The 4 Key Assumptions Driving Canada's Newest Venture Fund

Congratulations to the team at Real Ventures on the launch of Canada's next great Venture Fund.

Here's an excerpt from JS Cournoyer's post this morning talking about the key assumptions driving the fund:


1- The cost of getting a company from idea to the validation of the business model is now 10X less than what it was 5-10 years ago and is no more than a few hundred thousands $ for consumer Internet companies and less than $1M for companies targeting the enterprise:

a) The evolution of opensource platforms and development frameworks means that software or web services that used to take a team of 6 people over a year to build now takes 2 people less than 3 months. In addition, software infrastructure costs are zero (operating systems, databases, etc.)

b) Because of the cloud, hardware costs (servers, storage, bandwidth) are now directly proportional to utilization, meaning that startups can get started for less than $100 per month;

c) There are now many platforms with more than 100 million active users that are seamlessly accessible to third party apps, software and web services providers including Facebook (500M +), Twitter (200M+), Iphone and ipod touch (more 250M+), Android (250K new activations per day), Google search and adwords, Google Apps, Gmail, Salesforce AppExchange, Amazon, etc. These platforms allow companies to transact with their customers with one click in many cases. Combined with a blog and media industry dedicated to technology, it now costs very little for a startup with a good product to get access to customers.

2- M&A is the new R&D and talent recruitment: The IT market is maturing. To maintain historical growth rates, midsize and large companies have to diversify their service offering. These companies have all been built under a different development and innovation model and cannot innovate at the speed that is required today. In addition, mobile and the web are now important parts of every consumer facing company’s business but they can’t recruit the young talent that would rather work in startups. They have to resort to M&A to acquire new product lines and talent through smaller acquisitions in the $5M-$100M range. Google alone has made more than 20 this year. Mark Zuckerberg, the CEO of Facebook, stated in an interview with GigaOM they have only made talent acquisitions so far in their short history.

3- The access/proximity to capital is not a competitive advantage anymore. Now that startup costs are getting close to zero, being in the valley and having access to capital is not a condition for success. What companies need is enough capital to get to market validation from people who can help connect them to funding, business development and corporate networks. This is what we do. Although most of the seed funding activity has come from the San Francisco-Silicon Valley area, other pockets such as New York, Boulder, Chicago, Seattle, Research Triangle, London, etc. have emerged. In Canada, Montreal, Vancouver and to a certain extent Toronto are booming.

4- The rise of the Super Angels is having the effect of increasing the size of the seed rounds in the US and driving Series A and B valuations to stratospheric heights. I believe this will have the effect of increasing the number of US VC funds that come to Canada for early stage investment opportunities.