Billions With Zero Knowledge

Google today announced that they have purchased formerly Ottawa-based video game advertising company Adscape Media. (You could call them Video Game Advertising 2.0 if the sidebar picture is Video Game Advertising 1.0)

See today’s coverage on the news,

• Techcrunch - Google to buy Adscape for $23 million.
• PaidContent - Google does by Adscape after all for $23 million.

Mark Evans wrote about the rumored acquisition a couple of weeks ago and explains the companies Canadian roots.

Adscape was named a startup to watch in December 2006 by the Ottawa business journal where they mentioned moving headquarters to San Francisco.

Congratulations to the Adscape team on joining the Google family. According to reports Adscape raised $3.2 million in Venture Capital from H.I.G. Ventures (based in Boston & SF).

What I found interesting was that there were no Canadian VCs involved in this company. I don’t know the players involved, but wonder if they attempted to raise capital with Canadian firms to be rebuffed or if they chose to avoid them altogether.

Unfortunately too often I see both situations where Canadian entrepreneurs avoid Canadian VCs (I’ve spoken to many Canadian CEO’s who can go direct to the US VCs and feel that local VCs don’t add a lot of value. I don’t always agree with this, but it depends on the team & VC) or the Canadian VCs don’t understand or have the risk appetite for some hot Canadian deals that end up going to the states.

Amid a growing video game marketplace and the strong Canadian talent pool of video game developers (Ubisoft in Montreal just announced another 1,100 positions to be hired, Electronic Arts has Vancouver & Montreal presence) you would think there would be more innovative gaming based startups being funded by Canadian VCs.

From yesterday’s Ottawa Citizen in an article entitled Gaming Nation the following stats were included,

As many as one in three North Americans, or 120 million people, play video games for at least one hour every week and recent studies have shown that one quarter of all gamers in Canada are over the age of 50.

Parr said Canadians spent more than $933 million on video gaming last year. Worldwide, the game industry brought in more than $25 billion U.S. in revenues during 2006. That figure is expected to hit $55 billion U.S. by 2009.

During the massive industry explosion, Canada has quietly become a world leader in video game development. The top two game development studios on the planet — EA in Burnaby and Ubisoft in Montreal — call Canada home.

The number of companies developing video games in Canada has tripled in the last three years. According to a study conducted at Queen’s University in 2004, there were only 100 gaming companies in Canada that year.

The ESAC says there are more than 300 video game development companies employing more than 49,700 full- and part-time employees are scattered across the country now.

And these are not low paying call-centre-type jobs. The average starting salary for a video game developer is $60,000 U.S.

I may have missed it, but you would imagine with all the companies working around and supporting the video game industry there would be some activity by Canadian VCs.

While I think it’s great that a Canadian company has succeeded in getting an exit through an acquisition to Google, it is interesting to see that our Canadian VCs are not playing roles in Canadian companies.

Case in point, I had the pleasure to meet two successful Canadian entrepreners Patrick Lor and Ravi Sood on my panel at Garage Canada’s Startup Canada. For those not aware, Getty Images bought Patrick Lor and Bruce Livingstone’s company iStockPhoto for $50 million. Hewlett-Packard bought brothers Ravi & Rahul Sood’s company Voodoo PC for an undisclosed sum and he and his brother Rahul are now in San Fran working with HP.

They are both great examples of Canadian entrepreneurs who built and sold their companies to US firms without traditional VC investment.

In each case they recounted how VCs ignored them until the risk was almost gone and buy out offers started to emerge as viable choices to taking VC money for growth capital. They join other Canadian companies such as Flickr in having chosen to prove the business viability and let a larger company expand the market.

Early stage risk capital means taking risk at the early stage - not waiting until the company has product, traction and sales and then trying to invest to help them grow. As the cost of building, launching and obtaining traction continues to drop (at least for consumer & enterprise software) there becomes less of a role for Canadian VCs who don’t know how to play aggressively at the early stage.

Once a company has proven a product with traction in the marketplace, the US investors care less about location and are happy to invest in a winning concept. So Canadian investors not playing aggressively at the early stages when they can still put risk capital to work will end up always sitting behind the US aquirers and financing options that the best companies will always be able to get.

In today’s marketplace where innovation through acquisition becomes more common place Canadian early stage investors will have to change how and when they invest in made at home opportunities if they wish to play a role in our Canadian success stories.

On Fri 16 Feb 2007.