Amir Sariri is a Ph.D. student in Strategic Management at the Rotman School and a Research Fellow at the Creative Destruction Lab. His research interests centre on the economics of innovation. He focuses on the economics of artificial intelligence and conducts research on the labor market for AI scientists and implications of AI academic entrepreneurship on the rate and direction of research.
Tony Lacavera helping startups cross the “Valley of Death”

Tony Lacavera helping startups cross the “Valley of Death”

Illustration by Min Gyo Chung

Illustration by Min Gyo Chung

this post was originally published on Canadin Business on June 14th, 2016

In many ways, James Sun is emblematic of today’s tech entrepreneur: He’s scarily young (21), fluent in business jargon and running a company that’s baffling to anyone older than 30. He arrives one morning at the office of Globalive Capital, an investment firm in Toronto founded by Anthony Lacavera. Sun plops down at the conference table, wearing a hoodie over top of a bright blue T-shirt emblazoned with the name of his company, Revlo. Globalive invested seed capital into Revlo last year, and the startup is raising a follow-on round. Sun is here to give an update to Lacavera and the company’s three other partners.

Revlo requires some explanation: It’s a fan engagement platform for influencers on Twitch. (Don’t worry if that sentence means nothing to you. “The first time I met James, I didn’t even know what he was talking about,” Lacavera says later.) To understand Revlo, you need to first know that gamers now live-stream their play for others to watch. Twitch, owned by Amazon, allows them to do that. Second, the practice is so popular that the best gamers command legions of followers, draw brand sponsorships and earn a plush income. Revlo’s platform helps these gaming influencers retain and engage their fan bases by facilitating things like contests, giveaways and rewards. Revlo is also looking to expand to other streaming services, such as YouTube Gaming.

Even though Sun’s startup is still figuring out how to make money, Globalive’s partners are enthusiastic about its prospects. “I would go crazy on influencer management,” Brice Scheschuk, Globalive Capital’s CEO, tells Sun in the meeting. “Understand those guys. Live in their world.” Lacavera adds, “They’re really your customer.” Sun politely nods along, although one gets the impression he already knows all this.

Revlo is the kind of startup Lacavera wants to back for the long-term, especially now that he’s turning his attention to venture capital investing. He is best known as the founder of wireless carrier Wind Mobile, which was sold last year for $1.6 billion. Flush with cash from the sale, Lacavera has wasted little time in seeking out startups to finance. He wants to eventually put together a $100-million fund that would include cash from outside investors and be capable of writing even bigger cheques. A sizable war chest would allow Globalive to have more influence with portfolio companies and within the venture capital scene in Canada at large. (He’s on track to close the fund by the end of the year.)

Lacavera’s goals extend beyond earning a return; he wants to help fix a fundamental problem with the funding landscape today. The recent boom in accelerator and incubator programs, which help young entrepreneurs build or refine business plans in exchange for equity, means ample funding for early-stage ventures. At the other end, funds such as OMERS Ventures and Georgian Partners, two of the country’s most prominent VCs, are capable of investing large amounts of money in more mature companies. OMERS and Insight Venture Partners, for example, led a $100-million investment in Shopify in 2013, which turned heads at the time.

As Lacavera sees it, the problem occurs in the middle. “That’s where we don’t have enough funds,” he says. This phase, sometimes known as the Valley of Death, is part of the reason tech startups have difficulty scaling into world-class behemoths. Entrepreneurs might sell out or be wooed across the border by American VCs. “We’re actually gift-wrapping investment opportunities for these people,” he says. Lacavera’s fund will focus on Series A investments, the term given to the capital raise that follows an initial seed round, and will help bridge the funding gap in Canada by being faster, more flexible and willing to take on bigger risks. But among the first questions he’s asked when approaching potential investors in the fund is, “What makes you think you can do this?”

One way to pull it off is to be mindful of valuations. At the meeting with Sun, the talk turns to Revlo’s fundraising round. Sun tells the partners how much he’s looking to raise and the valuation he’s seeking. (Canadian Business was permitted to attend a series of Globalive meetings, provided financial information was not disclosed.)

“I would say you have risk on that valuation,” Scheschuk says. Sun gives a quick nod and turns to Lacavera.

“That’s too fucking high, man,” Lacavera says.

“I was trying to be more diplomatic,” Scheschuk deadpans. Sun laughs. Rather than trying to press his case, he asks for their thoughts on a more reasonable valuation. The figure Lacavera quotes is a good deal lower than what Sun was seeking. The young entrepreneur doesn’t seem too dejected.

Lacavera isn’t new to investing (Globalive has made more than 75 investments over the past 15 years), but raising this fund would put him in another league. Perhaps that’s what makes him eager to tout his credentials. He thinks his entrepreneurial experience differentiates him from other funds run by individuals who come from finance, rather than an operational backgrounds. He founded Globalive Communications at 23 years old in 1997 and went on to start, grow and exit a number of businesses. Enunciate Conferencing, founded in 2001 with two partners, offered automated teleconferencing services. It sold for $28.3 million in 2006. More recently, Globalive launched an augmented reality firm and then sold it 18 months later to a Los Angeles–based company for an undisclosed amount. Wind, of course, was the biggest of those ventures, growing to eventually employ approximately 1,200 people. Lacavera feels that puts him and his partners in the unique position of being able to advise entrepreneurs and to take on an active role in case business plans go awry. “Not a lot of VCs know how to do that,” he says. “Or they haven’t done it to the same extent we have.”

Lacavera is looking at a different fee model, too. Typically, venture capital firms charge a 2% annual management fee and take 20% of whatever profits are made by the fund. (Private equity firms and hedge fund managers also use the so-called “2 and 20” model.) Lacavera declines to discuss specifics, except to say, “I’m considering something unique that keeps a greater percentage of risk with Globalive, and a greater percentage of the upside.”

But what really could help Lacavera’s fund address the gap in the Canadian market is an emphasis on speed and flexibility. Funds typically have a certain investing mandate; they focus on early-stage mobile gaming companies, for instance. If an opportunity arises that’s slightly outside that mandate, the VC firm’s partners might have to get the approval of their investors before making a move. By that time, the opportunity could be gone. The VC market is also fragmented. While there are a few firms in Canada targeting Series A rounds (as Lacavera plans to), there are usually only one or two names per sector. The result is a startup that’s been turned away by the one Series A fund in its category has few other places to turn in Canada. Lacavera’s mission, on the other hand, is almost absurdly broad: “The fund mandate is we’re going to invest in technology companies,” he says.

In order to practise that kind of flexibility, however, Lacavera has to find like-minded investors. Often VCs secure money from the Canadian banks and other large institutional investors, which would not make an ideal fit for him. “I don’t have a lot of confidence that the Canadian banks wouldn’t impose some restrictions on my fund that I’m not interested in having,” he says.

Ultimately, Lacavera has a different view of risk than his Canadian peers—the same issue he ran into when trying to get Wind off the ground. “In 2007, I went around to every single Canadian telecommunications investor, and I got laughed at—out loud—or I got told no,” he says. Investors thought taking on Bell, Rogers and Telus was foolish. To Lacavera, it made perfect sense to challenge an oligopoly. “That’s what is fundamentally wrong with the Canadian investment community,” he says. “Instead of thinking of it as a suicide mission, think of it as an opportunity.” (He later scored a $700-million commitment from Egyptian billionaire Naguib Sawiris.)

With his VC fund, promoting speed and flexibility tends to make Canadian investors nervous. Moving quickly on an opportunity means less time for due diligence. “When I started talking about this Series A focus for Globalive in the Canadian community, [I heard], ‘Oh, well, the guy’s reckless. He’s too fast,’” Lacavera says. “If you think I’m making a stupid bet, that means you think I’m stupid.”

Although Canadian investors are still welcome to participate in the fund, Lacavera hasn’t yet found a match. Instead, the most promising partners are institutional investors and high-net worth individuals outside the country. It’s worth noting that Lacavera does have an almost preternatural ability to raise money. (“I don’t know how to explain it,” Scheschuk says, before venturing that Lacavera succeeds by simply being straightforward with investors about his business goals and how he plans to achieve them.) In addition to securing Sawiris’ backing, Lacavera was forced to recapitalize Wind in 2014 when its then majority owner, VimpelCom, sold its stake following a dispute with the Canadian government. Lacavera turned to private equity firms to replenish Wind with cash. Those investors made out nicely when Wind was sold, he says.

The funding challenge Lacavera is hoping to address with his new venture has been a long-standing issue in Canada. Investors are far more willing to back early-stage companies because the amounts of cash required are relatively small, and the potential payoff is huge. “Everyone has seen guys like Peter Thiel make millions off a $500,000 investment,” says John Albright, co-founder of Relay Ventures in Toronto, which also targets Series A rounds. Later-stage firms, even though they require greater sums of money, are seen as less risky. By that point, aging startups have likely turned a profit (or have a clear path to profitably) and have proven a market exists. In between, however, companies’ capital needs increase, and the viability of their businesses could still be in doubt. That makes investors wary—especially Canadian ones.

Still, there is some debate in the venture capital community about whether the overall need for capital is greater at the Series A stage (where rounds are typically between $5 million and $10 million) or at the next stage, Series B, where bigger amounts are required. Jim Orlando, a managing director at OMERS Ventures, contends the deficiency is actually greater at Series B. At the beginning of 2015, Orlando predicted there would be a “mid-stage capital crunch” that year, owing to the fact that it has historically been the most difficult stage of a young company’s growth, and because U.S. investors that might otherwise back Canadian companies have their pick of opportunities at home these days. That didn’t end up happening—both the volume and value of investments at this stage increased from 2014. Orlando isn’t exactly sure why, but he does suggest that Series B funding remains the bigger challenge. “A Series B round requires something like $20 million to compete on a world-class stage,” he says. “As companies grow larger, there are fewer and fewer funds that can write those kinds of tickets.” Albright, meanwhile, says Canadian companies need ample access to funds at all stages in their development. “It’s hard to believe there could ever be too much money chasing Series A,” he says.

But the threat of American VCs poaching Canadian startups is not as urgent as it once was. “That’s not the norm anymore,” says Allen Lau, co-founder and CEO of Wattpad. “That’s more the exception.” His previous company, Tira Wireless, secured the backing of one U.S. venture capital firm, but it was contingent on moving the headquarters to Silicon Valley. That was 10 years ago, however. Albright isn’t seeing that phenomenon happen either. “I haven’t been in a deal in four years where the U.S. VC insisted the teams move,” he says. “They all realize the disruption caused by moving is huge.” Relocation is expensive and distracting, not to mention the fact that costs are high in Silicon Valley and the competition for talent is intense.

If there is a risk of that situation happening today, it’s for early-stage startups, which have a small number of employees and fewer ties here. Revlo, which is currently tiny, might fall into the category. The company recently enrolled in the prestigious Y Combinator accelerator program in Silicon Valley, deepening its connections to American investors. “Over my dead body I get beat by a U.S. VC on that thing,” Lacavera says.

He’ll soon have the chance to hone his chops when it comes to actually leading a Series A round. In May, Globalive secured the position of lead investor for a raise by TimePlay Inc., a Toronto-based company that makes an interactive gaming app for movie theatres. He emphasizes the $100-million fund is just a start—that amount is merely the price of entry to lead Series A rounds, after all—and naturally, he’s aiming high. “There’s no way I’m raising a $500-million fund later if the first one doesn’t hit it out of the park,” he says.

To that end, he’s scouting dozens of potential investment opportunities. On the day Canadian Business visited, an experienced telecommunications executive met with Globalive’s partners to pitch the mobile payment company he’s now heading. Upon introducing himself, the executive mistook Lacavera for a Canadian Business reporter. “I’m Tony Lacavera, the chairman of Globalive Capital,” the venture capitalist explained patiently.

Later, Lacavera laughs it off. “That was unusual,” he says. “I think that’s only happened two other times in 15 years.” If his fund takes off, it probably won’t happen again.

 

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