Failure to launch

Why too many Atlantic startups are losing – and how they can get back on track

AS GENERAL partner at Build Ventures, Patrick Keefe has spent the past few years listening to pitches from entrepreneurs and, occasionally, investing in their businesses.

In the three years since its founding, Build Ventures has made eight investments in Atlantic Canadian companies, with more deals expected to close soon. The $65-million Build account — funded by the four Atlantic Canadian provincial governments, other public sector entities and private individuals, including Keefe — was created, in part, to address a common East Coast lament: the region lacks venture capital.

But in doling out cash, Keefe discovered another problem: East Coast startups are growing too slowly. In the startup race, a slow mover often ends up a loser.

Keefe summarized his findings in a blog post on the Build website in November. He argued the region offers many benefits for startup founders, including lower operating costs such as salaries and rent. Keefe notes that when Build was launched, there was an “unquestioned” assumption that it is far cheaper to launch and run a startup in this region, compared to other parts of Canada and the U.S.

“Source of advantage — right?” he wrote. “Actually no.”

In his post, Keefe admitted the fund’s organizers made a “significant omission” in their startup success equation: time.

“Our observation is that companies in Atlantic Canada are taking longer to find product market fit,” he wrote. “This more than offsets the operating cost advantage. “Put another way, startup companies here are taking too long to grow.”

Why? Keefe hypothesizes that the “feedback loops” for East Coast companies are longer than in many other places. Local startup creators are simply not exposed to the customers, partners, competitors, and investors needed to help refine, improve, and fund their business plans.

Are local startups failing as a result?

“That’s a good question,” Keefe says in an interview. He pauses to ponder it. No, he concludes, but they are severely handicapped by it.

“I think you can build worldclass companies in Atlantic Canada,” he said. “However, it will take more time and more money.”

Fixing the situation is a long-term mission, but in the meantime Keefe offers a relatively simple solution. “You’ve got to get on a plane and spend time in the markets you are attacking,” he said, pointing to San Francisco and New York as two key examples.

“There’s just so much interaction when you’re in those markets, whether it’s investors, customers, competitors, potential employees, partners… When you’re out there you’re in a nutrient-rich soup of stuff to help you accelerate your business.”

Soaking in that soup has benefited many of the Build Ventures portfolio companies, including Halifax-based Affinio.

Tim Burke, Affinio’s founder and CEO, secured his company’s seed round from Build in October 2013. Three months later he took part in the Canadian Technology Accelerator (CTA) in New York. The program provided access to mentors, networking events and, ultimately, contacts at the companies Burke needed to begin assembling his client roster. He later took part in a CTA in San Francisco.

Burke’s push into those American hubs of venture capital helped him secure big name clients, including Sony Music, Universal McCann, and L’Oréal.

Affinio’s software helps marketers and advertisers pull intelligence from social media. In October, the company raised a $4-million Series A round, which included money from Build Ventures, Toronto’s Whitecap Venture Partners, and San Francisco-based Social Starts, a $20-million venture fund. This year, Burke expects to double his number of employees to 50.

Burke says his clients, investment cash, and overall growth have all been secured as a result of venturing into key cities. “Face time is critical,” he said.

The company has a permanent employee in New York, and Burke travels to New York and San Francisco every two to three weeks. He says regular visits to those cities boost the “rates of collisions” he has with key contacts, particularly potential clients.

“Don’t restrict yourself to this region for your early adopters,” he advised. “If you’re going to build a global startup in this region, it has to begin with validating against global customers.”

Jevon MacDonald is currently working on a new as-yet-unannounced startup. But he has little interest in trekking from airport to airport in an effort to entice potential clients and early adopters.

The Halifax-based entrepreneur and angel investor sold his previous startup, GoInstant, to Salesforce in 2012. He stayed on with the San Francisco-based cloud computing company as a vice president until last year.

This time, with two kids to consider, MacDonald has altered his approach. “I don’t want to build another business where I have to be out selling,” he said in an interview. “So I need to think about products and software I can build that acquire users organically, without having to show up at their offices to sell it to them.”

His outlook is also shaped by his time at Salesforce, where he saw the resources required to build the sales side of a large business.

Halifax is not San Francisco, so MacDonald is carefully considering the constraints presented by building a company locally, including geography and the availability of workers.

“You can’t ignore those factors in Halifax any more than you can anywhere else. It’s important to not sugar coat it and pretend you could hire 5,000 sales people in Halifax. You can’t. Not going to happen. It doesn’t necessarily mean there’s a deficiency, we should just build different types of businesses there.”

In other words, MacDonald is hoping to again create a prosperous company with a small team.

“How do I be more of an Instagram — 10 engineers, billion-dollar outcome, or WhatsApp — $20-billion outcome, 22 engineers, and less like a Salesforce — 18,000 people, 8,000 engineers?” he said.

The sale of GoInstant, for a reported $70 million, followed the sales of Radian6 and Q1 Labs, which fetched a combined $1 billion.

MacDonald is unsure why other East Coast companies have failed to fully blossom in the years since. “There are some great companies who I think could have grown two times as fast or three times as fast in half the amount of time, and haven’t,” he said. “They’ve decided to take a more long-term and low-capital approach to things.”

Part of the problem, he argues, is a lack of early stage capital in the region. There is capital, but it flows from too few players. Thus more VC competition is needed.

Even more critical for startup development, however, is the need for successful entrepreneurs and big companies to emulate.

MacDonald points to Ottawa’s Shopify and California-based Uber as companies that illustrate the quick growth and impact that startups can deliver. Atlantic Canada requires its own examples.

“The scale and speed at which Uber has done things has sent people’s heads spinning and realigned expectations,” MacDonald says.

“You can have all the accelerators and incubators in the world, but until people see (success) and see world-class entrepreneurs executing on it, it’s never quite as real for them.”

MacDonald’s position is unique. He possesses a large supply of Silicon Valley contacts, and eager potential investors. Some investors have told him: “Whatever you’re doing, we don’t care. We’ll invest.”

Thus he has the flexibility to travel less and instead tap his existing resources from the East Coast. Patrick Keefe says most other entrepreneurs have a simple option: buy a plane ticket. “Don’t hole yourself up in a garage and ignore what’s going on around you,” he says. “Get out and spend some time in other markets.”