Yesterday, Pete Forde wrote up a piece on raising capital in Toronto and this hit on something that I believe is missing from Toronto’s startup community.
I’ve always found that information about VCs, angels and who the best lawyers are, was easy to find in Toronto. From attending various democamps, I’ve found plenty of experts on raising capital in Toronto. The angels here are very accessible and the StartupNorth team is very knowledgeable.
Raising capital is not the most immediate problem facing Toronto startups
One of the commenters on the post pointed out that you need to prove that your startup can make money before raising capital. I belive this is very true in Toronto and for the most part in the valley as well.
Similar to scaling the technical end, figuring out how to raise capital is a problem “you should be so lucky to have”. Because it means you’ve reached a point where you’ve found a business model and you need the cash to scale it.
The people getting funded on an unproven idea are much rarer than most people think. The only people who don’t have to go over the hurdles of establishing a scalable business model first are people who have had previous success – something that is far more common in the valley than Toronto.
The real problem that Toronto entrepreneurs face is learning how to get to a scalable business model – getting to the point where your business is realistically investable. Because once you reach that point the process of raising capital is much more straightforward.
While you can easily find experts in raising capital at Toronto startup events its harder to find vocal mentors/leaders who have gone out and built successful startups and had a good exit.
“What we need in New York is our own PayPal mafia. We need a big company to go public, throw off employees that start their own companies and create a self-propagating, thriving scene like that out here.” - Caterina Fake, Flickr Co-founder
This is true for Toronto. We need a Paul Graham or Steve Blank – people who have built successful startups – to provide a base to our startup community. Another point raised at the Toronto Dev Lunch was that we need an incubator like YCombinator thats founded not by traditional investors or bureaucrats but by experianced vets.
Why? Because investors and beaucrats know the capital scene in and out and who the right person to talk to is. But they can’t teach you the street smarts needed to build a scalable startup.
With that base we can start pumping founders who are ready to build scalable startups. Once that happens capital will become more accessible in Toronto and more favourable to founders.
Steve Blank recently said in at his great keynote (42:00), the problem right now is not a lack of information. You can go online and find an answer to any startup question you have. What we need is a framework to take in the information and put that information to good use and I think it takes an battle tested entrepreneur to provide that framework whether its through an accelerator, mentorship, or just getting involved.
After my winter vacation had to be rescheduled last minute, I ended up having a few days of free time after christmas. I decided to use this time to start a small side project called CareLogger a diabetes log book.
CareLogger is a tool for diabetics to keep track of glucose levels, blood pressure and when they take medication.
We soft-launched about a week ago and so far 70 people have signed up which we’re really excited about.
The CareLogger Story
The idea came after me and my collaborator on this project, Nick Van Nuil from Dalmeny, discovered after speaking to a few people that there was a serious lack of tools online for diabetics. The one that came closest was an expensive windows-only application that had a very difficult to use UI.
So we spent 3 days creating a web application, with the idea of having a tool that will allow people with diabetes to track their illness from any web browser (and possibly a iPhone application in the future, if there’s demand).
The Plan
Right now we have no plans to charge money or display ads on the application. It was a great exercise in creating a minimum viable product as well as learning how to build a community and helping people manage their illness along the way.
CareLogger originally had the name HumaLogger that came from the name humalog, a name for insulin. But we decided to change it to CareLogger after finding out that humalog is trademarked.
We’d love to hear any feedback. You can try it out using our demo account (username: demo; password: demo) at http://carelogger.com/.
Last night Integrate had its first public appearance at StartupEmpire. At night there was an after party hosted by Microsofts Bizspark where we had a table showing off our application to attendees.
The conference was Canada’s version of StartupSchool with speakers such as Rick Segal and Austin Hill during the day, talking about raising VC and legal work for startups. There was a lot of good information for early companies but what stood out was the openness of the Toronto tech startup community. In this industry there is no shortage of support for startups online but having a solid local community is very valuable.
We got some quality feedback and a few blank stares (FYI enterprise software can be a tough sell to the social network crowd). We also meet some great people like Leila from Idee and Pema from GigPark.
We’re looking forward to the next meetups, hopefully the “FuckupCamp”-the conference for startup horror stories-that Rick mentioned gets set up.
Advice on what not to do from real world experiences can be more useful then broad recommendations. My own take on the mishaps of my previous startup was one of the most popular posts on this site.
Thanks goes out to Jevon Macdonald, David Crow and Jonas Brandon for organizing the event.
Possibly the best business book of 1880 (prove me wrong), The Art of Money Getting by P.T. Barnum, the legendary showman and entrepreneur, is full of great material like this…
“It is this go-aheaditiveness, this determination not to let the horrors or the blues take possession of you, so as to make you relax your energies in the struggle for independence, which you must cultivate.”
- P.T. Barnum, The Art of Money Getting
Some advice is still effective 128 years later.
Glen Gary Glen Ross, this one never gets old…
Walden, another one from 1854
“I say beware of all enterprises that require new clothes.”
- Henry Thoreau, Walden
Walden is about Henry Thoreau ignoring the usual “9-5 life” and taking his own path, building a house in the country and living simply for 2 years. Inspiring for anyone making their own way.
“I learned this, at least, by my experiment; that if one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours.”
- Henry Thoreau, Walden
Watch the movie Wall Street (and maybe Rudy too)
This one sounds like it was made last week. Was Gordon Gekko running AIG?
Man in the Arena
“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.””
- Theodore Roosvelt, Citizenship in a Republic
I spent the last week at Algonquin Park and had the chance to finish reading The Innovators Dilemma. I would recommend this book to start-up founders before anything else. It introduces a type of opportunity that gives small companies advantages over big market leaders, by taking recent innovations and creating new markets.
Four Types of Business Opportunities
There are four main types of opportunities you can pursue when creating a software start-up:
1)New technology in a new market, you create a new innovative product in a previously unserved market. Example: Overture (acquired by Yahoo) creating the pay-per-click technology to create the search engine advertising market.
2) New technology in an established market, this most likely starts with, “this product sucks… I could make something better.” You take advantage of recent advancements to build a product that improves on the existing solutions. Example: Last.FM creating a social music application that gradually learns your tastes in music, a significant improvement over the existing online radios.
3) Applying a proven technology to a new market, you see an opportunity to take an existing product and tailor it to a new market. Example: 37Signals Highrise, CRM applied to smaller businesses like web design firms.
4) Applying a proven technology in an established market this is where a start-up tries to compete head-to-head with market leaders. There’s generally a lot of money at stake so there will be a lot of entrants. Example: Cuil building a search engine with a fast indexing technology to compete against Google and Yahoo.
Disruptive Opportunities
Disruptive opportunities generally fit into the first too categories. Although, it’s not just an improvement over existing technology. It’s an innovation that causes a significant shift in the market (see Wikipedia entry).
For example, Mint created an online finance application that took aim at Quickens desktop software. Mints founder, Aaron Patzer took recent improvements to web applications and combined it with an innovative monetization system that allowed him to launch an effective competitor to the cluttered desktop alternatives.
If Aaron took the usual approach and created the desktop software it would of just been another new product, trying to compete in an established industry. Instead he created a disruptive innovation, an online financial application with an automated system that helps people save money, and helped create a new market (plus its free).
Whats stopping the big competitiors from copying you and using their market access?
Big companies have a history of failing to adopt disruptive technology, the author gives a few reasons why:
1) By adopting the technology they cannibalize their current customers by offering a product thats usually at a lower price point.
2) Big companies are not organized to build out disruptive technologies because the markets for them are too small to begin with to make it worth the companies time.
3) They can’t gauge how big the market is because there is no current market to base the research off of, making it hard to sell to the executives making the decision.
These are things that start-ups can take advantage of and makes disruptive technology can be much more effective then the other types of opportunities
Why are disruptive opportunities better for start-ups?
It’s easier to answer this in context with the types of opportunities mentioned above:
1) Being first to market tends to be difficult because the companies end up spending a large amount of money laying the ground work, for example building awareness and facing unknown difficulties.
A good example of this happening right now is the Enterprise 2.0 market. Jevon Macdonald wrote a great post on the lack of an established market for Enterprise 2.0.
“There is no Enterprise 2.0 market. Enterprise 2.0 budgets do not exist, except where some early adoptors create them, and there is no Enterprise 2.0 sales cycle.” – Jevon Macdonald, Firestoker.
The businesses in that market have to either invest in building awareness through media, wait until the market develops, or building off of existing markets. For start-ups that can be very costly unless they can ensure a return.
If you building a “new market” disruptive technology you can benefit in the long run from being the leader and championing the technology. It allows you to have first-mover advantages that gives you a competitive edge when other competitors enter the market.
2) Just creating a better product then your competitors can also very difficult. A big company has the resources, brand and access to existing customers that would require much more then just a slightly better product to effectively compete.
In the tech world I see that most new companies seem to fall into this area. Just spend a few weeks watching Techcrunch and you can see just how many people are creating me-too companies.
These founders see the big companies making money and want a piece. They end up modeling their business around the leading companies and offer little differentiation. To make it worse their business models rely on low-margin advertising.
If you take a different approach by bringing a disruptive technology to an existing market (called “low-end disruption”) you can target the customers that were left behind by the current market leaders. Those leaders usually have a high-performance and expensive product thats out of reach by certain segments.
Once start-ups have some market share they can improve the technology until it’s capable of being valuable to the larger mainstream market.
3) Applying a proven technology to a new market usually has the lowest barrier to entry mainly because it involves little innovation. This is a trap I fell into myself when I created Contrastream. The product was essentially a derivative of an existing product Digg (but not nearly as bad as most Digg-clones) that I applied to a new market, indie music.
The problem with this approach is that it’s difficult to gauge whether there is actually a need for the product in the new market.
It’s a common trap to have built a new technology and see all the ways it could benefit peoples lives. But that does not mean there is a need for it. If you are relying on the theory that “great products spread online by themselves” you better hope that people are aware of something lacking in their lives and are looking for a way to satisfy that need.
For online marketing to be effective its essential that people are already searching for a solution. You can’t spend a ton of money on advertising just to make people aware that their need exists.
Of course, some products have a viral nature, like being invited to Facebook or emailing Youtube videos to your friends. But viral marketing is not something that can be created, only assisted.
4) Bringing a proven technology to a well-developed market is an area left to the ambitious entrepreneurs.
You will be facing some tough competition by companies with years of experience in the market. When markets reach a certain point its generally very hard for a small company to compete. This is because those big companies are spending all their time not only fending off the other big competitors but also securing their position in the market.
Approaching a Disruptive Opportunity
The idea behind Innovators Dilemma is to find a smaller market that can benefit from a new disruptive technology. Build the product, get some market share, make improvements and reiterate until it’s ready for a mainstream market.
Early on the technology tends to be more expensive or under-developed to be ready for a mainstream market, for example Flash solid-state hard drives are too expensive for the average consumer but the price continues to drop.
The key is becoming the expert in that technology and the company that pushes it forward until it’s matured. By the time the bigger companies see the potential in the technology they will already be way behind.
I read 37Signals post this morning about Not Taking Money. This is a common theme that 37Signals has been following, especially since DHH’s presentation at Start-up School:
They say you don’t need a big $100 million dollar idea and you don’t need Venture Capital.
They are right about the first one, there’s a lot of opportunities for making a well paying independent company without having a huge market and trying to IPO.
The second part is what bothers me.
Telling entrepreneurs to “do everything you can to avoid taking money“, without clarifying the type of business your talking about is some can be some very detrimental advice to give entrepreneurs.
Before making general statements like that, how about helping them identify whether their business opportunity is VC fundable or not?
The real problem is the entrepreneur thinking he has a $100 million dollar idea then shopping it around to VCs, getting shut down, and not pursuing it. When in reality he/she should of at least tried bootstrapping it, evolved the product and tested the market.
At the same time those who may have that potential might take that advice and miss an opportunity to fully realize their business.
Deciding on VC or Bootstrapping shouldn’t be about taking sides; being realistic about what your business needs, understanding the scope of your business and focusing on timing is a better strategy.
Who Should Aim for Venture Capital?
From my understanding, a VC fundable business has high growth potential that would give the investors a large return in 5+ years. Which is exactly why the VC would take such a high risk investing in you in the first place.
The businesses they invest in are often disruptive technologies in the high technology industry (IT, bio-tech, and clean-tech).
If your business does not fit into that category, then you probably shouldn’t be looking to VC’s for capital.
If I was considering bootstrapping or venture capital, I would be evaluating the opportunity instead of just following the “keep-it-small” philosophy at every step.
This is not about being different then other technology companies. It is not about screwing the big companies and keeping it small. 37Signals is playing the rebel to prove a solid point. Just be aware of the difference before taking their advice.
I read posts on Hacker News about “Why my start-up failed” and found them interesting because its a raw start-up story not the fairy tales that magazines like to write about. So here is my shot at it.
Last summer, I started developing a social music site, Contrastream. The problem: finding good indie music was difficult and a good reason why the 5 big labels control everything. The solution: a Digg-inspired site where you submit albums you want to share and vote up the ones you think are worth listening too, each album gets its own page with a YouTube music video, comments, etc.
7 Reasons Why it Never Took Off
Design Perfection, I’ve heard its common for founders to spend too much time doing what they like or what they are good at. For me it was spending too much time perfecting the design. Not only how it looks but all the aspects of user experience. This would of been a good thing if I was a designer on a team but there was a lot more I should of been doing. Adding content, SEO, getting press, writing blog posts, and getting to know the early community to name a few.
Underestimated the “Cold Start” problem, I read this article by Bokado Social Design which talks about a big issue you face with a social site, especially when it relies on user generated content. The value you provide to your users centers around the content on the site, so to build a user-base you need a lot of content created by the first users to kick off the community. In my case it was having interesting new indie albums always on the site. But user content usually follows the 80/20/1 rule, 80% browse, 20% interact (comment), and 1% contribute (add albums). So even though I had 10,000 people visiting in the early months, I still ended up adding 75% of the content. It was very demanding and time consuming especially being a solo founder.
Market Size vs Business Model, the market I was targeting with the site, indie fans who knew a lot about music outside of the usual review sites, was small. I had planned to monetize the site with ads and in the process I realized that you need a LOT of people using your site everyday to make money off of ads, or a certain type of people who can’t tell the difference from adsense and site links. The people I was targeting were also notorious for not clicking on ads (similar to the tech community).
Bad launch, the launch of the site wasn’t planned very well at all. I decided to use the “genius” marketing ploy of having a private beta to create scarcity. I saw a bunch of other sites doing it and figured it was a good strategy. I was wrong. Private betas are good for sites that have either complex technology or something thats hard to scale, and those two are about the only times you should do that.After the site appeared to be ready to go live, I decided to email Techcrunch about it. At the time I didn’t understand the importance these types of blogs put on exclusives. I figured they would take a day or two and send some questions. But about an hour or two after I emailed them, Techcrunch posted about Contrastream.Not only was I unprepared to have thousands of people come to my site right away, it turns out I didn’t get the chance to fully pitch my site to TC. Michael Arrington called the number I had posted in the whois and privacy policy which was my co-founders cell phone. I had used his because my phone was broken at the time. He called at about 11pm and my friend was sleeping, he also had no idea who Michael Arrington, an internet celebrity to most tech founders, was. In his half-asleep state he didn’t know what the call was about. I didn’t find out about the call until my friend had woken up a couple hours later and decided to tell me about it… so we were off to a good start.
Competition, we had a lot of high quality competitors. We were offering information on great albums and community voting. But other sites like Last.fm and Hype Machine were offering the actual music. That was a competitive advantange thats hard to beat and we lacked a significant userbase to convince enough people.
Motivation, having to consistently find new content was probably the biggest hit to my motivation for the site. As much as I loved indie music it was draining to constantly find new albums to post up. It turned something I liked doing into a chore mainly because at the same time I was busy marketing the site, redesigning it, and attending classes. (I was in college for business for 18 hours of the week).
Co-founder, I had started the site with a friend, he was smart and knew a lot about business but in the end could not contribute much to the site. One reason why was that hes not technical, so he couldn’t help much with the development of the site and knowing who Michael Arrington was might of helped. The other reason was that he wasn’t really into indie music so providing content and reaching out to the users was a barrier.
Bonus: Derivative Idea, I tried to avoid just listing the common start-up mistakes written by Paul Graham, but this one was pretty accurate. The idea itself for Contrastream wasn’t too innovative or original. It was inspired by Digg.com which had applied the same model to news and articles on the web. I still believe applying this model to music is interesting and useful, but there were so many other me-too digg sites. It was simple software to develop and it could be applied to almost anything. Plus there were open source PHP versions of it available on the web.
4 Important Things I learned in the Process
Ruby on Rails + Mac, I had used PHP+MySQL professionally in my last year of high school but had become rusty over the years. I decided to learn Ruby on Rails to develop Contrastream and I’m completely convince it was the right decision. This is a language that lets you build applications quickly and stay agile. Like most rails developers I also bought a Mac which is another thing I’m completely convinced about, OSX has some of the best designed software.
How to Get Press, I learned the importance of having something interesting to say, how to leverage a product launch to get press, and the other basics like press releases and messages.
Practical “Getting Real”, I’ve read this book twice and had the opportunity to apply almost everything with Contrastream. Great way to learn something.
Niche Social Networks are not Businesses, they are communities. They have to be built like a community. That means spending a lot of time building relationships, knowing everything about the niche, and finding users. You can monetize a niche social network but its really important that you don’t approach it like a business.
Bottom line, I learned more from starting this site then I would ever have from college business classes or reading blogs. As a music site it has hasn’t exactly “failed” at the moment, it still pulls in around 3000 people a month mainly from search engines. I now consider it a hobby site and I’m looking forward to applying what I learned with my next start-up, Integrate.
This summer I began to work on my start-up Integrate, a SaaS sales management application (more info here), and decided to see what options I had as a young entrepreneur. Getting free help and capital is always good.
I found a few that sounded useful, but one that stood out was the Ontario Summer Company program run by the Ministry of Small Business; mainly because the deadline for applying was coming up in a few weeks.
Summer Company Program
The program offers 15-29 year olds starting a company a $3000 grant and some basic business consulting.
I decided early on that this time I was going to take all the traditional and legitimate steps to creating a business, for example registering the name, getting a tax id etc. I saw this program as away to force me into doing all these things.
To get in you just have to submit an application, which includes a business and a financial plan. If you get past that stage you are invited to come in for a meeting to see if you’re the right “fit” for the program.
Side note: I really recommend making a business and a financial plan. This might seem like some overplayed advice but asking yourself the right questions is a necessity. I recommend this at Sequoia Capital.
The Meeting
I spent the weekend making up the plans and sent in my application.
Right out of the gate I saw it as a 50-50 chance of getting into the program. How much would they really know about starting a high-tech company thats targeted at large corporate companies?
I figured they would be used to having kids come in with low-end business ideas like selling swimming lessons or walking dogs.
“The usual governments policy to create growth in the economy through entrepreneurship is akin to throwing mud at the wall and seeing what sticks. It usually involves creating as many companies as possible without considering the quality of the opportunities.”
- Scott A. Shane, Illusions of Entrepreneurship
About a week later I had a meeting with a lady who ran the local small business office at Town Hall. She started off by saying how she liked my business idea, ambition, and how she was surprised I could build a prototype in a few months (I had showed her an early version).
She went on to say that she wasn’t sure the people above her, who made the final decision, would be convinced for a few important reasons.
They want finished products: At the time of the meeting. It had about a month left of development. They prefer that it’s ready to be sold when the program starts. Which cuts out almost every software company that needs to develop and actual product or service.
There was no guarantee I’d make a sale before the summer ended. When the government looks at the program to see if it was a success they need to say we started x many companies which made x amount of dollars, not whether the company had any real value.
This is where I realized the reality of the program and most government entrepreneur programs. They foster companies with low-barriers to entry, requires little capital to create, and in bad industries.
But isn’t the real point not to create sustainable companies but to teach kids how to make a company?
That’s understandable, so after hearing that I asked her politely: what type of company is an ideal fit for this program? She smiled and spoke about how a few years ago a young guy had started a company selling t-shirts who eventually got in the news giving their program good publicity.
Everyone hears the statistic that 90% of businesses fail after around 7 years. But after reading The Illusions of Entrepreneurship by Scott A. Shane I’ve realized it’s mainly because people often chose bad opportunities and fail before they leave the gate.
“Most entrepreneurs don’t select the most profitable industries but instead pick industries with the highest firm failure rates. Entrepreneurs don’t select industries because they are good for start-ups but rather because they know these industries and its easy to start a business in them.”
- Scott A. Shane, Illusions of Entrepreneurship
Selling t-shirts is the definition of the type of company that is most likely to fail for a few key reasons.
Saturated market: Everyone thinks they know how to make t-shirts, and there’s no shortage of them trying.
Low barrier: It hardly costs anything to make a few t-shirts.
Feasability: the only way to make any real money is to get distribution in channels where big companies have had locked down for decades.
If your going to teach someone who to make a company the number one goal should be to help them identify what a good business opportunity is. I can go to the library or online to figure out what the different between a partnership and sole proprietorship is… the technical details are secondary.
The Result
My 50-50 bet came back as “we’re sorry, your have been declined for the program”, at least she still offered to help with the technical details (registering the company & name).
I did come out of the experience optimistic though; the more these programs grow and help maintain that 90% failure rate, the less competition I will have to deal with.
RSS Feed
1) Being first to market tends to be difficult because the companies end up spending a large amount of money laying the ground work, for example building awareness and facing unknown difficulties.
2) Just creating a better product then your competitors can also very difficult. A big company has the resources, brand and access to existing customers that would require much more then just a slightly better product to effectively compete.
3) Applying a proven technology to a new market usually has the lowest barrier to entry mainly because it involves little innovation. This is a trap I fell into myself when I created 
4) Bringing a proven technology to a well-developed market is an area left to the ambitious entrepreneurs.
I read 37Signals post this morning about 
I read posts on Hacker News about “Why my start-up failed” and found them interesting because its a raw start-up story not the fairy tales that magazines like to write about. So here is my shot at it.
This summer I began to work on my start-up 
Follow my RSS Feed