There have been two monster capital raises in Vancouver this summer. Well, one big and one monster, to be truthful. How big, you ask? On a relative basis, Hootsuite’s $165 million total of capital that it pried from the cold hands of investors is so large that if the capital alone had been the value of the entire company, only nine other acquisitions in BC in the past 15 years would have been bigger. And BroadbandTV’s $36 million in capital raised is larger than the total company acquisition value of any BC company in the past couple of years, save Layer 7 Technologies.
These capital raises are massive in today’s environment, but how does it compare to the go-go dotcom days? Back then I was a VC. I invested in Series A rounds primarily, but participated in larger Series B rounds as an inside investor. The largest of these was a $30 million raise by a company called Inkra Networks based in Fremont CA (with a large software office in Burnaby). Four venture funds teamed up to raise that amount. Then in the technology downturn, the largest of any of the rounds that I was involved in was $7.5 million. In fact, I spent much of the last decade complaining about the fact that it was nearly impossible to raise a large round of capital in Canada for a growth stage company. Our US counterparts recovered from the excess of 2000 and had an active later stage investment industry, creating what we now know as “growth equity”. Through the 2008-2009 downturn, it was even more difficult to raise later stage capital and, except for a few clean tech deals of size, there were very few large deals until 2011.
In 2012, we had four fairly hefty growth equity raises in BC: Vision Critical raised $20 million, BuildDirect raised $21 million, Hootsuite raised $20 million and D-Wave raised $29 million. This was thanks, in large part, to OMERS Ventures and Tandem Expansion focusing Canadian money on the later stage technology companies in Canada.
Then, in the span of 7 weeks this summer, we saw BroadbandTV raise $36 million and Hootsuite raise $165 million, the top two technology private placements in Western Canada since 2004 (and Hootsuite becoming Canada’s largest… ever). That is $291 million into five BC companies in a little over eighteen months!
These companies, like many other great recent successes in BC, are choosing not to sell early and grow to very significant companies. That is one reason for the large capital raises or growth equity. But the other aspect of this phenomenon is how they managed to command a high enough valuation to support these very large capital raises.
It is a pretty simple equation when raising money at any stage… what is the pre-money valuation, add the money being raised, then divide the money raised by the new total (the post-money). That is how much of the company you sell to investors (there is an interesting twist to that… more in a moment). If you can command a higher valuation, you can raise more money and sell the same amount of your company. Clearly, raising the type of capital that BroadbandTV and Hootsuite did, means some pretty good valuations.
Lots of factors go into a higher valuation, but the main ones that investors are looking for at the growth equity stage are: very rapid sales growth, leadership in a category, profitable business model (although sacrificing current profit for rapid growth is usually the norm) and a hot industry sector. Two of these factors are quantitative and fact based: your sales growth and business model can be scrutinized. But the future forecast and the other factors are qualitative… in other words, they are about the perception, not necessarily the reality. The main reason that Hootsuite and BroadbandTV raised the capital they did is that they have the quantitative factors (rapid growth and profitability) and they have created and leveraged the fact that they are in a hot space… and are leading it in some way. Creating the perception is known as “framing” the environment for the investors.
This recent article about the nosebleed valuations in the Silicon Valley is bang on the point of framing the valuation. He refers to it as “valuation anchoring”.
What I love most about Shahrzad Rafati (BroadbandTV) and Ryan Holmes (Hootsuite) is that they were not afraid to “frame” their companies in a similar way, generating significant valuations, thus allowing for the largest investment rounds in recent memory.
How can you learn from them? It takes very hard work on the investor and buyer relations side and an excellent marketing communications strategy and team to create the right frame. You have to be known by the top opinion leaders and get on the radar of every investor to drive a transaction like these. Ryan has a gift for his own opinion leadership. He writes columns published in FORTUNE and gets meaningful exposure in dailies across North America. He speaks at many events and has leveraged his knowledge of the social media industry (born out of being a pioneer) into a properly framed story of continued success that put his raise at 7th largest in North America since Facebook went public. Shahrzad works the hardest I have seen of any entrepreneur… anywhere. She drives BroadbandTV forward through smarts and sheer will. Her company’s persona was created within the online video industry through their pioneering work with YouTube on the technology side. Consider this quote from a YouTube executive that I heard directly while at an industry gathering with all of the top YouTube executives and partners: “She is the smartest person about our technology and our business in this room… that doesn’t work for YouTube.” When our firm (Garibaldi Capital Advisors) was helping BroadbandTV raise this large round of capital, part of our job was to bottle that praise from within the industry and, like Ryan, frame it for the investor community.
It’s not easy to create a company that sells $1m worth of product or services, let alone $10m or $100m. But once you have established yourself in the marketplace, it really pays to learn how to properly frame your company and its success. We will have some other great capital raising stories like these in the coming year or so, as another factor adds to the valuation anchoring equation: These successes put Vancouver on the investor map and more attention is coming our way thanks to the success of Ryan and Shahrzad and their great companies.
(Original article available here).