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by Scott Adams
Dow Jones Newswire, Monday, February 14th, 2000.
Venture-capital financing of technology companies has been pushed into the spotlight in Canada because of the feeding frenzy in tech stocks.
Although Canada's venture-capital community is still small and immature as a whole compared to the U.S., tens of millions of dollars have flowed into new high-tech venture-capital funds here in the past few months. Private Canadian venture capitalists say they are raising and investing more money than ever before, and the quality of the Canadian companies they are see is uniformly higher.
Dow Jones met with three of the best-known private venture-capital technology-focused funds in Canada - J.L. Albright Venture Partners, XDL Intervest and Mosaic Venture Partners. All three are based in Toronto and, as good paternal VCs must do, they provide advice and sales contacts and find senior managers for the companies they invest in.
All three funds have raised, or are in the process of raising, more than C$100 million, small potatoes compared with U.S. funds exceeding US$1 billion, but still about five times the size of a few years ago.
Here are their stories:
XDL Intervest Signs Linux Co-Founder To Advisory Bd
XDL has made two splashes in Canada this month. First, it convinced Canadian billionaire Robert Young of Red Hat Inc. (RHAT) to invest in its fund and to sit on its advisory board. A Hamilton, Ont. native, Young co-founded and is chairman of Red Hat Inc. (RHAT), the Durham, N.C. Linux company.
Second, XDL bathed in the successful initial public offering of Delano Technology Corp. (DTEC), a Toronto e-commerce and e-mail-services company that went public on Nasdaq. Delano's IPO was priced at US$18, but the stock jumped 180% on the first trading day. With the stock now trading at about 51, the company has a market cap of about US$1.5 billion.
XDL founder Dennis Bennie is chairman of Delano and he and XDL hold a 35% stake in Delano.
Bennie made a name for himself as co-founder and chief executive of Delrina Corp., an electronic-forms company that was sold to Symantec Corp. (SYMC) in 1995 for about C$550 million. Delano was founded by former Delrina employees and XDL backed the company from day one.
Bennie founded and ran the first XDL fund of C$25 million and put together a C$140 million fund this year. The first fund has returned at least C$30 for each dollar invested, depending on Delano's share price, he said.
For the new fund, Bennie brought in two new principals: Tony van Marken, former chief executive of telecom software company Architel Systems Corp. (ASYC), and Michael Bregman, former chief executive of Second Cup Ltd. (T.SKL), a franchiser of coffee boutiques.
A big focus for any VC fund in Canada is helping its companies find their way into the big U.S. market. Bennie has the qualifications, since his resume includes selling Delrina to a U.S. company and helping Delano go public on Nasdaq.
Some Canadian tech entrepreneurs believe that they need U.S. venture-capital money to give them connections into the U.S. Some of them even move to the U.S. because of this.
XDL's Bennie, having already built two successful technology companies in Canada, disagrees. "You can do it here," Bennie said. "I proved they're wrong."
Mosaic Venture Wins With Direct Hit Investment
Mosaic Venture Partners hit the jackpot when Direct Hit Technologies Inc., a Wellesley, Mass. Internet search technology company, agreed to be acquired by Ask Jeeves Inc. (ASKJ) for US$527 million in January. Mosaic invested C$3.5 million in Direct Hit, a stake now worth worth C$40 million to C$50 million depending on the value of Ask Jeeves.
Mosaic principal Vernon Lobo co-founded and is chairman of Cyberplex Inc. (T.CX), a Web-service company with a market cap of about C$700 million. Another principal, David Lawee, worked as a merchant banker and founded two media companies. A third, David Samuel, was president of Rogers Communications Inc. (RG) cable Internet division and was vice-president of new media at newspaper company Torstar Corp. (TS.B). He also worked as an investment banker at Morgan Stanley Dean Witter & Co. (MWD).
The three met while working at U.S. consulting firm McKinsey & Co.
The firm's other big success is Cyberplex, where an investment of C$5.1 million is now worth about C$150 million.
Mosaic raised its first fund of C$22 million in June 1998 and its second last November totals C$110 million. The first fund has returned more than 350%.
Mosaic's three partners often make investments in people they met through McKinsey and the respective U.S. business schools they attended. One of their keys is backing managment with whom they are already familiar and can trust.
For example, Mosaic invested in Zefer Corp. (X.ZFR) of Boston, an Internet-consultant company founded by Canadians Anthony Tjan and Kaming Ng. After Mosaic's investment, Zefer received US$100 million last year from GTCR Golder Rauner LLC, a Chicago venture-capital company, said to be a record for Internet financing at that time.
Mosaic's principals met Tjan at McKinsey and Mosaic's original investment in Zefer was arranged in a university residence room. Zefer is set to go public next month.
J.L. Albright Says 'Don't Look To U.S. Too Soon'
John Albright, J.L. Albright's principal, believes that Canadian start-up companies are wrong to seek U.S. venture-capital money early in their development. That money is useful in later rounds of financing, but a young company needs an experienced VC close at hand to provide guidance. 'It's more than just phone calls," Albright said. A Silicon Valley venture capitalist is too far away, he says.
J.L. Albright is in the midst of raising its third fund, which will reach about C$150 million. The first fund in 1996 raised C$22.5 million and the second in 1998 was C$60 million. The first fund returned more than 100% and the second fund has returned more than 500% so far.
Mr. Albright has a venture-capital and investment-banking resume. Principals Osama Arafat and Stuart Lombard teamed up as co-chief executives of Isolation Systems Ltd., a networking company sold to Shiva Corp. in 1998 for C$67 million. They also built InfoRamp Inc., an Internet service provider which was sold to iSTAR Internet in 1995. The fourth principal, Gary Rubinoff, has a background in corporate law and venture capital.
J.L. Albright scored when Isolation Systems was sold and again when INEX Corp, an e-commerce software company, was sold to Infospace.com Inc. (INSP) for US$37 million in 1999.
Its biggest success is Descartes Systems Group Inc. (DSGX), a supply-chain software company with a market cap of close to C$2 billion. J.L. Albright distributed the shares to the limited partners and the general partners have sold about one-quarter of their stake.
Next Funds, Perhaps In 18 Months, Will Be Much Bigger
All three funds will probably be raising money soon, perhaps in as little as 18 months. They're finding that institutions who were reluctant to invest a few years ago are much more receptive since the first funds show returns of 100%-plus.
The heat is on for Canadian funds to get bigger. Startup companies need more and more money to be globally competitive faster. Whereas a big round of financing for a Canadian technology company might have been for C$10 million a year ago, C$40 million is becoming more common now.
The Canadian funds understand this. Albright's new C$150 million fund is "not big enough," Mr. Albright admits. "Hopefully, the next time, we'll be a C$500 million fund."
-Scott Adams, Dow Jones Newswires; 416-306-2026;
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Here is a list of some of the current investments of the three featured Canadian tech venture-capital funds:
J.L. Albright
- Chrysalis-ITS Inc. of Ottawa, a network security systems company;
- Grocery Gateway Inc. of Toronto, an online grocery company;
- Indian Motorcycle Co. of California, a motorcycle and restaurant company;
- PixStream Inc. of Waterloo, Ont., a video-networking company;
- Servicesoft Technology Inc. of Natick, Mass., an Internet customer service company;
- TigrSoft Inc. (T.TGF) of Edmonton, Alta., a planning and scheduling software company;
- Triple G Systems Inc, a Toronto laboratory information systems company;
- Stream Intelligent Networks Corp. of Toronto, a networking company.
Mosaic Ventures
- Silanis Technology Inc., a Montreal electronic approval automation and document authentication company;
- Grocery Gateway;
Zefer Corp. of Boston, an Internet-consulting firm;
- Skulogix Inc., a North American e-commerce company;
- Incanta, a broadband content provider in Atlanta;
- H2MG, a San Jose, Calif. company that provides an Internet community for the Indian community;
- E-tail Factory of Toronto, an e-commerce company.
XDL Intervest
- Changepoint Corp., a Toronto e-commerce company;
- ClickNet Software Corp., a San Jose, Calif. computer-security firm;
- ePod Corp. of New York, an e-commerce company;
- PC Data Inc.; a technology intelligence company in Reston, Va.;
- TUCOWS.com Inc., a Toronto distributor of online software;
- Reciprocal Inc., a U.S.-based digital media company.
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