Contrasting the funding of a seed VC startup in Israel and Canada

Coming back to Canada from our trip to Israel, I wanted to highlight some programs that I think could make a huge difference to the Canadian VC market. I am not making these suggestions as criticism of existing or past programs, but rather as a constructive way of trying to help the Canadian VC market catch up with the Israeli VC market.

 

At Brightspark, as one of the only private seed VC funds in Canada, we OFTEN see really interesting ideas presented to us. The challenge we have is to try and select the companies that we think are going to be able to flourish and become successful as a “VC investment”.
 

One problem we often encounter is the very high risk of trying to evaluate extremely early stage technology companies. Sometimes it makes sense to invest in a marketplace with huge potential (meaning where LOTS of money is being spent, such as wireless), and we often do just that. But at other times, we are presented with ideas that need to worked on before we know how successful they can be, and very often we need to turn down these investment opportunities because they are too risky. 

An example case in point: We were presented by a small software company which was creating software to improve productivity in an existing market. The concept was developed by very knowledgeable domain experts, including professors at one of Canada’s leading universities, and recognized leaders in the field. The company was self-funded, along with a few Angel investors, and they had created some prototypes and concepts that “demo’d really well”. Our challenge at Brightspark was trying to evaluate how much better than the existing products would this new product be? We consulted with experts in the field, potential customers, and evaluated competitive existing products. Our eventual conclusion was that the company would need to spend in excess of $1 million dollars to get the product to the point where we would be able to start answering these questions. It would still have “VC-type” risk at the end of that process. As a result, we turned down the investment. We were not willing to invest up to $1m of our investors' monies to get that answer – the risk was simply too high.

In Israel, we met VCs and incubators that are undertaking quite a number of these early trials. How do they do that? They have access to risk capital from the “Incubator Program” and Chief Scientist office. In the above example, the startup would have received two thirds - about $650k in the form of a non-recourse loan which would be matched with $350k from the early stage VC/incubator. These loans are given according to a formula – if the company and VC/incubator meet the formula, they get the loan. 

This is not theory, but linked to REAL examples. I know of many startups that have not been able to be launched in Canada because it was too risky without these types of programs. And, we met a number of later stage startups that grew with these programs.

It’s not hard to set up or to run programs like this in Canada. It just needs the government programs to realize that their role is to stimulate the industry and grow it. And the way to stimulate the industry is not to compete with the private VC professionals but by fostering a healthy private VC driven market like in the US and Israel. The focus for government programs needs to be the creation of a software industry.

Comments

[Jake]

thanks for the info! hope to read more from you. cheers!