Sean Kilpatrick/The Canadian PressThere are some accelerators that help young companies get beyond the very early startup phase, but there is little funding for those companies to continue to viability.
Want to start a technology business? Just do it. It’s never been easier or cheaper in Canada. Growing that business beyond an idea and some coding is far more difficult, however.
Fifteen years ago, it routinely took millions of dollars to start a technology business; today they’re launched daily for almost nothing after a few conversations in a coffee shop by a small group of educated but often under-employed young people. There’s a reason why the term “Starbucks Startup” has entered the tech lexicon.
But that’s often as far as most startups go because at that level there is sparse infrastructure to nurture them into viable companies. Yes, there are some accelerators that help young companies get beyond the very early startup phase, but there is little funding for those companies to continue to viability.
Individual angel investors tend to cherry-pick the most promising, providing some initial funding to those that have managed to survive with family-and-friends startup financing. Venture capital has become more conservative and tends to work in the middle market where companies have already proven themselves and are staged for explosive growth.
But those at the beginning of the business-building process often starve to death before they can gain any traction and draw meaningful financing.
To reach this vibrant market at the bottom of the investment pyramid, a new animal — the publicly listed technology investor — has appeared. To date there are only three in Canada: Toronto’s Difference Capital (TSXV/DCF), which finances technology, health and media companies, Vancouver’s Green Angel Energy (TSX.V/GAE) which invests in green technologies, and LX Ventures, which is an incubator of early-stage, high-growth technology companies operating in health, finance and advertising that launched in October.
LX Ventures has a different model in that it concentrates on nurturing very young businesses through the “plateau of despair” that often precedes a first round of financing, or gradual failure. It launches, integrates or acquires very early-stage technology companies and provides funding, resources, mentorship and access to a global network of companies. The company either becomes a partner with startups, assists with distribution and scaling, or internally innovates by generating ideas and following up through launch and exit.
“We’re seeing a ‘pixelization’ of entrepreneurship today,” says Mike Edwards, chief executive of LX Ventures and a 20-year veteran of public and private financing. “Young people know that there won’t be a job and a pension waiting for them, so they’re starting their own businesses. It’s a tidal wave of entrepreneurship that’s coming up against a brick wall of A-round (initial) financing.”
LX Ventures currently has five portfolio companies in its office in a downtown sector of Vancouver that has become a hub for new, often digital, companies. It also operates the entry-level Launch Academy, a non-profit, peer-to-peer accelerator with 75 entrepreneurs who are creating new companies by learning from each other as well as from mentors. Entrepreneurs can graduate to GrowLab, a smaller, for-profit, accelerator that helps them grow to a more viable state.
However, the real business of LX Ventures (TSXV/LXV) is to create exits — sale of their client companies to larger companies — which, in turn, create returns for investors. So far, a slight majority of LX Venture’s stock is held by the founders, with some added investment from large Canadian venture funds.
The public-listing strategy emerged because of the current state of public investing in Canada, especially on the junior TSX Venture exchange, where there is a growing belief investment is ready to shift to technology from natural resources.
“Technology makes up only 3% of the TSX, but accounted for the largest share appreciation in 2012,” said Kier Reynolds, director and executive chairman. “Meanwhile, natural resources, which make up the majority of TSXV companies, are coming off a long investment cycle that is ending.
“In future it will be very difficult to generate returns in natural resources, but technology will be creating them. So we believe a wave of sector rotation is about to happen.”