business is good and you have got the right management team, keep plugging away. You’ll find the money.”

Not that start-ups are disappearing. University and college courses for entrepreneurs are brimming with new talent, while boot camps and networking companies are gaining in popularity. Peter Day, who manages the Canadian Science and Technology Growth Fund Inc., says that by noon on a given day he will have spoken to five start-up companies. “Entrepreneurs are a pretty hardy lot,” he chuckles. “You have to hit them over the head many times before they don’t get up off the mat.”

Working out of his home in Guelph, Ont., Dr. Michael Wells is trying to drum up $2.5 million for Protevia. His partner, who developed the technology, doesn’t want to leave the security of his university research job, so Wells knew he had to risk it. “As time went by, I became more and more unhappy,” he says of his previous work in pharmaceuticals. And though he still needs to polish his pitch, Wells adds, in true entrepreneurial form, “I’m not disillusioned yet.”

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HOW TO WIN OVER THE ANGELS

Veteran investors’ advice for start-ups:

– Go back to basics. A detailed, well-reasoned business plan is crucial. Think profitability and a competitive advantage that can last, not just market share.

– Work with the best. Investors want to see a strong management team, with creativity, tenacity, flexibility and a deep understanding of your market.

– Get real. Operate as a regular business with real clients and an actual product, not a fairy-tale Internet start-up.

– Perfect your pitch. When you meet investors, make sure you are thorough, thoughtful and articulate. Speak clearly and be straightforward. Don’t forget to ask for a specific amount of money.

– Stick close to home. Angel investors generally look to the same industry and region that they live in.

– Tighten your belt. Stretch what money you have as far as you can.

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