July 17, 2013
Interviewed by: David Snow
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What’s Left to Disrupt? Plenty

Whatever the internet has yet to fully disrupt is of great interest to Chris Arsenault of iNovia Capital, a leading venture capitalist and veteran of the Canadian startup scene. The conversation starts with the question: Should VC investors be worried about the growth of crowdfunding? Will the internet disrupt the industry that backed its creation?

Whatever the internet has yet to fully disrupt is of great interest to Chris Arsenault of iNovia Capital, a leading venture capitalist and veteran of the Canadian startup scene. The conversation starts with the question: Should VC investors be worried about the growth of crowdfunding? Will the internet disrupt the industry that backed its creation?

Disruptive Opportunities 

A Privcap conversation with Chris Arsenault of iNovia Capital

Should VC investors be worried about the growth of crowdfunding for equity?

I do think it’s disruptive to the VC model. There are two folds. The first part is more of the rewards-based funding and the other part is the new equity crowd funding. On the rewards-based crowdfunding that we’re seeing today, we’re doing a deal right now where the valuation of the company is a multiple of what it would have been without crowdfunding. Why? Because these guys took a crowdfunding approach, build up a PO of purchase orders slightly under $5 million before going out for their first round of financing. So the valuation is totally different from somebody that comes to you with this great idea, with this great team, and these great entrepreneurs but with no market validation, right? On the other side, beyond just the returns and valuations and the sizable financing that we’re seeing already being impacted, the equity crowdfunding is much more complex. So I do believe that equity crowdfunding is happening, will affect the VC model in the mid to long term, but there’s still a lot of work to be done in terms of how these shares are being voted, how the entrepreneur manages the communications and the reporting with all of the shareholders. So there’s still a lot to be done on that front.

What new trends and innovations are you seeing in the Canadian VC market since we last spoke a couple years ago? 

It is interesting because last time we spoke, it was the beginning of this new era where you had more privately driven GPs doing the deals and raising funds and we had raised our second fund when we last spoke. Since then, we’ve raised our third fund. We’ve done 48 investments in that period of time. Canada changed in terms of both the approach that the VCs are taking to do investments, to qualify and evaluate those investments, as well as on the syndicate side where we’re seeing our top tier U.S. co-investors coming into Canada with or without a local investor.
And like the top guys, Kleiner Perkins, they came into deals with us in Canada and even if we would not have participated, they would have done the deal anyways. So that dynamic is kind of changing the way people are looking at opportunities and also looking at how they’re structuring those opportunities. From the entrepreneurial perspective, it creates more value-added capital coming into their companies, but it also creates a more aggressive approach of wanting to be top tier. Because before, if you’re an entrepreneur and you’re starting your business and you don’t know where to go to, your expectations and your vision kind of gets dampened by that situation. Right now, the sky’s the limit. So we’re seeing entrepreneurs building multi $100 million businesses. We have two businesses in our current portfolio that weren’t in existence five years ago that are in the multi $100 million of revenue and they’re both Canadian. So there’s this revival of both interest from the VCs as well as the entrepreneurs on how to build those billion dollar businesses.

What is iNovia’s current investment strategy?

Our broad theme that we still are respecting and going after is the theme, is what the Internet has not yet disrupted, in logistics, in travel, and even to a certain extent, retail. There are a lot of things that the Internet and the mobility of the Internet that we have today has not yet disrupted. So we do look for disruptive opportunities. We are driven by software so we are a software-focused type of fund. Digital media is probably where we have a third of our portfolio companies, big data and profiling.

Do you try to match disruptive ideas and entrepreneurs?

We don’t identify a specific need and go after trying to find the entrepreneur that actually can address that specific need. We tend to work with entrepreneurs that are brought to us through our other entrepreneurs. So the best quality deals that we have in the fund, especially with the new fund that we just raised, actually comes from our other portfolio company CEO’s. They’re bringing us our new deal flow and the growth rates of these companies are much higher than there ever was, if I compare our deal flow with five years ago. The quality of our syndicates is also a key factor. So we have a lot of deal flow coming from our co-investors. So we see opportunities before they actually become too expensive for us to participate in because we remain that early stage VC.

How important is the entrepreneur to the structure of a growing portfolio company? 

Our focus on the early stage because we like to connect with the entrepreneur. We like to connect with that initial spark. Even though most of the companies that we back become different beasts over the years and eventually define their trigger points and basically double up on what they’re great at and let go of everything else that they were trying. But that spark, that fire in the belly is what’s really attractive to us. So we back entrepreneurs. We think that the biggest and most successful companies out there are entrepreneurial driven. So taking the entrepreneur, the founder out of the company is not a good thing, even though in some cases it happens. It’s not something that we look forward to. We basically try to find people that we feel comfortable with, that we like working with, and we try to provide them with support but get out of their way. We’re trying to help them identify the type of talent that they need and bring in that type of talent at the right stage. And that goes for the top executive but it also goes down into the business where sometimes just a key marketing person or a key businessperson is as important as the technology person. So it doesn’t need to be always at the “C” level, though that’s where we focus most of our resources and time, is trying to help the company and the entrepreneurs identify the right type of talent and bring them in at the right stage.

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