Continuing our series on funding, I sat down with Bruce Croxon from Dragon's Den and Round 13 Capital to talk about his perspective on the state of funding.
Bruce was an entrepreneur in his own right: in the late 1980s he and a partner built Lavalife, a company which made millions, and for which Bruce made an exit in 2004. Since then, as the principal investor at Round 13 Capital, Bruce has sought out investible digital companies for seed, angel, and follow-on funding.
Karen: Can you explain a bit about the funding of Lavalife? When did you raise capital?
Bruce: A lot of people don't realise [Lavalife] started in the late '80s, long before the Internet. We had a brand called Telepersonals. When the Internet came about in 1996, we bought a company out of Manhattan called Webpersonals, and we rebranded both of those companies as Lavalife in 2000/2001.
One of the best things back then was that the barrier to entry for competition was pretty high from a cost and technology perspective. We grew the initial business, and the merged company rapidly without outside help right through to 1996. We decided at that time to take outside investment because we were undertaking a technology changeover, and it was ambitious. We took another round in 1998. We were lucky that for the most part, we had been able to fund our own growth.
Karen: Since you've been on both sides of the equation, what is the biggest misconception about venture capitalists?
Bruce: Like anything, to be good at it, it requires a lot more work and discipline than it may appear on a show like Dragon's Den. It looks like we're making an investment decision in seven minutes. The reality is, on average, we have 40 minutes with them, but you'd still be nuts to make an investment decision in 40 minutes. We spend months and months on due diligence to find out everything about the companies that we've shown an interest in. The biggest misconception for me is that I'm sitting on a pile of money, and you can get it out of me in seven minutes.
Karen: What are some of the biggest traps people fall into when pitching venture capitalists?
Bruce: You're selling, so once you've articulated what you're about, try and find out from the potential investor what they are looking for, and any questions they may have. You need to pivot your pitch on-the-fly to address what's on their mind. Investors want to know that you can have a conversation, and that you have a modicum of introspection. You need to be able to show that. At the end of the day, if the relationship doesn't work, the business partnership likely won't either.
Karen: Do you believe that companies can raise VC just on an idea?
Bruce: Absolutely. Just in the last nine months or so, there has been an uptick in seed, early round capital, and incubators. Extreme Labs, Communitech and GrowLabs are doing big business. It is possible to get a start. What we don't have in Canada is where you go after you've gotten your start. We're trying to address this at Round 13 with our FOunder's FUnd. Currently in Canada, follow-on funding isn't available. A lot of companies end up going down to the States.
Karen: In your opinion, what is the right way to approach venture capitalists?
Bruce: We get a tremendous amount of interest in Round 13, but the way to break through to us is to show that you're disrupting and innovating at an acceptable cost per user. Many VCs are available by email, but to break through, you have to show them you know what you're doing.
Be mindful that VCs see a lot of presentations. We've never seen a projection we didn't like. How you defend your thinking and how you behave goes a long way to determining whether VCs will do business with you.
Karen: We've heard in previous interviews that the best way to get VCs interested is to show traction, but every VC seems to identify traction differently What's a good rule of thumb?
Bruce: Twenty years ago, if you were thinking about an idea, someone else was likely thinking about it too, but that wasn't being shared instantly at the click of a mouse. Traction in and of itself is tricky, because you can be doing great things and getting good numbers, but in the same quarter, you could be beaten by the competition. You have to keep innovating. You need to test and show that you've got results in specific customer acquisition channels, so when you get money, you can put the pedal down and pump money into proven channels. Even if you only have 1,000 users, but you can sit down and show me your tested channels, and you're innovating or disrupting, you can get an investment.
Karen: Any other advice you'd like to share with entrepreneurs?
Bruce: For a person who is doing this full time on their own, I would say gather the support of friends and family. Spend some time gathering proof that people want to use the product you're making. If you're doing your business part-time, quit your day job and double down on the business. Things move way too fast for you to "part-time" anything, because someone else will scoop you, because they've been working on it 24-hours a day.
Dragon's Den airs Sunday Nights on CBC. Check your listings for times.