Sprout Fund Interview

Grassroots Connector
Nov 5 · 32 min read

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Sprout Fund: Early-stage technology companies. High-velocity capital. A growing local economy.

Interview

Shaheel Hooda and Lindsay Dodd from Sprout Fund (sproutfund.ca) joined Heather Barnhouse and Dave Bellous for a conversation to learn more about Sprout Fund as well as the investor and entrepreneurial community in Alberta. We had a great conversation around what you can do as an Entrepreneur to be informed about investment and why VCs and Micro VCs may or may not invest in your business. We also learned more about what makes the Alberta investment community unique and what you need to know about investor math that may be helpful for levelling the playing field for entrepreneurs looking for investment.

DB: Why did you start Sprout fund?

SH: Lindsay why don’t you take this one?

LD: Sure. Let me just close my door in that will do that.

The genesis of the Sprout Fund kind of evolved, but it really started with Mark Benning and his desire to really bring the community around new founders of new Ventures and and see if he could build some community support for those. So Pitchfest (https://pitchfest.org) was his brainchild to get the community in front of these young companies and young founders, or new founders. To see if they could pitch in with some sort of resources, knowledge, services so when we were chatting about it, I said why don’t we see if we could actually put some capital behind that idea. What we’ve heard is that there’s a lack of capital going into early stage technology ventures.

My experience has been that there’s lots of capital in this region. There’s lots of money floating around and lots of business people have been successful. We have 30,000 business owners in the region, which is a lot of experience and lots of capital, but that capital is going into early stage tech. We wanted to put together a fund that would bring some of that existing money into the early stage tech space and provide it with a kickstart, provide it with some mentorship, and then get that company in front of people with capital so that they could watch the genesis of these companies emerge and then fund the companies as they grow in scale and need more and more capital. The model seems to have kind of a triple whammy effect. We get old capital coming into new tech; and we get founders in front of funders in a way that really builds that relationship and provides that intimacy that helps build the trust. And through the Sprout Fund we teach some of this old money how to value and get engaged with these new tech companies that are emerging in the community. It seemed to have a positive effect for all of the players in the ecosystem.

We wanted to start with a smaller fund, we figured a $1,000,000 was a good place to start. We thought it would take much longer to raise the money than it did and we thought it would be easier to place the money than it is. So we’ve raised the capital quite quickly. Shaheel was a big part of tapping into his business network to say “hey come and join us in funding some early stage companies”, so Shaheel maybe I’ll turn it over to you and you can talk a little bit about the conversations that you had with your community as we raise the dough.

SH: Yes, so I was not part of those original conversations that Lindsey talked about. In fact, I think I was one of the early folks that they came to and said, hey, you know, we’d like you to consider being a limited partner in this journey that we’re going to go on because we know that you invest in early stage companies yourself. And for the last few years I had been thinking about putting together a fund myself but was looking for the right partners to do this with. I see that there is so many opportunities within Alberta and particularly in Edmonton, with all of the investment that’s been going into the AI space. I’ve had the good fortune of being involved as an early investor in some pretty successful companies one of which is, you know a company that’s no longer here. Unfortunately, it’s moved to Vancouver but a company that we were able to with a little amount of capital take the valuation from $2,000,000 to $60,000,000 over the course of four or five years. And so I believe that we’ve always had some interesting companies, and some really good talent here, but not the right kind of model around helping those early entrepreneurs get to the stage where they’re much more investor ready and investible.

I think that’s where the challenge has been. So when these guys came to me with what they were proposing, it was a no-brainer. I’m definitely in for a unit, but I went back to them and said, I’d really like to be one of the managing partners as well, because I think I can bring a lot more folks to the table in terms of investment and this is something that I want my community and my network to be doing more of in the future. My religious community came to Canada in the 1970s as refugees, with nothing. And today that community has achieved a lot and is fairly wealthy. A lot of that because Canada has provided some incredible opportunities for them. And they’ve done really well and investing in the real estate space and I see tech as the next real estate. So this is a direction that I want my community to be able to move in so that it can sustain and continue to build and continue to give back to Canada. As I heard the story that these guys were trying to put together it just completely made sense. It’s exactly what I was looking for. And it just sort of crystallized in the right way.

DB: Excellent, Thank you. To follow up on that who is your target investor, some of the ‘old money’ providing their investment to the Sprout Fund?

LD: Well, the investors are not old. Some of them are actually quite young — some of them are even as young as Shaheel so I mean, yeah, there’s some young types, but perhaps some of the some of the money has been around for generations and has traditionally invested in real estate and oil and gas, that’s the staple of wealth in this community. And so the capital naturally heads there.

So the individuals might not be old, but certainly the family fortunes are. It’s more about their traditional mindset that early-stage tech is foreign to some of them. We do have some limited partners who are very well versed in tech startups themselves, or have done an exit but I’m saying the vast majority are not tech entrepreneurs. So they are what I would call traditional investors and most of them are private company fortunes. So they’ve done very well as private business owners in their own right but not many of them in tech.

SH: Yeah, and I would add to that although they haven’t necessarily invested in tech they are definitely interested and see that as the future. When we presented this opportunity to them, they saw this as an avenue for them to dip their toe into this space, in a low risk way and without the level of effort in terms of screening and due diligence that they otherwise would have to make. That is one thing that we heard. The other thing that we heard is that, the single company risk is really high when you’re writing cheques into early stage companies and so a fund like this allows them to be involved in a portfolio of companies. All of those companies are equally risky, but the likelihood that 1 of the 10 or 12 or 15 companies that we invest in becomes a home run is attractive to the individuals. So I think that was the second thing and then the third we heard quite a bit was the concept of community building.

We have these incredible entrepreneurs here. There is fertile ground in terms of the investments that are being made by government. We have incredible universities and talent that are coming out of the universities and there’s the potential of a perfect storm of opportunity coming together. What we need is a catalyst to try to help move that forward. There’s a community building opportunity here that a lot of investors really like.

DB: Excellent, I really like that point about choosing to support the community and create a catalyst for growth. The next question is who is your target entrepreneur? What companies are you looking to support?

SH: So amongst the four of us, we are still figuring that out. I think what we’ve landed on in terms of our rubric is entrepreneurs that have “hustle”. First and foremost we’re investing in an entrepreneur — their ability to have a big vision. The ability to hustle and their ability to go out and understand pain in the market. Then figure out how to build something that’s going to solve that pain. There are a lot of what I would call “Wantrepreneurs” out there who really just don’t want to go and look for a job. Those are not the guys we’re looking to invest in. We’re looking for those that have the mentality of “I want to change the world” and I’m willing to invest everything I can into it. My time and effort, I’m going to lose sleep over this and I’m investing the next decade into building this business. The second thing that I’d say we were looking for is a big market opportunity a big market opportunity that is achievable from here.

Given the resources, talents and advantages we have right here in Alberta, are we able to leverage those in some way?

And then the third I would say is we’re looking for some level of market traction already. Some market validity. That might be demonstration of revenue already or that might be demonstration of relationships with potential partners that will get them access to the market. That’s a bit flexible. But some clear sense there is validity for what they’re trying to solve.

Lindsay anything else you want to add?

LD: No, I mean those are fantastic. The one element that has surprised us is we’re very attracted to entrepreneurs and founders who are coachable. And the reason that we’ve been attracted to that is this is very early stages of their company and it’s a big stage in their life. And this is they’re going into territory that is largely unknown for them as entrepreneurs. So they need to coachable because there’s so much learning, not only in their personal growth but in the growth of their company as it responds to the market feedback. So we really look for that humility and coachability in our entrepreneurs. We know that they’re going to be successful if they build on what they’re learning and what they’re hearing both from us as investors and as the market in general, so we’re really attracted to that kind of founder. We’ve run into founders who are the opposite of that. Founders who are very firm in their beliefs, who are very firm in how they value their company, very firm in what the market is going to need what it doesn’t need. In early stage organizations that is often the kiss of death. So coachability is a big marker for us in that early stage relationship.

HB: How do you measure that though? Is that something that comes from their comments? Or do you have a secret list of questions that they have to answer for you to assess that? I’m interested in how you assess that.

LD: What we’ve told founders is, especially with early stage investors, there’s so much relationship building that has to be done, because it is a big marriage of investor capital and founder ideas. Because that relationship has to built, it gives us an opportunity to have multiple interactions with that founder over time. As we learn about their company, we learn about their vision, their traction to date, and what they know and what they don’t what they’re curious about, and what they’re not. I have to say one of the magic ingredients that has emerged out of Sprout Fund is that we have 4 managing partners, each with a slightly different perspective and set of experiences. And so as each of the 4 partners interacts with the potential candidate founder we learn new things. We get different perspectives. We’re able to identify some really genuine insights about the people that were dealing with and the opportunities we’re looking at. Those insights come from the various perspectives of the managing partners. It’s wonderful, we meet twice a week. Sometimes over Zoom and sometimes in person. They’re always rich conversations because we have such different experiences to draw from.

HB: Thanks.

SH: We can’t share that secret list of questions with you.

DB: That’s too bad. Next question — what struggles have you faced?

LD: The biggest struggle is finding good companies that fit our criteria.

We’ve looked at a lot of companies and many are too early and some are too

too late. We had a couple of companies we were really interested in, we thought they had great potential, but they already had so much market traction and investor interests that they were already past the stage of growth where Sprout Fund could add value in terms of a mentor relationship or early stage money. Some are too far along; many are too early, they haven’t got the market traction that Shaheel was alluding to earlier. So

we’re encouraging them to get into the market and learn a little bit, get some customers get some pilot users. Create a minimum viable product, and then we will stay on the journey with them as they emerge into a state of being that we can actually invest in them. But you know, we were hoping to see more qualified deal flow. I would say and more from Edmonton. We’re seeing a lot out of Calgary right now and less out of Edmonton, which is a bit disappointing. Shaheel do you want to build on that?

SH: Yeah, I completely agree with Lindsay. I might layer on that there are two categories the struggles of deal flow quality fall into:

1. Really nice entrepreneur, we think they have a shot of making something work, but they haven’t demonstrated enough traction yet. In those situations, if we really like the entrepreneur and like the space, we move into relationship building mode with them. We may not invest in them today, but six months from now, depending on what traction is, or maybe it’s a year, if they’ve been able to demonstrate that we’re hoping that we’re continuing to maintain contact with those.

2. An area we’re seeing a lot more often is valuation and expectations from the entrepreneurs. It’s interesting because what I’m hearing quite often is “if we were in the Valley we’d be able to raise this at $10 million or $15 million” and there’s a lack of understanding of many entrepreneurs in our region that there’s a there are a few reasons why when you raise money in the Valley, you’re raising a lot more at a much higher valuation. It’s a lot harder to raise money there than they think, and it’s highly competitive. There are thousands of companies, not hundreds of companies, raising money. Also, the cost of doing business there is so much higher. An engineer might cost you $250,000. So you have to raise two to three times as much money. The only way that you can do that is at higher valuations. In addition, the expectations from the investors that you’re raising money from there, in terms of what you’re going to achieve in what period of time is also much higher. A lot of our companies, as great as the talent that we have, are not conditioned to the environment of the Valley. They haven’t grown up in that kind of competitive environment where they have the ability to do the kinds of things that are going to be expected of them. And so there needs to be some more education for our entrepreneurs around the reasonableness of the valuations that they’re expecting. Not because we’re cheap, that’s not what it’s about. However, they need to get into their heads that investors look at the long term investment pathway. It’s not just this round that matters. It’s the next round and the following round. If you don’t set things up right in the first round or your first raise, you will screw things up for yourself along the way. A lot of entrepreneurs are not thinking about those follow-on rounds and what they would have to look like. The milestones they need to achieve, whereas we are looking at those kinds of things. And so that’s something that we see and we’re having more and more conversations with entrepreneurs about this.

DB: Great answer. Just to follow up on one of your points above, you mention if you don’t set up the early rounds correctly, you might screw things up. Do you mind going a little deeper on that?

SH: I’ll give you an example of a company I was involved with. I won’t mention the name, but I lived through this. I had a bunch of angels who invested in the company in the early days. They invested in the company at a $4,000,000 pre-money on the first raise. This was pre-revenue pre-product — really it was just at the idea stage.

Now I won’t take credit for raising the money at that pre-money valuation because I took over the company after it had raised this round of funding. On follow-on rounds we were always trying to play catch up with that valuation. The next round we raised money at a $6,500,000 valuation. In the following round it was at $10,000,000. The following round it was at $12,000,000. We were never able to raise any sophisticated venture money. We were continually raising money from our super angels that were invested in the company. They were always inside rounds. And the reason they were inside rounds is because our valuation was never going to be reasonable as far as the external VC’s were concerned. That’s one example or perspective on it. I’ve lived through that.

The other thing is if you look at the average exit in Canada for a tech company after 5, 7, 10 years, it would surprise you to know that that average is $32 million on exit. It’s not a $100 million. It’s not $1 billion. It’s not $5 billion. It’s $32 million. If we are investing in companies, and we know that the average exit is $32 million and it’s likely the company is going to have to raise $4 or $5 million in a couple of rounds, there’s no way that you can start with the pre-money valuation of $4 million. It just won’t work. The economics won’t work. That’s what I mean by, entrepreneurs screwing themselves or painting themselves into a corner if they start too high, or if they worry too much about that valuation in their seed round.

LD: The point that we made this morning that you haven’t mentioned yet Shaheel is the notion of a “Down Round” with investors. Once you have a Down Round, you’ve got a taint on your company as it grows and investors pass, or get very angry that you’re now pricing it around lower than what they came in at. And reputationally you’ve got some issues that you haven’t been meeting investor expectations. The price to your company’s falling. It’s better to build slowly, to Shaheel’s point, over time, to the final exit and then everybody’s happy.

SH: External venture investors don’t like companies if they have to do a down round. Even if that’s to the benefit of that company. They know it’s going to be a really hard conversation for the founder to have with their pre-existing investors. It is going to be a tense situation. VCs look at a 100 to 1,000 deals a year. Why bother having to deal with that kind of a headache when there’s another deal that’s just as good without that baggage associated.

DB: It’s very helpful; and I think a perspective that not many entrepreneurs aware of here. The experience of scaling up financially is something that most young entrepreneurs would not have an experience or perspective on.

LD: I also tell this analogy to entrepreneurs; you’re on a street with $2 million houses and you price yours at $4–5 million. That might be valid but you’ve got to explain why that is. A lot of them haven’t thought it through. We’ve invested in companies at $1.5 and $2 million valuations with early stage traction, and that’s a reasonable amount for where they’re at in their growth. You’d see lots of deals through the Valhalla groups at $1.5 to $2 million. If someone shows up at the door with a $5 or $7 million pre-valuation, I’m open to look at it, but there’s got to be a compelling reason. Often there isn’t, they’re just pulling a number out of the air or they’ve received counsel from somebody else saying you should be asking this for your company or you’re going to get diluted out. That’s when some of that founder coachability comes into the conversation. We have had founders that dig their heels in at excessively high valuations and we might not invest, not because of the valuation, but because of how hard the founders dug in, so it’s interesting.

SH: A little primer on VC math. Okay. If we invest in a company whatever the amount we invest; if we carve out a 5% stake in the company, which we usually don’t given the small investments that we make, but to make the math easy we carve out a 5% stake. We know that by the time that company exits, if it’s successful, we’ll be lucky if we still retain 50% of our original stake in the company after two or three rounds of dilution. It’s probably going to be closer to 1/3 of what our original stake was. So if we originally started off with a 5% stake in the company and we end up with a 1.5% stake in the company.

The company’s got to be worth a heck of a lot of money on exit for that 1.5% stake to be worth something significant and actually provide us with returns that make sense.

That’s the sort of fundraising strategy and pathway most early stage entrepreneurs, unless they’ve been through it before, don’t understand.

LD: It is interesting, I saw a chart once which had all the big famous unicorn companies and their founders’ shares at the end of the fundraising cycle. They’re all around 10–15%, founders at 10–15% tops. The only reason that Zuckerberg hold so much is they skipped a whole round of fundraising. Founders need to understand they’re going to own a smaller share of a bigger company if it grows right, and that’s okay.

DB: I will see if I can track down that chart, it was super helpful to see that perspective. Perspective is helpful, as if you’ve never been through a scaleup experience before, how would you know this?

An infographic describing a hypothetical startup from idea to IPO
An infographic describing a hypothetical startup from idea to IPO

source: https://blog.adioma.com/how-funding-works-splitting-equity-infographic/

More great charts and data here: https://medium.com/@alitamaseb/land-of-the-super-founders-a-data-driven-approach-to-uncover-the-secrets-of-billion-dollar-a69ebe3f0f45

SH: The other thing that we might even throw on this, given that we’re having this conversation around fundraising, is that a lot of entrepreneurs are not necessarily getting good advice. Throwing into the market complex forms of deal structures that they think allow them to kick the valuation discussion down the road. So we’re seeing founders coming to us with convertible notes, which are okay if used properly. If they’re not stacked on top of one another round after round. We’re seeing things like KISS’s which are less okay from our perspective, and we’re seeing SAFEs which essentially are not even security instruments in a company — it’s not an ownership position. What we see is founders thinking that they’re being really smart by going out to the market with fundraising in these ways because it’s faster or it’s cheaper. They avoid having to dilute today. They avoid having to really justify the valuation of the company today. But

if they don’t do this well and they stack those things on top of one another, the waterfall they experience later on when those things actually do convert (if they convert) is very damaging to them.

LD: Our limited partners are not interested in investing in SAFEs. They’re very founder friendly instruments, but our limited partners want to be in the companies and be partners with the founders in a real equity sense. So, haven’t been entertaining SAFEs at all.

SH: There’s a perspective that you can use structures that are founder friendly or you can use structures that are investor friendly and I think those two (KISS’s and SAFEs) are missing the boat completely. What you is need is a structure that is going to ensure alignment between the founders and the investors that are putting money into the business. That’s ultimately what matters. The wrong type of structure is going to create disincentives for support. Disincentives for future follow-on support, and disincentives in terms of whether we’re going to move the company together in the right way, or when shit hits the fan — how are we going to help the company through this?

DB: Very helpful. I guess I’m curious at this point where you are in your process. You have a couple of announcements on your website around some companies you funded. How’s it going?

SH: We’ve evaluated, what about 90 companies so far?

LD: Yeah, we’re just on 90 companies that we put through our tracker.

SH: Probably 75 to 80 of them Alberta only. We’ve realized the quality of the deal flow is not as strong as we would like and so we are starting to cast our net a little bit wider.

Obviously our focus is still Alberta companies and Alberta entrepreneurs because all of our money is Alberta money. Ideally we’d like to take that Alberta money and put it into Alberta companies. But at the end the end of the day, capital is very fluid and capital goes to where it’s going to have the best opportunities. So we are starting to cast the net a little bit wider. We’ve looked at about 90 companies. We’ve issued term sheets to 3, we’ve invested in 2 and we retracted one of the term sheets because we, at the 11th hour, came to the realization that the founders were not in alignment with us, in terms of where we wanted to take the company, and we felt they were not as coachable as we would like them to be. So as Lindsay said earlier that’s really important in our rubric, so much so, that even after we decided that we were going to invest, we pulled the term sheet.

We’re pretty close to making our third investment, which I think will probably happen soon.

We’ve come across a couple of other really interesting companies that we’re starting to evaluate right now and starting due diligence. Regardless of that fact, the numbers of companies we have invested in is not a lot, but I would say that of the companies that we’ve connected with, every single one of those we’ve tried to leave them with some advice that would make them better when they talk to the next set of investors.

LD: We have approximately 20 on our watch list that are perhaps too early stage and we just want to see them develop a little further. So that’s positive.

DB: I’m curious on a follow-up to that. Where are you finding the best leads to new opportunities, new companies?

LD: Well, you know, it’s interesting. There’s a huge opportunity that we’re poking away at that hasn’t really emerged fully yet. But you know, there’s a lot of competition in Silicon Valley between dealmakers for deal flow. That isn’t the situation up here. I don’t know that there’s much benefit in our community in not wanting to share deals more widely. So one of the things that we’re interested in is how do we get the funders in our community, whether they’re VCs, whether they’re angel funds, whether their angel groups, whether they’re little funds like ours, coordinating better to share deal flow. And if it’s not a right fit for one, it might be a better fit for another, based on stage or follow on. All those things, I think the mechanisms and conversations need to improve and mature in our community. I think that’s a real opportunity for the Edmonton ecosystem.

We’ve been really fortunate with our managing partners, they’re very involved in the community. Shaheel is doing a lot of work with early stage companies as an advisor. We’re all on the VMS. Mark (Benning) is doing some work with BDC. Kristine (Milke) is very tapped in through her Valhalla connection. We’re pretty tapped into the local buzz, but there’s still a lot going on in other communities that we don’t know about. So it would be interesting to see how those connections can start to emerge in the future.

SH: We’re tapped into the major VC’s that are active here that tend to do seed or later rounds. Since we’re early stage, we’re one round before those types. We’ve got great relationships with Accelerate, Yaletown inovia, Panache. Our value proposition to them is that if you come across companies that are too early for you, they may be a good fit for us. We provide not just venture capital or the first sophisticated capital, but we’ll set those companies up the right way in terms of structure and cap table and all of those kinds of things so that when they do get to a certain scale and we know what the metrics are that they look for we’re able to tee those up for you. And so it strengthens the quality of the deal flow further down the funnel.

DB: They know you’ll evaluate well, and set a company up well.

SH: It is truly a partnership. We work with those guys quite a bit. We’re also seeing a lot of interest from companies that come through 3–2–1 Academy (https://321growthacademy.com), Carry Houston’s group in Calgary, and we’re working closely with the folks at Platform in Calgary (https://www.platformcalgary.com) as well.

We’re hoping to see more stuff coming through Startup Edmonton as well (https://www.startupedmonton.com). So, you know how it is in the states, right? It’s about relationships course. It makes sense.

DB: What do you need next?

SH: More deals, not just deals for us. I think it would be great if there were more funds like us (micro VCs) in the Alberta environment because I think it would automatically attract a lot more entrepreneurs. There would be a lot more education taking place. We wouldn’t be the only ones trying to educate entrepreneurs. They’d hear similar messages from those different groups. And then we would be able to syndicate on deals together as well. So I’d love to see that. But of course, we would love to see more deals.

DB: Do you know if there’s a similar organization to yours in BC or Saskatchewan or Manitoba?

SH: I don’t know specifically in those provinces. I can tell you that the concept of a micro VC is one that is growing in popularity in all major startup investment communities. The reason for that is pretty much any of the major VC’s that exist today are probably 3 to 5 times, if not larger, fund size than they were 10 years ago. As funds get bigger, their cheque sizes have to get bigger. They can’t manage 250 companies in their portfolio. Automatically as the funds have gotten bigger they have moved to later and later stage deals. And so there has been this growing chasm or gap in early stage investment. As a result a lot of micro VCs are being formulated to fill that gap. We don’t know who they are, but there must be a couple in Vancouver. I don’t know about Saskatchewan. I think there are a number of loose Angel groups there and Manitoba I have no insight there.

SH: There are there are a lot of Angel groups out there, all across the world. I think there is a difference between a loose group of angels sitting around the table, evaluating a deal and then maybe deciding to participate in a deal, and what we do as fund managers given that we’re managing other people’s money. There’s a level of due diligence that we’re doing, not to the same extent that Yaletown might do, because we’re dealing with earlier stage, but we are doing more due diligence than the average angel either would have the time to do or even the ability.

LD: The model allows an individual angel investor to get into far more deals, and then be positioned to be the next money in a deal that starts to gain some real traction. If you look at the angel Community model, people are writing fairly significant cheques in the early stage companies, but here they can write tiny micro cheques and then be well-positioned to write the next one that counts, when that company starts to take off. So it’s a very cool model from that perspective.

DB: Smaller bets allow you to capitalize on the bigger payoffs.

LD: And across a broader spectrum of companies. An angel investor might invest $20,000 into one early stage company, but through us their $20,000 can get them into 15 companies. They’d never be able to do that on their own. No one is writing (or looking for) $1,000 cheques.

SH: I think the other advantage is that we do spend time with the companies that we invest in. With one of them right now that’s raising its seed round, based on its growth, we’ve not only helped with the pitch deck to make sure that it is more suitable for a seed round, we’ve helped the entrepreneurs understand valuation that’s appropriate, the right structure, what the cap table needs to look like, and then we’ve actually leveraged our network and we’re opening doors for that entrepreneur to be able to pitch. It’s so much easier for an entrepreneur to get introduced to our partners, instead of go pitch them cold or emailing the associate who’s going to do a different kind of screen, right? There’s a lot of mentoring that is contributed to these companies as well. Not just that initial cheque that we provide.

DB: Do you have a horizon or a goal of when you’ll start raising another fund?

SH: (laughing) That’s a great question. We’ve been asked by a number of our limited partners when we’re going to be starting raising another fund. Our intention is to do that within probably a couple years. Our long view on this is that we’re going to do a second fund and it’s going to be substantially bigger and it’s definitely going to change the fundraising landscape in Alberta.

But our focus right now is to deploy the capital that we’ve raised from our investors. We have an obligation and a duty to do that. We want to do that appropriately and not be too concerned about that next fund until we do that.

LD: (laughing) We’re always taking phone numbers if anyone wants to line up for Sprout Fund 2. Call Shaheel.

DB: (laughing) I’ll post your phone number Shaheel (kidding)

SH: I’ll talk to them — I love talking to people!

SH: I have a question for you. You’re talking to a lot of entrepreneurs as well and you guys have identified that there is a lack of knowledge lack of resources available for entrepreneurs. What are the questions that you are hearing most often, and where can a group like us in a fund like us be even more helpful than we are today.

HB: I can I can give you my thoughts on that. The second part of the question is a bit easier for me to answer in terms of tangible things I hear people ask all the time. By people, I mean entrepreneurs, but I also mean some of the funders, some angels, some groups like the Startup Edmonton’s, AWE (a group that I’m very involved with) in those forums (AWE has an accelerator program) I hear consistently it would be great to have (sort of like pitchfest) a forum where you could get either some high net worth people, or some people who are considering investing, qualified to be limited partners, those kinds of things, in a fund like this, what would it look like to be part of a group like that? Also have in the room people who are entrepreneurs that could benefit from some of these things.

So just the lessons, the math that you were just going through, if you put your 20K as an LP in fund one that allows you to invest in 15 companies. If you’re thinking of starting a company and you’re at the right stage then $50k investment might take you from Milestone X to Milestone Y and why it’s attractive for these early stage investors, and how it allows you to open the door to their network.

Also some of the leveling of the playing field in terms of the education pieces around the valuation. Shaheel, when you were saying you can’t start off with a $4 million valuation and then think that your company is going to continue to grow or attract investment down the track, I think people don’t understand that they hear the news out of the Valley and they hear the deals and they hear the valuations and they don’t realize that the environment is different here. They might hear information in movies and on podcasts and those kinds of things out of the Valley. I don’t think entrepreneurs understand that it’s different and I don’t really think that a lot of the angels or the VCs or the micro VCs have explained it or maybe don’t even really understand some of those differences in a way that they can articulate themselves. And so I think there’s this vast non-level playing field that causes questions. It causes misunderstanding, misalignment of expectations, companies say I’m ready to go get investment from a VC and they’re not, they’re absolutely not, but they don’t know they’re not because they’re realm of what’s real to them is skewed. What can be helpful is any presentation any kind of seminar that just gets that information out there. I think that is really helpful and starts to maybe turn some of those more overconfident entrepreneurs into more coachable entrepreneurs, in a little bit of a less threatening way to them.

So some of the seminars we’ve given are about what it’s like to raise capital for your company, or how do you protect your shareholders or the topic of employment. Often if there’s a large group it’s a little bit less threatening because you hear the question and it doesn’t seem like it’s so 1:1. At the end of that the entrepreneurs, even if they are clients come back being so much more coachable. And they have a common language. They have an ability to have a much more meaningful conversation. I don’t know if that’s at all helpful or realistic, but that’s what I see as a really big gap on a big scale.

SH: So I think you know all four of us as partners are more than willing to invest time into those kinds of activities. If there are events or venues that you’re connected to or that you’re involved with. We see our role here as not just running a fund. It is about community building and those are the kinds of activities that help make that happen. The more that we do that the higher the quality of the companies that are out there, the better it is for us at the end of the day, and better it is for all our limited partners as well.

HB: We see that with a one-offs repeatedly. We don’t have large groups of people in a room together at the same time but let’s say we close a deal for some entrepreneur. It’s interesting that you said that the average deal size was around $32 million. I would have said the average deal size that we see is between $25 million and $40 million. So that’s right there in the middle, but we’re seeing a lot of them creeping up more and more, $40 / $50ish million in this day and age, but we’ll see some of these entrepreneurs who cashed out and they’ll say to us — “How do I how do I give back? How do I get involved in groups?” Maybe they’re not tech investors, but oil and gas or whatever their industry was and they’ll say “I’m not connected. I’m not in the market. I don’t want to waste a bunch of time. Who do you know that you can connect me with that? Can I get a primer on investing 101 or how to give back or how to mentor?” That’s something we’ll hear probably once a month. So we, at Dentons, have often talked about how our Venture Tech, Emerging growth Group in Alberta should organize a meet and greet in Calgary or Edmonton. Perhaps you profile some companies, bring some investors along, bring some people who want to invest and create an event to be that bridge. I feel like we hear it on both sides, we hear it from entrepreneurs and we hear from the funders. The entrepreneurs are talking to the funders. The funders are talking to be entrepreneurs, but they’re also talking to us in various ways.

LD: Well, it sounds like though Heather you guys could be a mechanism to start to make some of those bridges. When I sold my company, I sold a tech advisory firm yet, I had no insights into the early-stage tech community at all. Zero, so I had to kind of barge my way in and find a starting point for all of that. So, you know, it’s our hope that Sprout Fund can start to build some of those bridges. It would be interesting for Sprout Fund to be able to bring those sorts of opportunities to our limited partners. Not just deal opportunities but learning opportunities. As a service provider, you’re probably better positioned than anyone to say to people walking into your office wanting to set up a shareholders agreement because they’re going to start a company. “Here’s some here’s some educational opportunities to help you on this journey” because it’s a whole different world.”

HB: Yeah for sure. And I mean I was on the phone today with the guy who said hey, like can you connect me? I was like, connect you to what? And he said all of it. First of all an accountant then I need a banker then I need some funders.

He wanted people to be connected every which way and we hear that all the time. Not everybody asks for everything all at once, but we are asked to be the connectors all the time. And we often do those kinds of connections.

Depending on the component they’re missing they do often ask us. And I think they often ask their accountants and other professionals in their field.

DB: Just to add a couple of thoughts, you two are lovely, approachable, warm human beings. While I know that, it can be quite imposing for someone who’s a young entrepreneur to walk up to you and ask questions. I meet a lot of entrepreneurs that are super passionate about what they’re doing. There are a baker, or they are technologist, whatever their passion is, they’re unfamiliar with the world of business and half the terms that are used regularly. Sometimes I’ll catch a glimpse of someone getting geared up go have a conversation with an investor or funder and come back and say “I don’t understand half of what they said,” but the entrepreneur was just nodding along pretending like they understood. I think any opportunity to have an open Office hours, or Ask Me Anything sessions — those less threatening opportunities, you’ll get more of that very early stage entrepreneur if you’re looking to build some of those relationships anyway.

LD: I’m hoping the entrepreneurial ecosystem can start to create events, platforms, and learning opportunities. One of the things that all four limited partners are pretty committed to is building out our community and our ecosystem. So, when people ask us to sit on panels or do whatever we usually say, yes, if our time can accommodate it. We want to be part of that education and that community building and making connections. It’s hard for us with our limited resources to be the catalyst for the sponsor of those things, but we can be willing participants because our time is something that we can work with and it’s about the only equity we’ve got right now is our time and our knowledge.

So, we’re happy to participate as if the ecosystem wants to start to sponsor some of those opportunities.

SH: Yeah, it’s interesting because I think there’s a lot more of those types of opportunities more of those kinds of events happening in Calgary right now, than there are in Edmonton.

Group: (agreements)

SH: We get invited to come and speak at those things, but there don’t seem to be as many opportunities here.

LD: There’s a lot more activity (in Calgary) which is ironic because I think Edmonton has a much better business community. There’s a lot of corporate action down there, but up here we’ve got, like I said 30,000 companies. So we got 30,000 business owners that know what they’re doing. They build businesses that are viable, providing employment, making payroll, doing the thing. We should have a better more supportive business community here than in Calgary would but in the startup sense, there’s still had massive gap between our traditional business community and the startup community. So we need to figure out how to bridge those two communities closer together and service providers and the non-governmental ecosystem can help with that. Even the government can help create those sorts of opportunities as well.

SH: I can tell you my own experience of the past 10 years being a Co-investor in early-stage deals with Accelerate Fund and Yaletown and Real Ventures historically their perspective was that the companies that come out of Edmonton that are fundable are much better companies and have much more global opportunity than the ones that they saw Calgary.

HB: We see that in here that all the time. The only exception to that is some really specific oil and gas patentable type of technology — it’s much stronger in Calgary, but if you take that it out we hear and see that all the time.

SH: Yeah, and I would argue that the technical talent that comes out of the U of A or our educational institutions here is stronger than what we would find on average in coming out of the universities down south. That said, I would say that in the last three years there has been a dramatic shift in the amount of attention and effort that ecosystem down in Calgary is putting into the space and I’m very concerned as an Edmontonian that Calgary is starting to look more interesting for investment.

DB: This has been incredibly helpful and valuable conversation. I want to say a huge thank you to both you gentlemen for participating.

LD: Thank you for inviting us. It’s been a pleasure, you know having the conversation and hope that we have many more but I appreciate all the work that you guys are going to help the community. It’s good for it.

HB: Perfect. Well, thanks so much for taking some time today.

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