In light of the news that MaRS client Edsby recently raised $2 million in funding, my motivation for writing this post is very simple. Ever since I began working with startups and fellow entrepreneurs, I have sensed a collective frustration about the lack of transparency of information around venture deals.
Far too infrequently—particularly in the education technology space—are we allowed to see behind the scenes of venture investment in startups to understand and appreciate what it is really like to make a deal. We see and hear about the small percentage of deals that are completed, but we never hear about their complexities or about what it’s like to endure a deal and emerge on the other side more whole as a founder and a company.
In my role as a senior advisor at MaRS, I work with many startups, primarily in the edtech space. As two Toronto edtech startups that I advise—OneClass and Edsby—recently raised notable rounds, I decided to reach out to the founders to ask if they would be willing to share their inside perspectives with the Canadian startup community.
Jack Tai (co-founder and CEO of OneClass): Fundraising is never fun and it’s always a tedious process. I remember going down to Silicon Valley from January 2013 until the end of April 2013. In that time, I pitched to 21 venture capitalists. Then it was two months of following up and waiting. We had one venture capital firm drop out after seven meetings (both in person and via phone calls with all of their partners individually). In the end, the reason they dropped out was that they couldn’t close their own new fund.
From the time we received a term sheet to actually getting money into the bank took us three months. Therefore, the whole process from start to end took a little over nine months.
John Myers (co-founder and CEO of Edsby): The part that went fastest and smoothest was adding in additional investors once a lead investor was in place. Having the deal defined and papered, and having a strong lead investor already committed to the project, made it relatively easy to bring on additional strategic investors. They didn’t need to worry about negotiating detailed terms—they could just focus on the big picture and make a quick decision regarding whether they were in or out. This enabled us to land some very strong strategic investors quite quickly once the core of the round was in place.
Jack: We found that many venture capitalists were hesitant to invest in a Canadian entity. We had to back out of one deal as it was going to cost way too much for us to set up an American entity during that stage. So there were some delays after going through pitches and initial due diligence, as well as the fact that some would not invest simply because we are based in Canada. There is also much more legal work involved when a venture capitalist outside of Canada invests in a Canadian entity.
John: It took us about six months to go from initial discussions with our lead investor to having signed agreements in place, and that’s considered about average. So we weren’t surprised by the total length of time. We were fortunate that we didn’t have a cash-crunch issue looming over us, so we were able to do it right and from a position of relative strength. At the same time, lead investors aren’t highly motivated to close off quickly. If you think about it, the more time it takes, the more they get to see how well you’re executing compared to the projections you’ve been making, and for some companies, the more desperate they become for the cash. Right now in Canada it is definitely an investors’ market, with many companies vying for capital from a relatively small pool of investors and investment capital.
Jack: It was long, tedious and extremely stressful. However, the team and the product we’ve built together, which is making a difference in people’s lives, kept me motivated. Even though it can be tough during the days when you’re out there on the road pitching, at night, when you check your support email or Twitter and receive feedback from users on how your service or product has helped them, then you know that everything is worth it.
John: For us, it was a very enjoyable experience, especially since we had such a great outcome. It’s nice when the hard work pays off. Even though this is our second startup, the first one was many years ago, so we can’t claim to have had a lot of expertise when we started, although we did have some. It’s like a form of dating. We pitched to about 20 or so groups before we found our “mates.” You have to expect lots of “No thanks” responses, but almost every potential investor provided good feedback about what they were looking for, as well as suggestions on what we needed to do to make our business a fit for the style of investment they like to make. If you pay attention to the feedback you receive, you can enhance your strategy (and your pitch) to improve the chance of success going forward.
John: We raised a round of $2 million led by Toronto investor Nigel Stokes, with one other investor, who we can’t name for a couple more days! (Stay tuned for an announcement in the coming days!).